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REVIEW NOTES FOR TAXATION 2

TRANSFER TAXATION
Transfer Taxes

those imposed upon the gratuitous disposition


of private property

Under our law, they are taxes levied on the


transmission of private properties from a prior
decedent to his heirs in the case of estate tax, or
from a donor to a donee in the case of donors
tax.
Kinds of Transfer Taxes

1. Death / Estate taxes


- those levied on the gratuitous transfers of property
upon ones death, formerly comprised of the estate and
inheritance taxes: Both taxes are now integrated into one
estate tax.
2. Gift Taxes
- Are imposed on the gratuitous transfers of property
during ones lifetime, formerly comprised of the donors
and donees gift taxes; both taxes are now integrated
into a donors tax.
I. DEATH / ESTATE TAX
Estate tax

graduated tax imposed on the privilege of the


decedent to transmit property at death and is
base on the entire net estate, regardless of the
number heirs and relations to the decedent.

a transfer tax not a property tax.

tax on the right to transmit property at death


and on certain transfers which are made by the
statute the equivalent of testamentary
dispositions.

Nature of Estate Tax


It is not a direct tax on property nor is it a
capitation tax, that is, the tax is laid neither on
the property, nor on the transferee or transferor,
but on the right of the decedent to transmit his
estate.
It is not a property tax but an excise tax.
Purpose and justification of estate tax:
The following theories have been advanced to justify
death taxation: (BRAP)

a.) Benefit-Received Theory


For the performance of services rendered by the
government in the distribution of the estate of
the decedent and other benefits that accrue to
the estate and the heirs, the state collects the tax.
b.) Redistribution of Wealth Theory
Estate tax is a contributing factor to the
inequalities in wealth and income. The
imposition of death tax reduces the property
received by the successor bringing about a more
equitable distribution of wealth in society.
c.) Ability to pay theory
The receipt of inheritance places assets in the
hands of the heirs and beneficiaries thereby
creating an ability to pay the tax and thus,
ability to contribute to governmental income;
and
d.) Privilege theory or State Partnership theory
Inheritance is not a right but a privilege granted
by the state and large estates have been acquired
only with the protection of the state. The State,
as a passive and silent partner in the
accumulation of property has the right to collect
the share which is properly due to it.
Incidence or burden of estate of tax
Three views on who is the taxpayer in estate
taxation:
1.

PREDECESSOR the object of the tax is the


property which has been held or accumulated
by the deceased and the tax has fallen upon him
in the sense it has affected the amount of the
property which he could dispose.

2.

SUCCESSOR the tax is not paid by the


predecessor who has no liability till he dies and
who is free to ignore the duty if he wishes, while
the successor comes into less than he would
have, and has no kind of redress.

3.

No Personal Incidence - the estate tax has no


personal incidence at all, merely falling upon the
estate as such.

Law applicable
Estate taxation is governed by the statute in
force at the time of the death of the decedent.
Reciprocity

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REVIEW NOTES FOR TAXATION 2


There is reciprocity if the foreign country of
which the decedent was a citizen or resident at the time
of his death:
1.) Did not impose an estate tax; or
2.) Allowed a similar exemption from estate tax with
respect
to intangible personal property owned by Filipino
citizens
residing in that foreign country.
Note:
1. Reciprocity applies only when:
a.) The property is an intangible; and
b.) The decedent is a nonresident alien
2. The following intangibles are deemed located in the
Philippines: (an exception to the principle of Res Mobilia
Sequuntur Personam and Situs of Taxation)
a.) Franchises 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; and
e.) Shares or rights in any partnership, business, or
industry
established in the Philippines.
GROSS ESTATE
the total value of all property, whether real or
personal, tangible or intangible belonging to the
decedent at the time of his death, situated within
or outside the Philippines, where such decedent
was a resident or citizen of the Philippines.
In the case of a nonresident alien decedent, it
shall include only property situated in the
Philippines.
Property Included in the Gross Estate (INCLUSIONS):
A. In case of resident citizens, nonresident citizens and
resident aliens:
1. Real Property within and without the Philippines;
2. Tangible personal property within and without the
Philippines; and
3. Intangible personal property within and without the
Philippines.

B. In cases of nonresident aliens:


1. Real property within the Philippines;
2. Tangible personal property within the Philippines
and;
3. Intangible personal property within the Philippines,
unless there is reciprocity in which case, it is not
taxable.
Note: These are either:
A) Properties actually owned at the time of death
B) Properties deemed by law to be owned by the
decedent
under Sec. 85
Inter Vivos Transfers Subject to Estate Tax
The gross estate extends to gratuitous transfers
made by the decedent during his lifetime which are
treated by the law as substitutes for testamentary
dispositions. They are transfers inter vivos in form
but mortis causa in substance.
Rationale for taxability:
To reach such transfers which are really
substitutes for testamentary dispositions and thus
prevent the evasion of the estate tax.
These transfers are:
a.) transfers in contemplation of death (sec.85 b);
b.) transfers with retention or reservation of
certain rights (sec.85 b);
c.) revocable transfers (sec.85 c)
d.) transfers of property arising under a general
power of appointment ( sec.85 d); and
e.) transfers for insufficient consideration (sec.85
g)
Note:
Transfers by virtue of a bona fide sale of
property for an adequate and full consideration in
money or moneys worth are excluded and not
taxable.
INCLUSIONS IN THE GROSS ESTATE (CR 2IG DIP)
1)
Decedents interest at a specific property
- To the extent of the interest therein of the decedent
at the time of his death. (Sec. 85 A)
-

Ex: partnership interest, dividends

2)
Transfer in contemplation of death
- A transfer with the thought of death.

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REVIEW NOTES FOR TAXATION 2

The term in contemplation of death means that the


impelling or controlling motive is the thought of
death, regardless of whether the transferor is near
the possibility of death or not, which induces the
disposition of the property for the purpose of
avoiding the tax.
Example: donation was made concurrently with the
execution of a will (Vidal de Rocs vs. Posadas, 58
Phil 108)

Under BIR Ruling No. 261 September 2, 1987, the law


does not specify the number of years prior to a
decedents death within which a transfer can be
considered in contemplation of death.

Circumstances taken into account in determining in


whether the transfer was made in contemplation of
death:
A.) Age and state of health of the decedent at the
time of the gift;
B.) Length of time between the gift and the date of
death; and
C.) Concurrent making of a will or making a will
within a short time after the transfer.

- Ex: X has a house and lot which he transferred to Y


a) with the condition that X will use it while X lives
- Effect: Still part of estate of X as he has control over it

Note: Check the factual settings before and at time of


death because proximity to death is not always
conclusive.

Examples of motives precluding the category of


a transfer in contemplation of death:

a.)

To relieve the donor from the burden of


management;
To save income or property taxes;
To settle family litigated and unlitigated
disputes;
To provide independent income for
dependents;
To see the children enjoy the property while
the donor is alive;
To protect the family from hazards of
business operations;
To reward services rendered

b.)
c.)
d.)
e.)
f.)
g.)

Note:
The THREE (3) YEAR PRESUMPTION provides that
any transfer of a material part of his property in the
nature of a final disposition or distribution thereof made
by the decedent within three years prior to his death
without such adequate and full consideration shall,
unless shown to the contrary, be deemed to be have
been made in contemplation of death.
This provision, however, has been already deleted in
Sec. 100 (b) now sec. 85 (B) of the Tax Code by PD No.
1705.

Note: In relation to transfers with retention of rights


which are made in contemplation of death if the right
of retention by the Decedent is co-terminous with his
lifetime.

b) with the condition that X will use it only for 10 years


and then X dies before 10 years
- Effect: Not part of the estate of X as he is not the
actual owner
3.) Transfer with retention or reservation of certain
rights
- This contemplates the instances where the owner
transfers his property during his lifetime but still retains
economic benefits (the possession or enjoyment of the
property or the power to designate the person who may
exercise such rights).
- It includes:
A. Transfer without retention of interest but intended to
take
effect at or after the decedents death.
- Example: donations mortis causa.
B. Transfer with retention of interest in respect to:
- 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 person who shall possess or
enjoy the property or the income therefrom. And
such interest is retained by the decedent for his life
or for any period which does not in fact end before
his death.
C. Transfer with reversionary interest, wherein there is a
possibility that the transferred property may return
to the decedent or his estate or that it may become
subject to a power of disposition by the decedent.
- Ex: A transfers his property to B in naked ownership
and to C in usufruct throughout Cs lifetime subject to
the condition that if C predeceases A, the property shall
return to A. If A dies during Cs lifetime, the value of the
reversionary interest of A at death is included in his
gross estate.
3.)

Revocable transfer

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REVIEW NOTES FOR TAXATION 2

- the decedent has full control of disposition of property


- even if the control is not exercised, it is enough that it is
exists
- A transfer where:
a.)
The decedent or in conjunction with any other
person has reserved the right to alter, amend,
revoke, or terminate; or
b.)
Any
such
power
is
relinquished
in
contemplation of the decedents death.

If the power of appointment is general, it makes


the appointed property a part of the donees
property.

The power to alter, amend or revoke shall be considered


to exist on the date of the decedents 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 upon the expiration
of a stated period after the exercise of the power.

5.)
Transfer for insufficient consideration
- A transfer that is not a bona fide sale of property for
an adequate and full consideration in money or
moneys worth. 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.

If the notice has not been given or the


power has not been exercised on or before the
decedents death, such notice or the power shall
be considered to have been given or exercised
on the date of the decedents death.
4.)

Transfer of property under a general power of


appointment

- A transfer where the donor of the power of


appointment authorizes the donee of such power to
designate any person he chooses to be given the right
over the appointed property.
- The transferee may choose freely any person who will
own the property after he dies
- Rationale: the will of the transferee is followed; hence,
part of transferees estate
* Note: the decedent is the transferee in this provision
General power of appointment vs. special power of
appointment:
A.) A power is general, when it authorizes the
donee of the power to appoint any person he
pleases including himself, thus having a full
dominion over the property as if he owned it.
B.) It is special when, the donee can appoint only
among a restricted or designated class of
persons other than himself.
Note:

Under a general power of appointment, title to


the property is legally transferred to the donee.
Therefore the property shall form part of the gross
estate of the donee.

However, if the purported absolute sale inter vivos


by the decedent is shown to be fictitious, then the
total value of the property transferred is subject to
inclusion in the taxable estate.

- Ex: X owns a house and lot, he wants to help Y so he


sells his house worth P5M for only P1M. At the time of
Xs death, his house and lot is worth P10M.
How much is included in the gross estatre of X? 10-1 =
9M
- Ex: X bought a car worth P1.3M. X needed money so he
sells his car to Y for only P1M. This is not a transfer for
insufficient consideration as this is a bona fide transfer at
arms length; hence, a valid transfer.
6.)
Proceeds of life insurance
- Proceeds of life insurance taken by the decedent on his
own life shall be included in the gross estate if the
beneficiary:
A.) Is the estate of the decedent, his executor, or
administrator
(regardless
whether
the
designation is revocable or irrevocable); or
B.) Third person other than the estate, executor,
administrator but the designation of the
beneficiary is revocable.
- Presumption: proceeds are revocable
- include in the estate only if it is revocable as the
decedent retained control over the proceeds
7.)
Prior Interest
- Except as otherwise specifically provided therein,
subsections (B), (C), (E) of Section 85 referring to
transfer in contemplation of death, revocable transfer
and proceeds of life insurance respectively shall apply
to the transfers, trusts, estates, interests, rights, powers
and relinquishment of powers as severally

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REVIEW NOTES FOR TAXATION 2


enumerated and described therein, whether made,
created, arising, existing, exercised or relinquished
before or after the effectivity of the CTRP.
NOTE:
In most of these transfers the property remains
substantially that of the transferor during his lifetime
notwithstanding the transfer since he still retains either
the beneficial ownership or naked title to the
property.
EXCLUSIONS FROM THE GROSS ESTATE

a) Amount receivable by any beneficiary irrevocably


designated in the policy of insurance by the insured.
b) Proceeds of a group insurance policy taken out by a
company for its employees.
c) Proceeds of insurance policies issued by the GSIS to
government officials and employees.
d) Benefits accruing under the Social Security Act.
e) Proceeds of life insurance payable to the heirs of
deceased members of the military personnel of the
United States Army or Philippine Army under laws
administered by the United States Veterans
Administration.
f) Accident insurance proceeds.

1. Merger of usufruct in the owner of the naked title


- ex: X has a house and lot. X gave the title to Z.
X also allows Y to use the same and that in case Y dies,
the use goes to Z. What are the effects?
a) If X dies include the house and lot in Xs estate
b) If Y dies exclude from the estate of Y as the will of X
is being followed, there is a merger of usufruct in Z (the
owner of the naked title).

5. Separate property of the surviving spouse.

2. Fideicommisary and transmissions from the first


heir, legatee, or donee in favor of another beneficiary,
in accordance with the desire of the predecessor
- ex: X has a house and lot. In the will of X, Y may have
the title to the house and lot but in case Y dies, the
property will go to Z. What are the effects?
a) If X dies include as part of Xs estate as he actually
owns it
b) If Y dies excluded from the estate of Y as he has no
control over its disposition

What regime of property relations shall govern the


spouses?

- Ex: X has a house and lot which he wants to give to Y


but Y is a minor at the moment so that X institutes T to
hold the property in trust for Y until Y reaches the age of
majority. X died. The property passed to T. T died. Y
reached the age of majority. Effect if T dies: Not part of
estate of T.

EXEMPTION FROM ESTATE TAX

Note: Common reasons for 1 and 2 the will of the first


decedent is followed, the second decedent has no control
over the disposition.
3. Transfers to social welfare, cultural, and charitable
institutions
- Requisites:
a) Qualified organization
b) Not more than 30% will be used for administrative
purposes
-Reason: to encourage such transfers
4. Proceeds of insurance not includible in the gross
estate of the decedent

Note:
In the determination of the gross estate, the nature of
the property, whether common property of the
spouses, separate or exclusive property either of the
deceased or of the surviving spouse, becomes of
vital importance.

Under the Civil Code, the husband and wife


who got married before August 3, 1988 are governed
by the Conjugal Partnership of Gains, while those
who got married on or after August 3, 1988 are
governed by the Absolute Community of Property,
unless a different regime was agreed upon in the
marriage settlement.

A. The first P200, 000.00 value of the estate (sec. 84


NIRC)
B. The merger of the usufruct in the owner of the naked
title.
C. The transmission from the first heir, legatee, or donee
in favor of another beneficiary in accordance with the
desire of the predecessor.
D. All bequest, devises, legacies or transfers to social
welfare, cultural and charitable institutions, no part
of the net income of which inured to the benefit of
any individual and provided that not more than 30%
of the said bequest, etc shall be used by such
institution for administration purposes.
E. Intangible personal property of non-resident aliens
under the principle of reciprocity.
F. Retirement benefits of employees of private firms
from private pension plans approved by the BIR.
G. Amount received for war damages.

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REVIEW NOTES FOR TAXATION 2


Grants and donations to the Intramuros
administration.
ALLOWABLE DEDUCTIONS FROM THE GROSS
ESTATE
- Granted by mere legislative grace
- Construed strictly against the taxpayer
- Requisites:
a) Substantiate the claim for deduction
b) Identify the provision granting the deduction.
The provision must be clear and definite.
H.

RESIDENT DECEDENT
A. Ordinary Deductions (ELIT):
1) Funeral Expenses
- The amount deductible is equal to 5% of the gross
estate or the amount of the actual funeral expenses
whichever is lower, but in no case to exceed P200,000;
- Actual funeral expenses are those which were
actually incurred in connection with the interment or
burial of the deceased and paid for from the estate of
said deceased.
- Funeral expenses include:
a)
Costs of coffin, tombstone, mausoleum, and
burial lot;
b)
Funeral parlor fees;
c)
Mourning clothing of the surviving spouse
and the unmarried minor children;
d)
Costs of obituary notices; and
e)
Expenses during the wake.
- The following cannot be deducted under funeral
expenses:
a)
Cash advances of the surviving spouse and the
heirs;
b)
Expenses paid by the relatives and friends; and
c)
Expenses after the burial.
-

Requisites:
a) The expenses must be due to the interment, wake
and burial; hence, expenses on the death
anniversary are not included
b) The expenses must have been shouldered by the
estate and not by other people
2)

Judicial expenses of the testamentary or


intestate proceedings
- Requisite: administration expenses to those actually
incurred in the administration of the estate.
- Examples:

a)
b)
c)
d)
e)
f)

fees of the executor or administrator;


attorneys fees;
accountants fees;
court fees;
salaries of employees; and
All other expense related to
administration of the estate.

the

Note:
This includes all expenses necessary to settle or
preserve the estate hence, extrajudicial expenses are
included.
Expenses not essential to the proper settlement
of the estate but incurred for the individual benefit
of the heirs, legatees, or devisees are not allowed as
deductions.
- ex: expenses to be declared as administrator vs. an
oppositor is a personal expense

3)
Claims against the decedents estate
- Debts or obligations of the decedent that is enforceable
against the estate provided that the following requisites
are
met:
a) They were contracted in good faith and for an
adequate and full consideration in money or
moneys worth.
b) They must be existing against the estate.
c) They must be legally enforceable obligations of
the decedent and ought to be enforced by the
claimants.
d) They must be reasonably certain in amount; and;
e) At the time the indebtedness was incurred, the
debt instrument was duly notarized and if the
loan was contracted within three (3) years before
the death of the decedent, the administrator or
executor shall submit a statement showing the
disposition of the proceeds of the loan.
4) Claims against the insolvent persons
- Requisites for deductibility:
a) The amount of said claims has been initially
included as part of the gross estate; and
b) The incapacity of the debtors to pay their
obligations is proven and not merely alleged.
5) Unpaid mortgages indebtedness
- Requisites for deductibility:

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REVIEW NOTES FOR TAXATION 2


a) The fair market value of the property mortgaged
without deducting the mortgage indebtedness
has been initially included as part of his gross
estate;
b) The mortgage indebtedness was contracted in
good faith and for an adequate and full
consideration in money or moneys worth.
- ex: X obtained a 3M loan from Y and executed a Real
Estate Mortgage over his house and lot worth 5M. X
paid 1M. X died.
Effect: in the estate of X, include the 5M in the gross
estate of X and claim as deduction the unpaid 2M.

Accommodated Loan
- Ex: X owns a house and lot worth 5M. Y obtained a 3M
loan from Z with Xs house and lot as collateral. Y paid
1M. Z died. X died.
Effect: Include in the gross estate of X the 5M as
receivable from Y (reason: right of reimbursement); and
claim as deduction the unpaid 2M.
6) Casualty Losses (TRECUSO)
- They include all losses incurred during the settlement
of the estate arising from fires, storms, shipwreck or
other casualties or from robbery, theft or
embezzlement.
- Requisites for deductibility:
a) Losses not compensated by an insurance or
otherwise;
b) Losses that were not claimed as a deduction for
income tax purposes; and
c) Losses incurred not later than the last day for
payment of the estate tax (6 months from death).
d) Include the worth of the property in the gross
estate
e) File a sworn declaration of the fact of loss within
45 days from its occurrence
7) Unpaid Taxes
- Unpaid income tax on income due or received
before death of the decedent, and real property
taxes, which have accrued prior to the death of the
decedent (real property taxes accrued at the
beginning of the year but may be paid before or at
the end of each quarter) are deductible.
-

Income taxes upon income received after the death


of the decedent, or property taxes not accrued before
his death, or any estate tax cannot be deducted
because they are chargeable to the income of the
estate.

- except: estate tax because estate tax liability is


determined at the time of death

B. Vanishing / Alternating Deduction Or Property


Previously Taxed
- an amount allowed to reduce the taxable estate of a
decedent where the property was:
a. received by him from prior decedent by gift,
bequest, devise or inheritance, or
b. transferred to him by gift, has been the object of
previous transfer deduction.
-

VANISHING DEDUCTION: because the rate of


deduction gradually diminishes and entirely
vanishes depending upon the time interval between
the two (2) successive transfers.

ALTERNATING DEDUCTION: because the present


decedents estate cannot claim it if the prior
decedents estate claimed it

a.

Factors necessary in vanishing deduction, these are;


There are two (2) deceased persons and the first
is the donor; and
The second decedent dies within five (5) years
after the death of the prior decedent or in the case of
gifts the decedent donee dies within the same
period after the date of the gift.

b.

- Rationale:
The deduction operates to ease the harshness of
successive taxation of the same property within a
relatively short period of time.
Requisites for deductibility:
1. The present decedent must have acquired the
property by inheritance or by donation.
2. The property must have been acquired within five
(5) years prior to the death of the present decedent
3. The property must have formed part of the gross
estate of the prior decedent if acquired by inheritance, or
the taxable gift of the donor if acquired by donation.
4. The estate tax or the donors tax, as the case may be,
must have been paid on the previous transfer.
5. The property must be identified as the one received
from the prior decedent or from the donor, as the case
may be.
6. The estate of the prior decedent must not have
previously availed of the vanishing deduction on the
subject property.
Procedure in computing vanishing deductions:
1. Value taken of property previously taxed
Less:Mortgage paid by the present decedent on
property previously mortgaged by prior decedent /
donor, if any (Ist deduction)

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REVIEW NOTES FOR TAXATION 2


= Initial basis
2. Initial basis divided by the value of the gross estate of
present decedent X Expenses, and transfer for public
purpose
=2nddeduction
3. Initial Basis
Less: 2nd deduction
Final Basis
Multiplied by rate deduction (sec.86 (A.2), NIRC)
Vanishing Deduction
C. Transfers For Public Use
- Requisites:
1. The disposition must be testamentary in
character.
2. To take effect after death.
3. In favor of the government of the Philippines, or
any
political subdivision thereof.
4. Exclusively for public purpose.
5. Included in the gross estate
Query: If in a will the property was bequeathed to a city
and an NGO, are the tax effects the same? No.
a) City - included in the gross estate and claimed as
deduction
b) NGO excluded from the gross estate and subject to
the limitation that not more than 30% must be used for
administrative purposes
D. Family Home
Refers to the dwelling house, including the land
on which it is situated, where the husband and wife,
or an unmarried person who is the head of the
family and members of their immediate family
resides as certified by the Barangay Captain of the
locality.
-

For the purpose of availing of a family home


deduction to the extent provided by law, a person
may constitute only one family home.

The amount deductible is equivalent to the current


fair market value of the decedents family home if
said current fair market value exceeds P1,000,000,
the excess shall be subject to estate tax.

- Requisites to be deductible:
a. The family home must be the actual residential home
of the decedent and his family at the time of his

death. (Decedent is married and has dependents or is


a head of family with dependents.)
b. Such fact must be certified by the Barangay Captain
of the locality where the family is situated.
c. The total value of the family home must be included
in the gross estate of the decedent.
d. The allowable deduction must be in an amount
equivalent to the current fair market value of the
family home as declared or included in the gross
estate not exceeding
P1, 000,000.
E. Standard Deduction Of P1, 000,000.00
- on top of other deductions, unlike the optional
standard deduction which is in lieu of other deductions;
hence, it does not include the P 200,000 exemption
F. Medical Expenses
- Requisites:
a. Must be incurred by the decedent within one (1)
year
prior to his death
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000
*Opinion of JB: medical expense must be related to the
cause of death as it is the estate that is being settled.
Otherwise, if not related, it is a personal expense.
G. Amounts Received By Heirs Under RA 4917 From
The Decedents Employer As A Consequence Of The
Death Of The DecedentEmployee, Provided That
Such Amount Is Included In The Gross Estate Of The
Decedent.
- retirement benefits
- Requisite: include in gross estate
H. NET SHARE OF THE SURVIVING SPOUSE IN
THE CONJUGAL / COMMUNITY PROPERTY.
- Requisite: Include the entire amount in the gross estate
then deduct the share of the surviving spouse
- Ex: H owns a car worth 1M and a house and lot worth
5M
W owns a truck worth 2M and jewelry worth 10M
H and W owns a conjugal lot worth 20M
H died.
Gross estate of H:
Exclusive
5 M house and lot
1M car _________
6M
Total gross estate = 26 M

BAR OPERATIONS COMMITTEE

Conjugal
20 M lot
_______
20 M

REVIEW NOTES FOR TAXATION 2


Then claim as deduction the 10M, which is the
share of the surviving spouse in the conjugal lot.
- Ex: H and W died simultaneously. In computing the
gross estate of H and W, their shares shares as to the
conjugal lot may immediately be split as there is no
surviving spouse left.
I) Tax Credit For Estate Tax Paid To A Foreign
Country
- The estate tax imposed by the tax code shall be credited
with the amount of any estate tax paid to a foreign
country.
- Concept: if a property located in the Philippines was
already subjected to estate tax abroad and the same
property is also subjected to estate tax in the Philippines,
the foreign tax paid is allowed to reduce his Philippine
estate tax
- Purpose: minimize the effect of international double
taxation
- applicable only to residents and citizens, not to NRA
since he is taxed only on his properties within the
Philippines; hence, the NRA will not be made to pay
estate taxes twice for his property located abroad = no
international double taxation = no tax credit. (Sec. 86
(E)(2))
- Requisites:
1. Prove that the foreign estate tax has been paid
2. Prove reciprocity : that in the decedents foreign
country, a similar tax credit is given to Filipinos
Limitations on tax credit:
A.)The tax credit limit for estate taxes paid to one
foreign country is determined by the following:
TAX CREDIT LIMIT=
Decedents Net Estate situated in a foreign country x
Phil. Estate tax of the Entire net estate
B.) The tax credit limit for estate taxes paid to two or
more countries is determined as follows:
TAX CREDIT LIMIT =
Decedents net estate situated outside of the Phil X Phil.
Estate tax of Entire net Estate
Note:
1.) Under limitation A the allowable tax credit is the
lower amount between the tax credit limit and the
estate tax paid to the foreign country.

2.) Under limitation B the allowable tax credit is the


lower amount between the tax credit limit computed
under (A) and that computed under (B)
B.) IF DECEDENT IS A NON RESIDENT ALIEN
The deductions allowed to citizens or residents
of the Philippines are also extended to a non-resident
alien decedent with respect to his estates situated in the
Philippines at the time of his death.
In case of deductions for expenses, losses,
indebtedness and taxes, the amount of the allowable
deduction is limited only to the proportion of such
deductions with the value of such part of his gross estate
which at the time of his death, is situated in the
Philippines, bears to the value of his entire gross estate
wherever situated. (Sec. 86 (B))
Formula:
Allowable deduction of non-resident estate =
Philippine Gross Estate
Claimed
Entire Gross estate

Deductions

As a prerequisite to the deduction, it must be


included in the return required to be filed the value at
the time of his death, of that part of the gross estate of
the non-resident not situated in the Philippines, to
determine the ratable portion of the deduction for
expenses allowable.
Valuation of Property
The estate shall be appraised at its fair market value
(FMV) at the time of death of the decedent (Sec.88,
NIRC). This is regardless of any subsequent contingency
affecting the estate. (Lorenzo vs. Posadas, 64 Phil. 353)
1. Real Property
- higher amount of :
a) FMV as determined by the Commissioner
- This is the zonal value (of the land) as fixed by the
CIR, and can be obtained from the BIR website or
regional office
b) FMV fixed by the provincial or city assessor
- This is the value as shown in the tax declaration
of the property
- Use this amount for real properties with no
zonal values (i.e. real properties other than land
such as buildings and improvements)

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


* Note : The law does not state that the prevailing
market rate or the consideration as a basis for
determining the FMV
* Note: If there are no improvements in the property,
get a Certificate of No-improvement, (which you can get
only after obtaining a Certificate of Non-tax
delinquency) and attach these to the estate tax return.
2. Personal Properties
a) Shares of Stock
- book or par value at the time of death, and can be
obtained by writing a letter of inquiry, asking for a
formal certification from the corporation which issued
the shares of stock as to the value of such stock at the
time of death of the decedent
b) Inventories
- value as stated in the invoices (i.e.: price at purchase);
or the prevailing market rate (ask for the value from
those engaged in the same business); or if value cannot
be definitely ascertained, state the approximate
reasonable value (but this will be subject to the
discretion of the BIR inspector)
c) Motor vehicles
- these depreciate 20% per year from purchase
- Hence, motor vehicles are fully liquidated and has no
estate tax liability after 5 years but include in the gross
estate placing zero as the amount (to secure a tax
clearance therefor)
3. Right to Usufruct, use or habitation; or annuity
- probable life of the beneficiary shall be taken into
account, in accordance with the latest basic mortality
table, to be approved by the Sec. of Finance, upon
recommendation of the Insurance Commissioner
Filing of Notice of Death
Where the gross value of the estate exceeds P 20,000
although exempt, the executor, administrator, or any of
the legal heirs shall give, within 2 months after the
decedents death or within like period after the executor
or administrator qualifies as such, a written notice
thereof, to the Commissioner of Internal Revenue. (Sec.
89, NIRC)
- Contents of the letter:
1. The fact that the decedent died
2. Residence of the decedent
3. Date of death

10

- Effect of failure to file notice: subject to penalty not


lower than P1,000
* Note: Filing with the nearest Revenue District Office is
sufficient compliance.
Filing of Return and Payment of Tax
1.) By whom?
An estate tax return under oath is required by
law to be filed by the executor, administrator, or
any of the legal heirs:
a.) Where the gross value of the estate exceeds
P200,000 though exempt from the estate tax;
or
b.) Regardless of the gross value of the estate,
where the said estate consists of registered
or registrable real property, such as real
property (land, bank accounts, others with
definite records), 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.
2.) When to file?
The return shall be filed within 6 months
from the decedents death.
The Commissioner shall have the authority
to grant, in meritorious cases, a reasonable
extension not exceeding 30 days for filing
the return.
3.) Where to file?
Except in cases where the Commissioner otherwise
permits, the return shall be filed with:
* if the decedent is a resident
a) an authorized agent bank
b) Revenue District Officer
c) Revenue Collection Officer
d) duly authorized treasurer of the city or
municipality where the decedent was
domiciled at the time of his death, or

* if the decedent is a non-resident


a) with the Revenue District Office where his
executor/administrator is registered

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


b) with the Revenue District Office having
jurisdiction over the residence of the
executor/administrator
e) with the Office of the Commissioner if the
decedent has no executor or administrator
4.) Copies:
The return shall be filed in triplicate, two (2) for the
BIR and one (1) copy for the taxpayer.
5.) When to Pay
Pay the estate tax at the time you will file your estate
tax return. (Pay as you file system)
6.) Extension for Payment:
- allowed in meritorious cases when the
Commisioner finds that the payment of the esate tax
on the due date would impose undue hardships
upon the estate or any heir :
At most 2 years if estate extrajudicially
settled
At most 5 years if estate judicially settled
- NOTE: The taxpayer must not be guilty of
a) negligence
b) intentional disregard of the rules and regulations, or
c) fraud
- the taxpayer may also be required to pay a bond not
exceeding double the amount of tax and with such
sureties, as the Commissioner deems necessary
* Note: The filing of the estate tax return is not sufficient
to
obtain
a
tax
clearance,
the
administrator/executor/heir must submit additional
documents to determine the correctness of the values
stated by him in the estate tax return.
- such as the title of the land, tax declaration of the land
and its improvements or Certificate of No-improvement,
vicinity map to fix the exact location and zonal value,
etc.
(Read: Revenue Memorandum Order 15-2003)
* Note: To avoid the imposition of penalties while there
is no extra/judicial settlement yet, any heir may file a
sworn declaration to the BIR stating the fact of death,
that the estate has not yet been settled and the list of the
properties included in the estate, as basis for payment of
estate tax.
If Gross Estate >2M, additional requirement:
must submit a certificate of an independent CPA
stating:

1.

2.
3.

11

itemized assets of the decedent with


corresponding gross value at the time of his
death;
or if NRA, that part of his gross estate situated
in the Philippines
itemized deductions from the gross estate
amount of tax due, whether paid or still due and
outstanding

Liability for Payment of Estate Tax

Primarily Liable : Executor or administrator before delivery to any beneficiary of his distributive
shares. After due payment, the executor or
administrator shall be discharged from personal
liability.

Subsidiarily Liable : Beneficiary - to the extent of


his distributive share, liable for the portion of the
estate tax as his distributive share bears to the value
of the total net estate.

NOTE: There are two ways the government may enforce


collection of estate taxes from the decedents heirs:
1. It can collect from all the heirs the amount of the estate
tax proportionate to the inheritance they received.
2. It can subject properties of the estate which are in the
hands of the heirs/transferees to the payment of the
tax. (CIR vs. Pineda, 21 SCRA 105)
NOTE: The heirs have a solidary obligation to settle the
estate. Hence, the BIR can collect from or sue any of the
heirs, but only up to the amount of that heirs share in
the hereditary estate. This is without prejudice to such
heirs right of reimbursement from his co-heirs of their
share in the payment of the estate tax. (CIR vs. Pineda,
21 SCRA 105)
Measures to Insure Payment of Estate Tax
a. No judge shall authorize the executor or
judicial administrator to deliver a distributive share to
any party interested in the estate unless a certification
from the Commissioner that the estate tax has been paid
as shown. (Sec.94)
- by the court requiring the executor/administrator to
submit an inventory of properties of the estate, these
properties are to be distributed only after payment of
estate taxes and receipt of clearance by the
Commissioner or his duly authorized representative
- NOTE: The approval of the probate court is not
required before estate taxes may be collected. The
enforcement and collection of taxes are executive in
nature. (Marcos II vs. CA, 273 SCRA 47)

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


b. Registers of Deeds shall not register in the
Registry of Property any document transferring real
property any document transferring real property or real
right therein or any chattel mortgage, by way of gift
inter vivos or mortis causa, legacy or inheritance, unless
certification from the commissioner that the tax has been
paid and the y shall immediately notify the
Commissioner, Regional Director, Revenue District
Officer, or Revenue collection Officer or treasurer of the
city or municipality where their officer are located, of
the non-payment of the tax discovered by them. (Sec. 95)
- before the properties are transferred in the name of the
heirs, a Certificate Authorizing Registration (CAR) must
be shown
c. Any lawyer notary public, or any Government
Officer who, by reason of his official duties, intervenes
in the preparation or acknowledgement of documents
regarding partition or disposal of donation inter vivos or
mortis causa, legacy or inheritance, shall have the duty
of furnishing the Commissioner, etc., with copies of such
documents and any information whatsoever, which may
facilitate the collection of the aforementioned tax. (Sec.
95)
- ex: deed of extrajudicial settlement, deed of donation
d. Neither shall a debtor of a deceased pay his
debts to the heirs, legatees, executor or administrator of
his creditor, unless a certification of the Commissioner
that the tax fixed has been paid is shown; but he may
pay the executor or judicial administrator without said
certification if the credit is included in the inventory of
the estate of the deceased. (Sec. 95)
- else: debtor may be personally liable for the payment of
the lost tax, like a withholding agent who fails to
withhold taxes
e.
Corporations,
sociedad
anonima,
partnerships, business or industry organized in the
Philippines shall not transfer in their books any shares
obligations, bonds or rights by way of gift inter vivos or
mortis causa, legacy or inheritance to the new owner
unless a certification from the Commissioner that the
taxes fixed and due thereon have been is shown; (Sec.
97)
- obligation of corporate secretary
f. If a bank has knowledge of the death of a
person who maintained a bank deposit account alone or
jointly with another, it shall not allow any withdrawal
from the said joint deposit account unless the
Commissioner has certified that the estate taxes imposed
thereon have been paid. However, the administrator of

12

the estate or any of the heirs of the decedent may, upon


authorization by the Commissioner of Internal Revenue
withdraw an amount not exceeding P 20,00 without the
said certification . (Sec. 97)
- For this purpose, all withdrawal slips shall contain a
statement to the effect that all of the joint depositors are
still living at the time of withdrawal by any one of the
joint depositors and such statement shall be under oath.
Otherwise, the joint depositor will be liable for perjury
(Sec. 267).
- joint accounts covered by this rule include and and
and/or accounts, but do not include an account
subject to a Survivorship Agreement with a survivortake-all feature (because there is an automatic transfer of
right to the survivor; hence, not included in gross estate
of the joint depositor who died tax avoidance scheme)
g. The estate tax together with interest,
penalties, and costs that may accrue in addition thereto
constitutes a lien upon all property and rights to
property belonging to the taxpayer. The lien attaches
when the taxpayer neglects or refuses to pay after
demand. (Sec. 219)
h. In judicial settlement of estates, the court is
required to furnish the commissioner of Internal
Revenue a certified copy of the schedule of participation
and the court order approving the same within 30 days
after its promulgation. (Sec. 91(b));
i. The estate tax shall be paid by the executor or
administrator before delivery to any beneficiary his
distributive share of the estate (Sec. 91 (c)). He may be
discharged from personal liability for deficiency in the
estate tax only after written application to the
commissioner and upon determination that no such
deficiency appears. (Sec. 92)
NOTE: Additional Readings
1. Revenue Regulation 2-2003
2. Revenue Memorandum Order 15-2003
TAX TIPS: Avoidance of Estate Tax Liability
1. Maximize your claims for deductions such as the use
of the transfers falling under the exclusions from gross
estate.
2. Donate properties to your relatives as the tax rates for
donors taxes are lower than for estate taxes.
3. Estate Planning (Section 40 (c), NIRC)

BAR OPERATIONS COMMITTEE

13

REVIEW NOTES FOR TAXATION 2


- execute a Deed of Exchange; the properties of at most
5 persons in exchange for shares of stock in order to
obtain control of the corporation (more than 51%
ownership)
- this exchange is not taxable for income tax purposes
- more tax savings if real properties are exchanged
- the properties in the deed will no longer be part of
the gross estate as it is now owned by the corporation
- the stock shares will be included in the gross estate
but the tax would be lower as the value at time of
death might still be the same original value at the time
of exchange; on the other hand, if there was no
exchange the estate tax for the land would be higher as
the value of the land at time of death will be higher
than at the time of the acquisition.
4. Set up a living trust
- Trust: obligation imposed by a person regarding his
property
- Create an irrevocable trust over your properties so
that they will not form part of your gross estate when
you die. This is because the Irrevocable Trust is a new
taxpayer created.
- Ex: grandfather (Grantor) during his lifetime would
like to give certain properties to his grandchild. Until
he reaches the age of maturity, the properties will be
held in trust by X (trustee) for the grandchild
(Beneficiary).

DISTINCTION BETWEEN DONORS AND ESTATE


TAX
DONORS TAX
Tax on the privilege to
transmit property during
the lifetime of the donor
Tax rates are lower (2 to
15)
Exemption is only P
100,000.00
Notice of donation is
generally not required

ESTATE TAX
Tax on the privilege to
transmit property upon
ones death
Tax rates are higher (5
to20)
Tax
exemption
is
P200,000.00
Notice
of
death
is
required

Extension of payment is
not provided

Extension of payment
may be granted by the
Commissioner of Internal
Revenue

Payable within 30 days


from the date of gift
Imposed on the net gift

Payable within 6 months


from the date of death
Imposed on the net estate

II. DONORS TAX / GIFT TAX


A. NATURE
- It is an excise (privilege) tax, imposed on the privilege
of the donor to give or on the privilege of the done to
receive. It is not a tax on the property as such because its
imposition does not rest upon general ownership.
- The tax is imposed without reference to the death of
the donor unlike in the case of estate tax.
Donation / Gift
- an act of liberality whereby a person disposes
gratuitously of a thing or right in favor of another who
accepts it.
- For tax purposes, the term has a much wider meaning,
it includes:
a. any transfer 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. any transfer of property by gift, except in forced
sales and in the sale of real property which is a
capital asset, for less than and adequate and full
consideration in money or moneys worth. (Sec.
100)
c. Condonation or remission of debt, where the
creditor merely desires to benefit a debtor and
without any consideration therefore cancels the
debt.
Requisites Of A Taxable Gift:
1.) CAPACITY of the donor to make the donation;
2.) DONATIVE INTENT or INTENT on the part of
the donor to make a gift;
3.) DELIVERY, whether actual or constructive, of
the gift; and
4.) ACCEPTANCE of the gift by the donee.
Note:
A. The donee, unlike the donor need not be capacitated.
B. donors tax applies now to both natural and juridical
persons.
C. donative intent must be present in direct gift but with
respect to indirect gift, e.g. transfer of property for
less than an adequate and full consideration,

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


donative intent is superfluous. Thus, donative intent
is not always essential to constitute a gift.
D. In Abello vs. CIR (Feb. 25, 2005), donative intent is
evidenced by a reduction of patrimony of one and an
increase in patrimony to the other.
Purposes Of Gift Tax
1.)

The gift tax was enacted originally to


supplement the estate and inheritance taxes by
preventing their avoidance through the taxation of
gifts inter vivos.
2.)
The donors tax is also intended to prevent the
avoidance of income tax through the device of
splitting income among numerous/different donees
with the donor thereby escaping the effect of the
progressive rates of income taxation.
Kinds Of Gift Taxes:
1.
Donors tax or tax levied on the act of giving; it
supplements the estate tax; and
2.
Donees tax or tax levied on the act of receiving;
it was formerly the counterpart of the inheritance
tax, which has been integrated into an estate tax.
*Both taxes have now been integrated into a donors tax.
Parties To A Donation:
1. Donor - the Person who disposes of his property or
right.
2. Donee - the Person who receives the property or right.
Properties Included In The Term Gift

14

B. FACTORS AFFECTING LIABILITY FOR GIFT


TAXES
1. Relationship of the donor and the donee
a) when the donee is considered a stranger to the
donor, the donors tax shall be 30% of the net gifts.
b) when the donee is a relative of the donor, the tax
shall be based on the 2-15% table under Sec. 99(A).

Stranger
1.) one who is not a :
(a) brother/sister (whole or half blood), spouse,
ancestor and lineal descendant
(b) relative by consanguinity in the collateral line
within the fourth degree of relationship
2.) donations made between individuals and business
organizations are considered donations to
strangers
3.) donations made between business organizations
are considered donations made to strangers
(RR 2-2003)

Note: Donees who have no blood relation to the donor


are considered strangers to the donor, such as those
made to ones in-laws or to juridical persons.
2. Value of the Gift
- the higher the value of the gift, the higher the gift taxes
C. DEDUCTIONS / EXEMPTIONS FROM GIFT TAX
1. Gifts Made by a Resident:

(A). In the case of resident citizens, non-resident


citizens and resident aliens:
1. Real property within and without the Philippines.
2. Tangible personal property within and without
the Philippines; and
3. Intangible personal property within and without
the Philippines.
(B.) In the case of non-resident aliens:
1. Real property within the Philippines.
2. Tangible personal property within the
Philippines.
3. Intangible personal property within the
Philippines, unless there is reciprocity in which
case, it is not taxable.
Note:
The specific items includible in the gross estate are
applicable to and are embraced by the term gift.

a.) Dowries or gifts made on account of marriage before


its celebration or within one year thereafter by parents to
each of their legitimate, illegitimate or adopted children
to the extent of the first P10,000.00.
Requisites:
1. The donation must be given on account of
marriage.
2. The parent must give it to his child.
3. The child must be either the legitimate,
recognized natural or legally adopted child of
the donor, and;
4. It must be given before or one year after the
celebration of the marriage.
b.) Gifts made to or for the use of the National
Government or any of its agencies which is not
conducted for profit, or to any political subdivision of
the said government.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


c.) Gifts in favor of educational, charitable, religious,
cultural or social welfare corporation, institutions,
foundations, trust or philanthropic organization,
research institution or organization, or accredited nongovernment organization. Provided, that no more than
30% of said gifts shall be used by such donee for
administration purposes.
Note:

For purposes of exemption, a non-profit


educational
and/or
charitable
corporation,
institution,
accredited
non-government
organization, trust or philanthropic organization is
defined as:
school, trust or university and/ or charitable
corporation, foundation trust or philanthropic
organization and/ or research institution or
organization incorporated as a non-stock entity:
paying no dividends.
governed by trustees who receive no
compensation; and
devoting all its income to the accomplishment
and promotion of the purposes enumerated in
its articles of incorporation.

Note:
Only donations made to non-stock, non-profit
educational institutions are exempt from gift taxes as
although Article 14 of the Constitution states that
proprietary educational institutions may be given the
same privileges subject to a guideline; as a guideline, the
NIRC does not provide for such exemption to them.
2. Gifts made by a Non-Resident Alien
a.) Gifts made to or for the use of the National
Government or any entity created by of its
agencies which is not conducted for profit, or to
any political subdivision of the said government.
b.) Gifts in favor of educational, charitable, religious,
cultural or social welfare corporation, institution,
foundations trust or philanthropic organization,
research organization or institution; Provided, that
no more than 30% of said gifts shall be used by
such donee for administration purposes.
Note: doesnt include accredited NGO
Note:
1. Intangible personal property in the gross gift of a
NON-RESIDENT ALIEN donor shall be taxable in the
Philippines, if the PRINCIPLE OF RECIPROCITY is not
cognizable.

15

2. Intangible personal properties considered situated in


the Philippines.

Franchise which must be exercised in the


Philippines
Shares of stocks issued by any corporation or
sociedad anonima organized or constituted in
the Philippines in accordance with its laws.
Shares of stocks issued by any foreign
corporation 85% of the business of which is
situated in the Philippines.
Shares of stock issued by a foreign corporation,
if such shares, obligations, or bonds, have
acquired a business situs in the Philippines; and
Shares or rights in any partnership, business or
industry established in the Philippines.

D.
TAX
TREATMENT
OF
PROPERTIES
TRANSFERRED FOR LESS THAN FULL /
ADEQUATE CONSIDERATION
General Rule: The amount by which the FMV of the
property exceeded the value of the consideration shall
be deemed a gift
Exception: real properties classified as capital assets (not
used in business) as there were already subjected to
Capital Gains Tax
E.
TAX
TREATMENT
OF
POLITICAL
CONTRIBUTIONS
- any contribution in cash or in kind to any candidate,
political party or coalition of parties for campaign
purposes shall be governed by the Election Code; hence,
this is not subject to gift tax (report to COMELEC?)
F. TAX CREDIT FOR DONORS TAXES PAID TO A
FOREIGN COUNTRY
1. Donor was a Filipino citizen or resident alien, at the
time of foreign donation
2. Donors taxes of any character and description are
imposed and paid by the authority of a foreign
country.
Limitations:

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


A.) For donors tax paid to one foreign country;
The amount of tax credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which credit is taken
which the net gifts situated within such country
taxable under the National Internal Revenue Code
bears to his entire net gift, and
B.) For donors tax paid to two or more foreign
countries:
The total amount of the credit shall not exceed
the same proportion of the tax against which such
credit is taken, which the donors net gift situated
outside the Philippines taxable under the National
Internal Revenue Code bears to his entire net gift.

1. Donors Tax Paid to 1 Foreign Country


Tax Credit Limit =
Net gift situated in a foreign country X Phil. Donors Tax
Entire net gifts

Note: Effects Of General And Specific Renunciation


- An heirs general renunciation of inheritance in favor
of a co-heir is not subject to donors tax, but if it is
specifically renounced in favor of a co-heir to the
exclusion of others, it shall be subject to donors tax.
Note: Renunciation of a surviving spouse of his/her
share in the conjugal partnership or absolute
community after dissolution of marriage
- whether made in favor of the heirs of the deceased
spouse or in favor of a third person, the same is subject
to donors tax

H. VALUATION
- the gift tax is based on the fair market value of the gift
at the time it was given
I. LAW APPLICABLE

2. Donors Taxes paid to 2 or more Foreign Countries


Tax Credit Limit =
Net gifts outside the Philippines X Phil. Donors
Tax
Entire net gifts

Between persons guilty of adultery or concubinage.


Between those found guilty of the same criminal
offenses.
Between those made to a public officer or his wife,
descendants, ascendants by reason of his office.

G. NET GIFT
- the total amount of gifts less the allowable deductions
and specific exemptions.
- the total net gifts made during the SAME calendar year
is used as basis for computing the donors tax

Formula:

Note:

16

- the law in force at the time of the perfection /


completion of the donation shall govern the imposition
of donors tax. A donation is considered as completed
FOR TAX PURPOSES at the time the donee accepts the
gift.
J. ADMINISTRATIVE PROVISIONS
1. Filing of notice of donation

Under limitation A the allowable tax credit limit


is the LOWER AMOUNT between the tax credit
limit and the gift tax paid to the foreign country.
Under limitation B the allowable tax credit is the
LOWER AMOUNT between the tax credits;
limit computed under A and that computed
Under B.

Note: Void Donations Are Not Subject To Donors Tax


Such as:
Between husband and wife, even if the relationship
has not been solemnized.

General Rule: Filing of notice of donation is not required


Exception: if the donor wishes to claim exemption from
tax and the donee is an organization under Sec.101(A3)
and Sec. 101 (B2)
Requisites to be exempt from gift tax :
1. Donor is engaged in business
2. Donee is any of the organizations mentioned
under Sec. 101(A3) and Sec. 101 (B2)
3. Donor must give notice to the RDO on every
donation worth at least P50,000.
4. The notice must be given within 30 days from the
issuance by the donee of a Certificate of Donation.

BAR OPERATIONS COMMITTEE

17

REVIEW NOTES FOR TAXATION 2


5. The certificate of Donation must be attached to the
notice.
2. Filing of Donors Tax Return
- within 30 days after the completion of the gift
- donation is completed FOR TAX PURPOSES at the
time the donee accepts the gift
- Contents:
1. Gifts made during the calendar year
2. Deductions claimed and allowed
3. Previous net gifts made during the year
4. Name of the done
5. Relationship of the donor and the done
6. Other information as may be required
3. Payment of Donors Tax
- pay as you file the tax return
- Note: if the donors tax was paid for the transfer, there
is no more need to subject the transfer again to estate
tax. Applying the Back Tax Theory, there is no tax that
remained unpaid regarding this transfer.
4. Extensions For Payment Of Donors Tax
- the NIRC does not provide for any extension for
payment of gift tax, as it is presumed that if you can
donate, you still have sufficient properties to pay for the
tax. Unlike in estate tax where extension is granted,
because the payment of the tax may cause undue
hardship on the heirs specifically for non-liquid
properties which requires time to be sold first to be
converted into cash for payment of the estate tax.
TAX TIPS : Avoidance of Gift Taxes
Execute a Deed of Extra-judicial Settlement with
simultaneous general renunciation of all inheritance
(by operation of law, the renounced inheritance will go
to the co-heirs anyway).
PROBLEMS ON DOWRY DEDUCTION
1. A is the child of H and W
January A got married, H and W gave him P2,000
March H and W gave A P2,000
April H and W gave A another P2,000
Can the parents claim dowry deduction even if these
were made on a staggered basis?
- Yes, provided these were made on account of marriage,
before the marriage or 1 year thereafter.
2. January - A married B and was given dowry
February B died
December A married C and was given dowry
Can the parents of A still claim dowry deduction even if
it was claimed already for the January dowry?

- There is no rule on the matter yet but it is submitted


that as it was made on account of 2 different marriages,
the deduction for the December dowry may be made.
3. A and C are the children of H and W
January - A married B, given dowry
February C married D, given dowry
Can H and W claim dowry deduction for both?
-Yes, as the dowries were given to different children
4. H and W jointly donated to their child A 1M on
account of his marriage to B. Show computation.
For each of H and W the computation is:
500,000 to A 250,000
- to B 250,000
A
250,000
-10,000
240,000
*2 to 15%
3, 600

250,000
_______
250,000
* 30%
75,000

Note: Do not deduct the first 100,000 in case of doneerelatives as this is incorporated already in the table
under Section 99.
General Rule: H and W are considered separate and
distinct taxpayers for purposes of donors tax.
Exception: What was donated is a conjugal property and
only H signed. There is only one donor, without
prejudice to the right of W to question the validity of
the donation without her consent.
PROBLEMS
1. Donations made by X
January 300,000 to his brother
April 400,000 to his sister
August 500,000 to his mother
Compute donors tax:
a) For January donation
= 300,000 * (percentage in the 2 to 15% table) = tax
b) For April Donation
= (300,000 + 400,000) * (2 to 15% table) = tax
c) For August Donation
= (300,000 + 400,000 + 700,000) * (2 to 15% table)
= tax less tax paid for January and April
2. X wants to give Y 200,000, will there be tax savings to
X if he will donate one time the amount of 200,000 or
should he split by donating 100,000 on December 2007
and 100,000 on January 2008?
- It depends if X and Y are relative or not.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


a) relatives yes, there will be savings as under the table
in Section 99, the first 100,000 is exempt from Donors
tax. No donors tax will then be paid for both donations.
b) strangers nom there will be no tax savings. A flat
rate if 30% is imposed on donations made between
strangers; hence, the same amount of P60,000 donors
tax will be paid whether made one time or split.
3. X died and left 1M each to his heirs A, B, C. The heirs
agreed to settle extrajudicially.
a) A renounced his inheritance in favor of B. Is there
liability for donors tax?

* VAT becomes due when the following conditioned concur:


a. There is sale, barter, exchange, transfer or similar
transactions, either for nominal or valuable
consideration, intended to transfer ownership of, or title
to, articles imported, milled, produced or manufactured;
and
b. The sale is consummated, not merely perfected, in the
Philippines. The place where the title to the thing passes
determines the place of delivery or tax situs.
C.

b) A renounced his share without specifying a co-heir


who will receive the same. Is there liability for donors
tax?

VALUE ADDED TAX

Specific Characteristics of VAT


a.

- Yes, this is a case of waiver. A is deemed to have


accepted the property before he gave it to B as one
cannot give what one does not own. A specific
renunciation is taxable.

- No donors tax because as if A never inherited


anything from X and the transfer was made directly
from X to B and C.

18

Consumption Based Tax


- the person who last consumes the product
absorbs the effect of VAT
1.

Destination Principle
- Goods are destined to be consumed in the
Philippines

2.

Cross-border principle
- Goods going out of the Philippines shall not
be subjected to tax since these goods are not
destined to be consumed in the Phils.

*VAT is imposed only on whatever value was added.


D.

Exempt Transactions (Sec. 109, NIRC, as amended


by RA 9337)

A.

Value Added Tax


E. Zero rating vs. Exemption
- Indirect Tax
- It is not the tax itself which is shifted or passed but it is
a. A zero-rated scale is taxable transaction, but
the burden to pay the tax
does not result in an output tax while an
Why? Tax is Personal. Seller is still liable, only that
exempted transaction is not subject to the output
the economic burden is shouldered by the buyer.
tax;
b. The input VAT on the purchases of VATregistered person with zero-rated sales may be
B. Transactions Subject to VAT (ISBEL)
allowed as tax credits or refunded while the
a. Importation whether or not in the regular course of
seller in an exempt transaction is not entitled to
business
any input tax on his purchases despite the
b. Sale
conducted in the
issuance of a VAT invoice or receipt; and
c. Barter
regular course
c.
Persons engaged in transactions which are zerod. Exchange
of business
rated, being subject to VAT, are required to
e. Lease
register while registration is option for VATexempt persons.
* The phrase in the course of business means the regular
conduct or pursuit of a commercial or an economic activity,
including transactions incidental thereto, by any person F. Tax Credits
a. Transitional Input Tax Credits (Sec. 111(A),
regardless of whether or not the person engaged therein is a
NIRC, as amended by RA 9337)
non-stock, non-profit private organization (irrespective of the
b. Presumptive Input Tax Credits (Sec. 111(B),
disposition of its net income and whether or not it sells
NIRC, as amended by RA 9337)
exclusively to members or their guests), or government entity.
BAR OPERATIONS COMMITTEE

19

REVIEW NOTES FOR TAXATION 2

subject to review by the Secretary of


Finance.
TAX ADMINISTRATION AND ENFORCEMENT

The power to decide disputed


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

A. Tax Administration: Its general concepts


is the power of the Bureau of Internal
Revenue (BIR) to enforced and
administer taxes.
B. Government agencies involved in tax
administration
the BIR and Bureau of Customs are
tasked to implement revenues laws as
the case may be.

a.

C. The Bureau of Internal Revenue

The power to issue regulations


is expressly conferred in the Tax
Code. Thus, the Secretary of
Finance,
upon
the
recommendation
of
the
Commissioner,
shall
promulgate all needful rules
and regulations for the effective
enforcement of the provisions of
the Tax Code. (see Sec.244,
NIRC).
The rules and
regulations of the Bureau shall
contain,
among
others,
provisions
specifying,
prescribing or defining the time
and manner of canvassing
revenue regions, form of labels,
conditions to be observed by
revenue officers respecting the
institutions and conduct of legal
actions. (see Sec.245, NIRC)

a. Composition Functions
- The Bureau of Internal Revenue shall
have a chief to be known as
Commissioner of Internal Revenue,
hereinafter
referred
to
as
the
Commissioner and four (4) assistant
chiefs to be known as Deputy
Commissioners. (Sec. 3, NIRC)
b. Powers and Duties
i. In general
-

The Bureau of Internal Revenue shall


be under the supervision and control
of the Department of Finance and its
powers and duties shall comprehend
the assessment and collection of all
national internal revenue taxes, fees,
and charges, and the enforcement of all
forfeitures,
penalties,
and
fines
connected therewith, including the
execution of judgments in all cases
decided in its favor by the Court of Tax
Appeals and the ordinary courts. The
Bureau shall give effect to and
administer the supervisory and police
powers conferred to it by this Code or
other laws. (Sec. 2, NIRC)
ii. Specific
1. Interpret tax laws and decide
cases (Sec.4, NIRC)
- The power to interpret the provisions
of this Code and other tax laws shall be
under the exclusive and original
jurisdiction of the Commissioner,

BIR Issuances and rules


relevant thereto

the Bureau has the power to issue rules


and issuances as the case may be but
subject to the following rule:

SEC. 246. Non-Retroactivity of Rulings.


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

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


General Rule:

(a) Where the taxpayer deliberately misstates or


omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
(b) Where the facts subsequently gathered by
the Bureau of Internal Revenue are materially
different from the facts on which the ruling is
based; or
(c) Where the taxpayer acted in bad faith.
2. Examination of Books of Accounts
(Sec. 5, NIRC)
the Bureau has the power to examine
books of accounts of every person
(taxpayer) engaged in a business
a.

however before a tax official


could inquire into said books
of accounts a letter of
authority is required.

b.
What
is
verification rule?

third-party

- In ascertaining the correctness of any


return, or in making a return when none has
been made, or in determining the liability of
any person for any internal revenue tax, or
in collecting any such liability, or in
evaluating
tax
compliance,
the
Commissioner is authorized to obtain on a
regular basis from any person other than the
person whose internal revenue tax liability
is subject to audit or investigation, or from
any office or officer of the national and local
governments, government agencies and
instrumentalities, including the Bangko
Sentral ng Pilipinas and government-owned
or -controlled corporations, any information
such as, but not limited to, costs and volume
of production, receipts or sales and gross
incomes of taxpayers, and the names,
addresses, and financial statements of
corporations, mutual fund companies,
insurance companies, regional operating
headquarters of multinational companies,
joint accounts, associations, joint ventures of
consortia and registered partnerships, and
their members;

20

The Bureau of Internal Revenue has no


power to inquire into the bank deposits of a
person or taxpayer.
Exceptions:
Notwithstanding any contrary provision
of Republic Act No. 1405 and other general or
special laws, the Commissioner is hereby
authorized to inquire into the bank deposits of:
1) a decedent to determine his gross
estate; and
(2) any taxpayer who has filed an
application for compromise of his tax liability
under Sec. 204 (A) (2) of this Code by reason of
financial incapacity to pay his tax liability.
In case a taxpayer files an application to
compromise the payment of his tax liabilities on his
claim that his financial position demonstrates a clear
inability to pay the tax assessed, his application shall not
be considered unless and until he waives in writing his
privilege under Republic Act No. 1405 or under other
general or special laws, and such waiver shall constitute
the authority of the Commissioner to inquire into the
bank deposits of the taxpayer.
Such limited power of the Commissioner does
not conflict with R.A 1405 or the Secrecy of Bank
Deposits Law because the provisions of the Tax Code
granting this power are an exception to the said
legislation.
If the bank has knowledge of the death of a
person, who maintained a bank deposit account either
alone or jointly with another, it shall not allow any
withdrawal from the said deposit account, unless the
Commissioner has certified that the transfer taxes
imposed thereon have been paid.
However the
administrator of the estate or any one of the heirs of the
decedent
may,
upon
authorization
by
the
Commissioner, withdraw an amount not exceeding
twenty thousand pesos (P20, 000.00) without the
certification. For this purpose all withdrawal slips shall
contain a statement to the effect that all of the joint
depositors are still living at the time of withdrawal by
any one of the joint depositors and such statement shall
be under oath by the said depositors.

c. Inquiry into bank deposits (Sec 6 {f}),


NIRC)
BAR OPERATIONS COMMITTEE

d. Summons persons, take testimony

21

REVIEW NOTES FOR TAXATION 2


In ascertaining the correctness of any return, or
in making a return when none has been made, or in
determining the liability of any person for any internal
revenue tax, or in collecting any such liability, or in
evaluating tax compliance, the Commissioner is
authorized:
1. To summon the person liable for tax or
required to file a return, or any officer or employee of
such person, or any person having possession, custody,
or care of the books of accounts and other accounting
records containing entries relating to the business of the
person liable for tax, or any other person, to appear
before the Commissioner or his duly authorized
representative at a time and place specified in the
summons and to produce such books, papers, records,
or other data, and to give testimony (Sec.5 {c}, NIRC)
2.
To take such testimony of the person
concerned, under oath, as may be relevant or material to
such inquiry (Sec.5 {d}, NIRC)
To summon the person liable for tax or
required to file a return, or any officer or employee of
such person, or any person having possession, custody,
or care of the books of accounts and other accounting
records containing entries relating to the business of the
person liable for tax, or any other person, to appear
before the Commissioner or his duly authorized
representative at a time and place specified in the
summons and to produce such books, papers, records,
or other data, and to give testimony.
3. Power to assess and prescribe requirements
for tax administration
a.

Power to examine returns (Sec. 6


{a}, NIRC)
After a return has been filed as
required under the provisions of this
Code, the Commissioner or his duly
authorized
representative
may
authorize the examination of any
taxpayer and the assessment of the
correct amount of tax: Provided, however;
That failure to file a return shall not
prevent
the
Commissioner
from
authorizing the examination of any
taxpayer.
Any return, statement of
declaration filed in any office
authorized to receive the same shall not
be withdrawn: Provided, That within
three (3) years from the date of such
filing, the same may be modified,
BAR OPERATIONS COMMITTEE

changed, or amended: Provided, further,


That no notice for audit or
investigation of such return, statement
or declaration has in the meantime
been actually served upon the
taxpayer.
i.

Amendment of Returns

When a report required by law


as a basis for the assessment of any
national internal revenue tax shall not
be forthcoming within the time fixed by
laws or rules and regulations or when
there is reason to believe that any such
report is false, incomplete or erroneous,
the Commissioner shall assess the
proper tax on the best evidence
obtainable.
In case a person fails to file a
required return or other document at
the time prescribed by law, or willfully
or otherwise files a false or fraudulent
return or other document, the
Commissioner shall make or amend the
return from his own knowledge and
from such information as he can obtain
through testimony or otherwise, which
shall be prima facie correct and
sufficient for all legal purposes. (Sec. 6
{b}, NIRC)
ii. Rule on confidentiality of tax
returns and exceptions thereto
(Sec.71 and 270, NIRC)
After the assessment shall have
been made, as provided in this Title, the
returns, together with any corrections
thereof which may have been made by
the Commissioner, shall be filed in the
Office of the Commissioner and shall
constitute public records and be open to
inspection as such upon the order of the
President of the Philippines, under rules
and regulations to be prescribed by the
Secretary
of
Finance,
upon
recommendation of the Commissioner.
The Commissioner may, in each
year, cause to be prepared and
published in any newspaper the lists
containing the names and addresses of

REVIEW NOTES FOR TAXATION 2


persons who have filed income tax
returns. (see Sec.71, NIRC)
Any internal revenue officer
who is or shall become interested,
directly
or
indirectly,
in
the
manufacture, sale or importation of any
article subject to excise tax under Title
VI of this Code or in the manufacture or
repair or sale, of any die for printing, or
making of stamps, or labels shall upon
conviction for each act or omission, be
punished by a fine of not less than Five
thousand pesos (P5,000) but not more
than Ten thousand pesos (P10,000), or
suffer imprisonment of not less than two
(2) years and one (1) day but not more
than four (4) years, or both. (see Sec.270,
NIRC)

b. Power to make a returns (Sec.6 {b},


NIRC)

purposes. The findings may be used as the basis


for assessing the taxes for the other months or
quarters of the same or different taxable years
and such assessment shall be deemed prima facie
correct.
When it is found that a person has failed
to issue receipts and invoices in violation of the
requirements of Sections 113 and 237 of the Tax
Code, or when there is reason to believe that the
books of accounts or other records do not
correctly reflect the declarations made or to be
made in a return required to be filed under the
provisions of this Code, the Commissioner, after
taking into account the sales, receipts, income or
other taxable base of other persons engaged in
similar businesses under similar situations or
circumstances or after considering other
relevant information may prescribe a minimum
amount of such gross receipts, sales and taxable
base, and such amount so prescribed shall be
prima facie correct for purposes of determining
the internal revenue tax liabilities of such
person.

What is Best Evidence


Obtainable Rule?
-

22

In case a person fails to file a required


return or other document at the time
prescribed by law, or willfully or
otherwise files a false or fraudulent
return or other document, the
Commissioner shall make or amend
the return from his own knowledge
and from such information as he can
obtain through testimony or otherwise,
which shall be prima facie correct and
sufficient for all legal purposes.
c.

Power to conduct inventory taking,


surveillance
and
to
issue
presumptive gross sales/receipts
(see Sec.6 {c}, NIRC)
The Commissioner may, at any time
during the taxable year, order inventory-taking
of goods of any taxpayer as a basis for
determining his internal revenue tax liabilities,
or may place the business operations of any
person, natural or juridical, under observation
or surveillance if there is reason to believe that
such person is not declaring his correct income,
sales or receipts for internal revenue tax
BAR OPERATIONS COMMITTEE

d. Power to terminate tax period (see


Sec. 6 {d}), NIRC)
When it shall come to the knowledge
of the Commissioner that a taxpayer is
retiring from business subject to tax, or
is intending to leave the Philippines or
to remove his property therefore or to
hide or conceal his property, or is
performing any act tending to obstruct
the proceedings for the collection of
the tax for the past or current quarter
or year or to render the same totally or
partly
ineffective
unless
such
proceedings are begun immediately,
the Commissioner shall declare the tax
period of such taxpayer terminated at
any time and shall send the taxpayer a
notice of such decision, together with a
request for the immediate payment of
the tax for the period so declared
terminated and the tax for the
preceding year or quarter, or such
portion thereof as may be unpaid, and
said taxes shall be due and payable
immediately and shall be subject to all
the penalties hereafter prescribed,
unless paid within the time fixed in the
demand made by the Commissioner.

REVIEW NOTES FOR TAXATION 2


-

the BIR has the power to terminate tax


period under the following instances:

members of which shall serve for three


(3) years, and shall designate from
among the senior officials of the
Bureau, one (1) chairman and two (2)
members for each board, subject to
such rules and regulations as the
Secretary of Finance shall promulgate
upon the recommendation of the
Commissioner.

when the taxpayer conceals his


properties with the intention to
evade taxes
when the taxpayer is leaving the
Philippines with the intention to
evade taxes
when the taxpayer is obstructing
proceedings for the collection of
taxes
when the taxpayer is removing
properties with the intention of
evading taxes
when the taxpayer is retiring form
business

Individuals and general professional


partnerships and their representatives
who are denied accreditation by the
Commissioner and/or the national and
regional accreditation boards may
appeal such denial to the Secretary of
Finance, who shall rule on the appeal
within sixty (60) days from receipt of
such appeal. Failure of the Secretary of
Finance to rule on the Appeal within
the prescribed period shall be deemed
as approval of the application for
accreditation of the appellant.

e. Power to fix real property values


(see Sec.6 {e}, NIRC)
-

The Commissioner is authorized to


divide the Philippines into different
zones or areas and shall, upon
consultation with competent appraisers
both from the private and public sectors,
determine the fair market value of real
properties located in each zone or area.
For purposes of computing any internal
revenue tax, the value of the property
shall be whichever the higher is of:

23

g.
Power
to
prescribe
procedural/documentary requirements
the BIR has the power to prescribe the
manner of filing of a returns

(1) The fair market value as


determined by the Commissioner, or
(2) The fair market value as
shown in the schedule of values
of the Provincial and City
Assessors.
f. Power to accredit tax agents (see
Sec.6 {g}, NIRC)
The Commissioner shall accredit and
register, based on their professional
competence, integrity and moral
fitness, individuals and general
professional partnerships and their
representatives who prepare and file
tax returns, statements, reports,
protests, and other papers with or who
appear before, the Bureau for
taxpayers. Within one hundred twenty
(120) days from January 1, 1998, the
Commissioner shall create national
and regional accreditation boards, the
BAR OPERATIONS COMMITTEE

h. Power to delegate (see Sec.7, NIRC)


The Commissioner may delegate the
powers vested in him under the
pertinent provisions of the Tax Code to
any or such subordinate officials with
the rank equivalent to a division chief
or higher, subject to such limitations
and restrictions as may be imposed
under rules and regulations to be
promulgated by the Secretary of
finance, upon recommendation of the
Commissioner: Provided, however, That
the
following
powers
of
the
Commissioner shall not be delegated:
(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;
(c) The power to compromise or abate,
under Sec. 204 (A) and (B) of this Code,

24

REVIEW NOTES FOR TAXATION 2


any tax liability: Provided, however, That
assessments issued by the regional
offices involving basic deficiency taxes
of Five hundred thousand pesos
(P500,000) or less, and minor criminal
violations, as may be determined by
rules and regulations to be promulgated
by the Secretary of finance, upon
recommendation of the Commissioner,
discovered by regional and district
officials, may be compromised by a
regional evaluation board which shall
be composed of the Regional Director as
Chairman, the Assistant Regional
Director, the heads of the Legal,
Assessment and Collection Divisions
and the Revenue District Officer having
jurisdiction over the taxpayer, as
members;

b.

Where the basic tax involved exceeds One


million pesos (P 1,000,000.00) or where the
settlement offered is less than the prescribed
minimum rates, the compromise shall be subject
to the approval of the Evaluation Board which
shall be composed of the Commissioner and the
Deputy Commissioners.
All criminal violations may be compromised
except those
a.
b.

Non-delegable powers in relation to


Section 16 of NIRC
-

the following are the powers which the


Bureau of Internal Revenue cannot
delegate:
a.

The compromise settlement of any tax liability


shall be subject to the following minimum
accounts:
a.

b. power to abate
The BIR may abate or cancel tax liability
when:

the power to compromise

as a general rule the power of the BIR


to compromise cannot be delegated to
other administrative agencies unless in
the following grounds:
1.
a reasonable doubt as
to the validity of the
claim
against
the
taxpayer exists
2.
financial inability to
pay

those already filed in court


those involving fraud (see
Sec. 204 {a}, NIRC)

The taxpayers offer to compromise


shall not be considered, unless and until
he waives in writing his privilege under
RA 1405 or under other general or
special laws, and such waiver shall
constitute the authority of the
Commissioner to inquire into his bank
deposits. (see Sec. 6 {f}, NIRC)

(d) The power to assign or reassign


internal
revenue
officers
to
establishments where articles subject to
excise tax are produced or kept.
i.

For
other
cases,
a
minimum
compromise rate equivalent to forty
percent (40%) of the basic tax assessed.

a.

b.

the tax or any portion


thereof appears to be
unjustly
or
excessively
assessed
the
administration and
collection costs involved do
not justify the collection of
the amount due

The power to compromise or abate shall not be


delegated by the Commissioner, except in the
following cases;

For cases of financial inability to pay, a


minimum compromise rate equivalent
to ten per cent (10%) of the basic tax
assessed

BAR OPERATIONS COMMITTEE

a.

assessments issued by the


regional offices involving
basic taxes of
P 500,000.00 or less
b.

Minor criminal violations.


These
cases
may
be
compromised
by
the

25

REVIEW NOTES FOR TAXATION 2


regional evaluation board.
(see Sec.7, NIRC)
i.

Enforcement of police power (see


Sec.15, NIRC)

shall be composed of the Commissioner and the four (4)


Deputy Commissioners.
(B) Abate or Cancel a Tax Liability, when:
(1) The tax or any portion thereof
appears to be unjustly or excessively
assessed; or
(2) The administration and collection
costs involved do not justify the
collection
of
the
amount due.

The Commissioner, the Deputy Commissioners,


the Revenue Regional Directors, the Revenue
District Officers and other internal revenue
officers shall have authority to make arrests and
seizures for the violation of any penal law, rule
or regulation administered by the Bureau of
Internal Revenue. Any person so arrested shall
be forthwith brought before a court, there to be
dealt with according to law.
j.

Authority
to
Abate
and
Compromise Tax Liabilities (see
Sec.6 {f}{2}, 204 in relation to Rev.
Regs.30-2002 as amended by RR
No.8-2004)

SEC. 204. Authority of the Commissioner to


Compromise, Abate and Refund or Credit Taxes.
- The Commissioner may (A) Compromise the Payment of any Internal
Revenue Tax, when:
(1) A reasonable doubt as to the
validity of the claim against the
taxpayer exists; or
(2) The financial position of the
taxpayer demonstrates a clear inability
to pay the assessed tax.
The compromise settlement of any tax
liability shall be subject to the
following minimum amounts:

For cases of financial incapacity,


a minimum compromise rate
equivalent to ten percent (10%)
of the basic assessed tax; and
For other cases, a minimum
compromise rate equivalent to
forty percent (40%) of the basic
assessed tax.

Where 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 shall be
subject to the approval of the Evaluation Board which

All criminal violations may be


compromised except: (a) those already
filed in court, or (b) those involving
fraud.
D. The rule on estoppel in relation to tax
administration
a. Against the government
The error made by a tax official in the assessment of his
tax liabilities does not have the effect of relieving the
taxpayer from the obligation to pay the full amount of
his tax liability, for taxes are fixed by law and the
government is never estopped to collect the legitimate
taxes because of the errors committed by its agents.
However, like other principles, the principle of estoppel
also admits exceptions in the interest of justice and fair
play. The Commissioner is precluded from adopting a
position inconsistent with one previously taken where in
justice would result therefore or where there has been a
misrepresentation.
Any mistakes committed by the
agents of the sovereign, namely government officials
and employees are their own and cannot bind the
government, which cannot be placed on estoppel on
account of the mistakes of its agents.
b. Against the taxpayer
E. Assessments and its governing principles
a. Definition
The notice and demand for payment of a tax
liability should not be confused with assessment
relative to real property taxation which refers to
the listing and evaluation of taxable real
property.
b. What constitutes an assessment

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


i. CIR v. Pascor Realty, 29 June 1999
Neither the NIRC nor the revenue regulations
governing the protest of assessments provide a
specific definition of form of an assessment
however the NIRC defines the specific function
and effects of an assessment:

2006

An assessment must be sent to and received


by a tax payer, and must demand payment of
the taxes described therein within a specific
period.
Issuance of an assessment is vital in
determining the period of limitation regarding
its proper issuance and the period within
which to protest.
An assessment is deemed made only when the
collector of Internal Revenue releases or mails
or sends such notice to the tax payer.
An assessment is not necessary before
acriminal charge can be filed.
Before an assessment is issued, there is by
practice, a pre-assessment notice sent to the
tax payer.The tax Payer is then given a chance
to submit position papers and documents to
prove that the assessment is unwarranted. If
the commissioner is unsatisfied, an assessment
signed by him/her is then sent to the tax
payer informing the latter specifically and
clearly that an assessment has been made
against him/her. In contrast, the criminal
charge need not go through all this.
ii. CIR v. Reyes, G.R. No. 159694, January 27,
Tax payers shall be informed in writing of the
law and the facts on which the assessment and
the assessment is made; otherwise the
assessment shall be void. (2nd paragraph of
section 228 is clear and mandatory)

c. Kinds of Assessment
d. Statute of Limitation on Assessment of Internal
Revenue Taxes (Sections 203, 222, NIRC)
General rule (sec203)
Internal revenue taxes shall be assessed within
three years after the last day prescribed for the
filing of the return, and no proceeding in court
without assessment for the collection of sluch
taxes shall begun after the expiration of such
period.
Exceptions (sec.222)

26

In the case of a false of fraudulent return with


intent to evade tax or of failure to file a return,
the tax collection may be filed without an
assessment at any time within ten years after the
discovery of the falsity, fraud or omission:
If before the expiration of the time prescribed in
the tax codes for the assessment of the tax, both
the commissioner and the taxpayer have agreed
in writing to its assessment after such time, the
tax may be assessed within the period agreed
upon.
i. RMO 20-90, Philippine Journalist Inc., v.
CIR, G.R. No. 162852, 16 December 2004
Appellate Jurisdiction of the CTA is not limited
to cases which involve decisions of the CIR on
matters relating to assessments or refunds. The
second part of the provision covers other cases
that arise out of the NIRC or related laws and
administered by the BIR. The wording of the
provision is clear and simple. It gives the CTA
the Jurisdiction to determine if the warrant of
distraint and levy issued by the BIR is valid and
to rule if the waiver of stature of limitations was
validly effected.
A waiver of the statute of limitations under the
NIRC, to a certain extent, is a derogation of the
taxpayers right to security against prolonged
and unscrupulous investigations and must
therefore be carefully and strictly construed. The
waiver of the statute of limitations is not a
waiver of the right to invoke the defense of
prescription as erroneously held by the CA. It is
an agreement between the taxpayer and the BIR
that the period to issue an assessment and
collect the taxes due id extended to a date
certain.
The waiver does not mean that the taxpayer
relinquishes the right to invoke prescription
unequivocally particularly where the language
of the document is equivocal. For the purpose of
safeguarding taxpayers from any unreasonable
examination, investigation or assessment, out
tax law provides a statute of limitation in
collection of taxes. Thus the law on prescription,
being a remedial measure should be liberally
construed in order to afford such protection/
ii. CIR v. CA and Carnation, G. R. No. 115712,
25 February 1999

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Finality of findings of facts as a matter of
principle, this court will not set aside the
conclusion reached by an agency such as the
CTA unless there has been an abuse or
improvident exercise of authority. By the very
nature of its function, dedicated exclusively to
the study and consideration of tax problems and
has necessarily developed an expertise of the
subject.

Wherein the statute of limitations on assessment


and collection of taxes is considered suspended,
when the tax payer request for a reinvestigation
which is granted by the commissioner.
f. Procedure in the process of assessment (Section
228)
i. Estate of the Late Juliana Diez Vda. De
Gabriel v. CIR, G.R. No. 155541, January 27, 2004

e. Instances where the running of the prescriptive


period is suspended (section 223)

The rule that an assessment is deemed made for


the purpose of giving effect to such assessment
when the notice is released, mailed or sent to the
taxpayer to effectuate the assessment requires
that the notice must be sent to the taxpayer, and
not merely to a disinterested party. Although
there is no specific requirement that the
taxpayer should receive that notice within the
said period, due process requires at the very
least that such notice actually be received.

i. Republic v. Hizon, 13 December 1999


Sec. 229 of the code mandates that a request for
reconsideration must be made within thirty (30)
days from the tax payers receipt of tax
deficiency assessment, otherwise the assessment
becomes final, unappealable and, therefore,
demandable. The notice of assessment for
respondents tax deficiency was issued by
petitioner on July 18, 1986. On the other hand,
respondent
made
her
request
for
reconsideration thereof only on November 3.
1992, without stating when she received the
notice of tax assessment. She explained that she
was constrained to ask for a reconsideration in
order to avoid the harrrasment of BIR collectors.
In all likelihood, she must have been referring to
the distraint and levy of her properties by
petitioners agents which took place of January
12, 1989. Even assuming that she first learned of
the deficiency assessment on this date her
request for reconsideration was nonetheless
filed late since she made it more than 30 days
thereafter.
Hence,
her
request
for
reconsideration did not suspend the running for
the prescriptive period provided under section
223. Although the commissioner acted on her
request by eventually denying it on August 11,
1994, this is of no moment and does not distract
from the fact that the assessment had become
demandable
ii. BPI v. CIR, G.R. No. 139736, 17 October 2005
The court had consistently ruled in a number of
cases that a request for reconsideration by the
tax payer without a valid waiver of the
prescriptive period for the assessment and
collection of tax, as required by the tax code and
implementing rules, will not suspend the
running thereof. (Exception: section 224)

27

When an estate is under administration, notice


must be sent to the administrator of the estate.
2006

ii. CIR v. Reyes, G.R. No. 159694, January 27,


The tax payers shall be informed in writing of
the law and facts on which the assessment is
made otherwise the assessment itself is void.
iii. CIR v. BPI, G.R. No. 134062, 17, April 2007
The inevitable conclusion is that BPIs failure to
protest the assessments within the 30-day period
provided in the former section 270 meant that
they became final and unappealable. Thus, the
CTA correctly dismissed BPIs appeal for lack of
jurisdiction. BPI was, from then on barred from
disputing the correctness of the assessments or
invoking any defense that would reopen the
question of its liability on the merits. Not only
that. There arose a presumption of correctness
when BPI failed to protest the assessments: Tax
assessments by tax examiners are presumed
correct and made in good faith. The taxpayer
has the duty to prove otherwise. In the absence
of proof of any irregularities in the performance
of duties, an assessment duly made by a BIR
examiner and approved by his superior offices
will not be disturbed. All presumptions are in
favor of the correctness of tax assessments.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2

28

iv. PNOC v. Court of Appeals, G.R. No.,


109976, April 26, 2005

i. When do we reckon the period when the


assessment was made?

The defense of prescription of the period for the


assessment and collection of tax liabilities shall
be deemed waived when such defense was not
properly pleaded and the facts alleged and
evidenced submitted by the parties were not
sufficient to support a finding by the supreme
court on the matter prescription, being a
matter of defense, imposes the burden on the
taxpayer to prove that the full period of the
limitation has expired, and this requires him to
positively establish the date when the period
started running and when the same was fully
accomplished.

Internal revenue taxes shall be assessed within


three years after the last day prescribed by law
for the filing of the return.

g. Instances when pre-assessment is not required


(Section 228)
A preassessment notice shall not be required in
the following cases:
When any tax deficiency is the result of
mathematical error in the computation of
the tax as appearing on the face of the
return.
When a discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding
agent.
When a taxpayer who opted to claim a
refund or tax credit of excess creditable
withholding tax for a taxable period was
determined to have carried over and
automatically applied the same amount
claimed against the estimated tax
liabilities for the taxable quarter or
quarters of the succeeding taxable year.
When the excise tax due on exciseable
articles has not been paid.
When the article locally purchased or
imported by an exempt person has been
sold, traded, or transferred to non-exempt
persons.
h. Governing principles concerning assessment
Injunction is not available to restrain the
collection of internal revenue taxes.
Exception: the Court of Appeals may issue
injunctions against administrative collection,
when collection could jeopardize the interest of
the Government or taxpayer.

In case where a return is filed beyond the three


year period shall be counted form the day the
return was filed.
j. Is assessment necessary before a taxpayer could be
prosecuted for violation of the NIRC?
i. Ungab v. Cusi, May 30, 1980
What is involved here is not collection of taxes
where the assessment of the commissioner of
internal revenue may be reviewed by the court
of tax appeals, but a criminal prosecution for
violations of the NIRC which is within the
recognizance of the CFI. While there can be no
civil action to enforce collection before the
assessment procedures provided in the code
have been followed, there is no requirement for
the precise computation and assessment of the
tax before there can be a criminal prosecution
under the code.
ii. CIR v. CA, G.R. No. 119322, 4 June 1996
Reading Ungab carefully, the pronouncement
therein that deficiency assessment is not
necessary prior to prosecution is pointedly and
deliberately qualified by the Court
with
following statement quoted form Guzik v. U. S.:
the crime is complete when the violator has
knowingly and willfully filed a fraudulent
return with intent to evade and defeat a part or
all of the tax. In plain words, for criminal
prosecution to proceed before assessment, there
must be a prima facie showing of willful attempt
to evade taxes. There was willful attempt to
evade tax in Ungab because of the taxpayers
failure to declare in his income tax return his
income derived from banana saplings. In the
mind of the trial court and the Court of Appeals,
Fortunes situation is quite apart factually since
the registered wholesale price of the goods.
Approved by the BIR, is presumed to be the
actual wholesale price, therefore, not fraudulent
and unless and until the BIR has made a final
determination of what is supposed to be the
correct taxes, the taxpayer should not be placed
in the crucible of criminal prosecution. Herein

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


lies a whale of difference between Ungab and
the case at bar.
iii. CIR v. Pascor Realty, 29 June 1999
The issuance of an assessment is vital in
determining the period of limitation regarding
its proper issuance and the period within which
to protest it. Section 203 of NIRC provides that
internal revenue taxes must be assessed within
three years from the last day within which to file
the return. Section 222, on the other hand,
specifies a period of ten years in case a
fraudulent return with intent to evade was
submitted or in case of failure to file a return.
Also, Section 228 of the same law states that said
assessment may be protested only within thirty
days from receipt thereof. Necessarily, the
taxpayer must be certain that a specific
document constitutes an assessment. Otherwise,
confusion would arise regarding the period
within which t make an assessment or to protest
the same, or whether interest and penalty may
accrue thereon.
k. Are the procedures outlined in Section 228 of the
NIRC retroactive?
2006

i. CIR v. Reyes, G.R. No. 159694, January 27,


The general rule is that statutes are prospective.
However, statutes that are remedial, or that do
not create new or take away vested rights, do
not fall under the general rule against the
retroactive operation of statutes. Clearly, Section
228 provides for the procedure in case an
assessment is protested. The provision does not
create new or take away vested rights. In both
instances, it can surely be applied retroactively.
Moreover, RA 8424 does not state, either
expressly or by necessary implication, that
pending actions are excepted from the operation
of section 228, or that applying it to pending
proceedings would impair vested rights.
INTERNAL REVENUE TAX REMEDIES

Tax Remedies: Its general concepts


Importance: They exist to enhance the
Governments tax collection efforts, they, too, come in as
safeguards against arbitrary action. While taxes are the
lifeblood of the Government and should be collected
without unnecessary hindrance, such collection must

29

nevertheless be made in accordance with law as any


arbitrariness will negate the very reason or the
Government itself.
Classification:
1.

Remedies in favor of the taxpayer


A. Administrative
(1) Before Payment
a. Filing of a petition or request for
reconsideration
or
reinvestigation
(Administrative Protest);
b. Entering into compromise
(2) After Payment
a. Filing of claim for tax refund; and
b. Filing of claim for tax credit
B. Judicial
(1) Civil action
a. Appeal to the Court of Tax Appeals
b. Action to contest forfeiture of
chattel; and
c. Action for Damages
(2) Criminal Action
Filing of complaint against erring
Bureau of Internal Revenue officials and
employees

2.

Remedies available to the government

Applicability of the Doctrine Exhaustion of


Administrative Remedies
No civil or criminal action for the
recovery of taxes shall be filed in court
without
the
approval
of
the
Commissioner. (Sec. 220, NIRC)

Remedies Available to Taxpayers


A. Before Payment
1. Protest (Section 228, NIRC)
Protest is a vital document which is a
formal declaration of resistance of the taxpayer.
It is a repository of all arguments. It can be used
in court in case administrative remedies have
been exhausted. It is also the formal act of the
taxpayer questioning the official actuation of the
CIR. This is equivalent to a pleading. It may be
a:

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Request for reconsideration- a plea for
the re-evaluation of an assessment on the basis
of existing records without need of additional
evidence. It may involve a question of fact or law
or both.
Request for reinvestigation- a plea for
reinvestigation of an assessment on the basis of
newly-discovered or additional evidence that a
taxpayer
intends
to
present
in
the
reinvestigation. It may also involve question of
fact or law or both.
Requirements of a valid protest
1. In writing;
2. Addressed to the CIR;
3. Must be accompanied by a waiver of the
Statute of Limitations in favor of the
government;
4. States the Facts, applicable law rules and
regulations and jurisprudence on which his
protest is based; otherwise, his protest shall be
considered void and without force and effect
on the event the letter of protest submitted by
the taxpayer is accepted;
5. Contains the following:
1. Name of the taxpayer and address for the
immediate past three taxable years;
2. Nature of request whether reinvestigation
or reconsideration specifying newly
discovered evidence that he intends to
present it is a request for reinvestigation;
3. Taxable
periods
covered
by
the
assessment;
4. Amounts and kind/s of tax involved, and
Assessment Notice Number;
5. Date of receipt of assessment notice or letter of
demand;
6. Itemized statement of the findings to which the
taxpayer agrees, if any, as a basis for computing
the tax due, which amount should be paid
immediately upon the filing of the protest. For this
purpose, the protest shall not be deemed validly
filed unless payment of the agreed portion of the
tax is paid first;
7. Itemized schedule of the adjustments with which
the taxpayer does not agree;
8. Statement of facts and/or law in support of the
protest; and
9. Documentary evidence as it may deem necessary
and relevant to support its protest to be submitted
within sixty (60) days from the filing of the
protest. If the taxpayer fails to comply with this
requirement, the assessment shall become final.
(Revenue Regulation No. 12-85, dated Nov. 27, 1985.)

30

Effect of a protest on the period to collect deficiency


taxes:
The prescriptive period is arrested by the taxpayer's
request for re-examination or reinvestigation even if he
has not previously waived it (CIR vs. Wyeth, G.R. No.
76281,Sep 30, 1991)
Failure of the BIR to act within the 180-day period.
If the Commissioner or his duly authorized
representative fails to act on the taxpayers protest
within 180 days from the date of submission by the
taxpayer of the required documents in support of his
protest, the taxpayer may appeal to the CA within 30
days from the lapse of the 180-day period.
Administrative actions taken during the 180-day
period.
1. Grant of the Protest
2. Denial of Protest:
A. Direct Denial
The decision of the Commissioner or his duly rep shall
(a) state the facts, applicable law, rules and regulations
or jurisprudence on which his protest is based,
otherwise the protest shall be considered void and
without force and effect, in which case the same shall
not be considered a decision a disputed assessment and
(b) that the same is his final decision. (sec. 3.1.5, RR 1299)
B.Indirect Denial
a. Commissioner did not rule on the taxpayers MR of
the assessment it was only when respondent received
summons on the civil action for the collection of
deficiency income tax that the period to appeal
commenced to run. (CIR vs. Union Shipping
b. Referral by the Commissioner of request for
reinvestigation to the Solicitor General (Republic vs.Lim
Tian Teng Sons)
c. Reiterating the demand for immediate payment of the
deficiency tax due to taxpayers continued refusal to
execute waiver (CIR vs. Ayala Securities Corp.)
d. Preliminary collection letter may serve as assessment
notice (United Intl Pictures vs. CIR)
Acts of BIR Commissioner Considered as Denial of
Protest which serves as a Basis for Appeal to CTA:

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


1. Filing by the BIR of a civil suit for collection
of the deficiency tax (CIR v. Union Shipping Corp . 185
SCRA 547)
2. Indication to the taxpayer by the
Commissioner in clear and unequivocal language of his
final denial. (CIR v. Union Shipping Corp)
3. BIR demand letter reiterating his previous
demand to pay, sent to taxpayer after his protest of the
assessment (Surigao Electric Co. Inc. v. CTA, 57 SCRA 523)
4. The actual issuance of a warrant of distraint
and levy in certain cases cannot be considered as final
decision on a disputed settlement (CIR v. Union
Shipping Corp)
b. Effect of protest filed out of time
The pendency of the taxpayer's appeal in the Court of
Tax Appeals and in the Supreme Court had the effect of
temporarily staying the hands of the said Commissioner.
If the taxpayer's stand that the pendency of the appeal
did not stop the running of the period because the Court
of Tax Appeals did not have jurisdiction over the case of
taxes is upheld, taxpayers would be encouraged to delay
the payment of taxes in the hope of ultimately avoiding
the same. Under the circumstances, the running of the
prescriptive period was suspended. Deficiency
Percentage Taxes must be imposed.(PROTECTOR'S
SERVICES, INC., petitioner, vs. CA, G.R. No. 118176,
2000 Apr 12)
Remedies from a denial of protest
1. Motion for reconsideration
2. Appeal to the Court of Tax Appeals(RA 1125, as
amended by RA 9282)
2.

Compromise

B. After Payment
1. Refund (Section 229, NIRC)
The Legal Principle of quasi-contracts or solutio
indebiti (see Art. 2142 & 2154 of the Civil Code). The
Government is within the scope of the principle of solutio
indebiti. (CIR vs. Firemans Fund Insurance Co.)
a.

Must be strictly construed against taxpayer

Grounds for filing a claim for refund:


Erroneously or illegally assessed or collected internal
revenue taxes;
Taxpayer pays under the mistake of fact, as for instance
in a case where he is not aware of the existing exemption
in his favor at the time payments were made.

31

A tax is illegally collected if payments are made under


duress.
1.Penalties imposed without authority; and
2.Any sum alleged to have been excessive or in any
manner wrongfully collected.
The value of internal revenue stamps when they are
returned in good condition by the purchaser may also be
redeemed.
b.

Period within which to file a claim for refund

1.General Rule is two years from the date of payment


The two-year prescriptive period provided in Section
292 (now Section 230 of the Tax Code should be
computed from the time of filing the Adjustment Return
or Annual Income Tax Return and final payment of
income tax.(CIR vs. TMX SALES, G.R. No. 83736, 1992
Jan 15,)
The rationale in computing the two-year prescriptive
period with respect to the petitioner corporation's claim
for refund from the time it filed its final adjustment
return is the fact that it was only then that ACCRAIN
could ascertain whether it made profits or incurred
losses in its business operations. The "date of payment",
therefore, in ACCRAIN's case was when its tax liability,
if any, fell due upon its filing of its final adjustment
return. (ACCRA vs CA, G.R. No. 96322, 1991 Dec 20)
The two-year period for prescription should be counted from
the date of payment of the tax, which for actions for refund of
corporate income tax should be computed from the time of
actual filing of the adjustment return or annual income tax
return. This is so because at that point, it can already be
determined whether there has been an overpayment by
the taxpayer. Moreover, under Sec. 49 (a) by the NIRC
(now Sec. 56(a), 1997 NIRC), payment is made at the
time the return is filed. (CIR V CA, CTA, BPI, GR No.
117254. January 21, 1999)
There is some likelihood that the above rule could apply
also to individuals who are self employed (i.e., in
business and professional practice) as well as estates and
trusts, which are likewise required to file quarterly
returns.
The prescriptive period of two years should commence to run
only from the time that the refund is ascertained, which can
only be determined after a final adjustment return is
accomplished.(CIR V PHILAMLIFE, 244 SCRA 446. May
29, 1995)
2. In case of Amended Returns

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


3. In case of taxpayers contemplating dissolution
c.

Who has the personality to file a claim for refund?


The duty of the withholding agent to withhold the
corresponding tax arises at the time of such accrual. The
withholding agent/corporation is then obliged to remit the tax
to the Government since it already and properly belongs to the
Government. If a withholding agent who is personally
liable for income tax withheld at source fails to pay said
withholding tax, an assessment for said deficiency
withholding tax would, therefore, be legal and proper.
(FILIPINAS SYNTHETIC FIBER CORP. V CA, GR
No.113347. June 14, 1996)

d. Is setting-off of taxes against a pending claim for refund


allowed?
e. Is automatic application of excess tax credits allowed?
f. Effect of existing tax liability on a pending claim for
refund
g. Period of validity of a tax refund/credit
1. Returns are not actionable documents for purposes of
the rules on civil procedure and evidence
h. Refund and Protest are mutually exclusive remedies

i.
Is the taxpayer entitled to claim interest on the
refunded tax?
General Rule: The Government cannot be required to
pay interest on taxes refunded to the taxpayer, unless:
1. The Commissioner acted with patent arbitrariness
Arbitrariness presupposes inexcusable or obstinate
disregard of legal provisions. (CIR vs. Victorias Milling
Corp., Inc. L-19607, Nov. 29, 1966.)
2. In case of Income Tax withheld on the wages of
employees
Any excess of the taxes withheld over the tax due from
the taxpayer shall be returned or credited within 3
months from the fifteenth (15th) day of April. Refund or
credit after such time earn interest at the rate of 6% per
annum, starting after the lapse of the 3-month period to
the date the refund or credit is made (Sec 79 (c) (2) 1997
NIRC
b.

Other Remedies

1.
231)

Action to Contest Forfeiture of Chattel (Sec.

32

In case of seizure of personal property under claim for


forfeiture, the owner desiring to contest the validity of
the forfeiture may bring an action:
a.
Before sale or destruction of the
property to recover the property from the person seizing
the property or in possession thereof upon filing of the
proper bond to enjoin the sale.
b.
After the sale and within 6 months to
recover the net proceeds realized at the sale (see. Sec. 231,
1997 NIRC)
Action partakes the nature of an ordinary civil action for
recovery of personal property or the net proceeds of its
sale which must be brought in the ordinary courts and
not the CTA
2.

Redemption of Property Sold (Sec. 214)

Remedies available to the Government


A.
No Injunction to restrain collection of
taxes ( Sec. 218, NIRC)
G.R. 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 the NIRC.
EXC: CTA may enjoin the collection of Internal
Revenue taxes.
REQUISITES:
1. there is a pending case before the
CTA (ancillary remedy, not a main cause of
action)
2. identify that the collection of tax is
prejudicial to the interest of either the TP or
government.
B. Period within which the government could
collect ( Secs. 203, 222, NIRC)
Assessment of Tax Liability

BAR OPERATIONS COMMITTEE

Three (3)years from the following,


whichever comes later:
1. The last day prescribed by law for
filing the return
2. The day when the return was
actually filed
Ten (10) years after the discovery of the
falsity, fraud or omission in case of:
1. False or fraudulent return with
intent to evade tax, or
2. Failure to file a return
Within the period agreed upon, when
both the TP and the Commissioner have
agreed in writing, before the expiration

REVIEW NOTES FOR TAXATION 2


of the period in Sec. 203 for the
assessment of the tax.

Register of Deeds of the province or city


where the property of the taxpayer is
located.

CASES:
REPUBLIC V. HIZON, DEC. 13, 1999
Revenue Adm. Order No. 10-95
specifically authorizes the Litigation and
Prosecution section of the Legal
Division of regional district offices to
institute the necessary civil and criminal
actions for tax collection. As the
complaint filed in this case was signed
by the BIRs Chief of Legal Division for
Region 4 and verified by the Regional
Director,
there
was,
therefore,
compliance with the law.
Sec. 7 of NIRC, authorizes the BIR
Commissioner to delegate the powers
vested in him under the pertinent
provision of the Code to any
subordinate official with the rank
equivalent to a division chief or higher.
CIR V. JAVIER, JULY 31, 1991
There was no actual intentional fraud in
filing the return. Private respondents
notation on the tax return was at most
an error or mistake of fact or law not
constituting fraud,
an invitation for
investigation and private respondent
had literally laid his cards on the table.
PNOC V. CA, APRIL 26, 2005
C. OVERVIEW OF REMEDIES (SECTION 205)
1. Tax Lien (Sec 219, NIRC)

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
Commissioner until paid with interest,
penalties, and costs that may secure in
addition thereto, upon all property and
rights to property belonging to the
taxpayer.
Lien shall not be valid against any
mortgagee, purchaser or judgment
creditor until notice of such lien shall be
filed by the Commissioner in the

33

A tax lien created in favor of the


government is superior to all other
claims and preferences, even to that of a
private litigant predicated on a court
judgment.

Extinguishment of Tax Lien


1. Payment or remission of the tax
2. Prescription of the right of the government to
assess or collect.
3. Failure to file notice of such lien in the office of
register of Deeds, purchases or judgment
creditor.
4. Destruction of the property subject to the lien.
NOTE: In Nos. 1 and 2, there is no more tax liability
while under nos. 3 and 4, the taxpayer is still liable.
CASE: CIR V. NLRC, NOV. 09, 1994
A tax lien created in favor of the
government is superior to all other
claims and preferences, even to that of a
private litigant predicated on a court
judgment. The tax lien attaches not only
from the service of the warrant of
distraint of personal property but from
the time the tax became due and
payable.
2.

Compromise
CIR may compromise both civil and
criminal liability of the taxpayer.
REQUISITES:
1. The taxpayer have a tax liability
2. There must be an offer by the
taxpayer of an amount to be paid by
the taxpayer
3. There must be an acceptance by the
Commissioner or the taxpayer as
the case may be of the offer in the
settlement of the original claim
Grounds for compromise
1. A reasonable doubt as to the validity of
the claim against the taxpayer exists; or
2. The financial position of the taxpayer
demonstrates a clear inability to pay the
assessed tax

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Cases that may be compromised
1.
2.
3.
4.
5.

Delinquent accounts
Cases under administrative protest
Cases disputed before the courts
Cases for collection already filed in courts
Criminal violations except those already filed,
and those involving fraud.

Cases that cannot be compromised


1.
2.
3.
4.
5.
6.

Withholding tax cases


Criminal tax fraud cases
Criminal cases already filed in court
Delinquent accounts with duly approved
schedule of installment payments
Cases where reduction of payments had already
been granted.
cases already decided and are final and
executory

Compromise of criminal violation

1.
2.

In criminal violations, the compromise


must be made prior to the filing of the
information in court.
All criminal violations may be compromised
except:
those already filed in court; and
those involved in fraud.

Limitations:
1. Minimum compromise rate:
a. 10% of the basic tax assessed in case of
financial incapacity.
b. 40% of basic tax assessed other cases.
2. Subject to approval of the Evaluation Board
a. When basic tax involved exceeds
P1,000,000.00 or
b. Where settlement offered is less than the
prescribed minimum rates.
Delegation of Power to Compromise
General Rule: The power to compromise or abate shall
not be delegated by the commissioner.
Exception:
The Regional Evaluation Board may
compromise the assessment issued by the regional
offices involving basic taxes of P 500,000.00 or less.
Remedy in case of failure to comply:
The CIR may either:
a. Enforce the compromise, or

34

b. Regard it as rescinded and insists upon the original


demand.
3.
4.
5.
6.

Distraint and/or Levy


Civil Action
Criminal Action
Forfeiture
Implies a divestiture of property
without compensation, in consequence
of a default or offense.
It includes the idea of not only losing
but also having the
property
transferred to another with out the
consent of the owner and wrongdoer.

Effect: Transfer the title to the specific thing from


the owner to the government.
When available:
a. No bidder for the real property exposed
for sale.
b. If highest bid is for an amount
insufficient to pay the taxes, penalties
and costs.
With in two days thereafter, a return of the
proceeding is duly made.
How enforced:
a. In case of personal property by seizure
and sale or destruction of the specific
forfeited property.
b. In case of real property by a judgment
of condemnation and sale in a legal
action or proceeding, civil or criminal,
as the case may require.
When forfeited property to be destroyed or sold:
a. To be destroyed by order of the CIR
when the sale for consumption or use of
the following would be injurious to the
public health or prejudicial to the
enforcement of the law: (at least 20 days
after seizure)
1. distilled spirits
2. liquors
3. cigars
4. cigarettes,
and
other
manufactured
products
of
tobacco
5. playing cards
6. All apparatus used in or about
the illicit production of such
articles.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


b.

To be sold or destroyed depends upon


the discretion of CIR
1. All other articles subject to
exercise tax, (wine, automobile,
mineral products, manufactured
oils, miscellaneous products,
non-essential items a petroleum
products) manufactured or
removed in violation of the Tax
Code.
2. Dies for printing or making IR
stamps, labels and tags, in
imitation of or purport to be
lawful stamps, labels or tags.

Where to be sold:
a. Public sale: provided, there is notice
given not less than 20 days.
b. Private sale: provided, it is with the
approval of the Secretary of Finance.
Right of Redemption:
a. Personal entitled taxpayer or anyone
for him
b. Time to redeem within one (1) year
from forfeiture
c. Amount to be paid full amount of the
taxes and penalties, plus interest and
cost of the sale
d. To whom paid Commissioner or the
Revenue Collection Officer
e. Effect of failure to redeem forfeiture
shall become absolute.
NOTE:
The Register of Deeds is duty bound to transfer
the title of property forfeited to the government
with out necessity of an order from a competent
court.
7. Suspension of Business Operations
8. Enforcement of Administrative Fines
D. ADMINISTRATIVE REMEDIES IN DETAIL
(SECS. 206-217, NIRC)
A. DISTRAINT - Seizure by the government of
personal property, tangible or intangible, to enforce the
payment of faces, to be followed by its public sale, if the
taxes are not voluntarily paid.
KINDS
a. Actual There is taking of possession of personal
property out of the taxpayer into that of the government.
In case of intangible property, taxpayer is also diverted
of the power of control over the property.
b. Constructive The owner is merely prohibited from
disposing of his personal property.

35

Difference between Actual and Constructive Distraint


Actual
Constructive
Made on the property only May be made on the
of a delinquent taxpayer.
property of any taxpayer
whether delinquent or not
There is actual taking or Taxpayer
is
merely
possession of the property.
prohibited from disposing
of his property.
Effected by having a list of Effected by requiring the
the distraint property or by taxpayer to sign a receipt
service or warrant of of the property or by
distraint or garnishment.
leaving a list of same
An immediate step for Such immediate step is
collection of taxes where not necessary; tax due
amount due is definite.
may not be definite or it is
being questioned.
Requisites:
1. Taxpayer is delinquent in the payment of tax.
2. Subsequent demand for its payment.
3. Taxpayer must fail to pay delinquent tax at time
required.
4. Period with in to assess or collect has not yet
prescribed.
When remedy not available:
Where amount involved does not exceed P100.
In keeping with the provision on the abatement
of the collection of tax as the cost of same might even be
more than P100.
Procedure:
1. Service of warrant of distraint upon taxpayer or
upon person in possession of taxpayers
personal property.
2. Posting of notice is not less than two places in
the municipality or city and notice to the
taxpayer specifying time and place of sale and
the articles distrained.
3. Sale at public auction to highest bidder
4. Disposition of proceeds of the sale.
Who may effect distraint
1. Commissioner or his duly
authorized representative
2. Revenue District Officer
(RDO)

BAR OPERATIONS COMMITTEE

Amount Involved
In
excess
of
P1,000,000.00
P1,000,000.00 or
less

REVIEW NOTES FOR TAXATION 2

How Actual Distraint Effected


1. In case of Tangible Property:
a. Copy of an account of the property
distrained, signed by the officer, left
either with the owner or person from
whom property was taken, at the
dwelling or place of business and with
someone of suitable age and discretion
b. Statement of the sum demanded.
c. Time and place of sale.
2.

In case of intangible property:


a. Stocks and other securities
Serving a copy of the warrant
upon taxpayer and upon president,
manager, treasurer or other responsible
officer of the issuing corporation,
company or association.
b. Debts and credits
1. Leaving a copy of the warrant with
the person owing the debts or
having in his possession such
credits or his agent.
2. Warrant shall be sufficient authority
for such person to pay CIR his
credits or debts.
c.

Bank Accounts garnishment


1. Serve warrant upon taxpayer and
president, manager, treasurer or
responsible officer of the bank.
2. Bank shall turn over to CIR so much
of the bank accounts as may be
sufficient.

How constructive Distraint Effected


1. Require taxpayer or person in possession to:
- Sign a receipt covering property
distrained
- Obligate him to preserve the same
properties.
- Prohibit him from disposing the
property from disposing the property in
any manner, with out the authority of
the CIR.
2. Where Taxpayer or person in possession refuses
to sign:
- Officer shall prepare list of the property
distrained.
- In the presence of two witnesses of
sufficient age and discretion, leave a
copy in the premises where property is
located.

36

Grounds of Constructive Distraint


1. Taxpayer is retiring from any business subject to
tax.
2. Taxpayer is intending to leave the Philippines;
or
3. To remove his property there from.
4. Taxpayer hides or conceals his property.
5. Taxpayer acts tending to obstruct collection
proceedings.
NOTE:
1. Bank accounts may be distrained without
violating the confidential nature of bank
accounts for no inquiry is made. BIR simply
seizes so much of the deposit with out having to
know how much the deposits are or where the
money or any part of it came from.
2. If at any time prior to the consummation of the
sale, all proper charges are paid to the officer
conducting the same, the goods distrained shall
be restored to the owner.
3. When the amount of the bid for the property
under distraint is not equal to the amount of the
tax or is very much less than the actual market
value of articles, the CIR or his deputy may
purchase the distrained property on behalf of
the national government.
B. LEVY OF REAL PROPERTY - an act of
seizure of real property in order to enforce the payment
of taxes. The property may be sold at public sale, if after
seizure the taxes are not voluntarily paid.
NOTE: The requisites are the same as that of
distraint.
Procedure:
1. International Revenue officer shall prepare a
duly authenticated certificate showing
a. Name of taxpayer
b. Amount of tax and
c. Penalty due.
- enforceable throughout the Philippines
2. Officer shall write upon the certificate a
description of the property upon which levy is
made.
3. Service of written notice to:
a. The taxpayer, and
b. RD where property is located.
4. Advertisement of the time and place of sale.
5. Sale at public auction to the highest bidder.
6. Disposition of proceeds of sale.
NOTE: The excess shall be turned over to owner.
Redemption of property sold or forfeited
a. Person entitled: Taxpayer or anyone for him

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


b.

Time to redeem: one year from date of sale or


forfeiture
- Begins from registration of the deed of sale
or declaration of forfeiture.
- Cannot be extended by the courts.
c. Possession pending redemption: owner not
deprived of possession
d. Price: Amount of taxes, penalties and interest
thereon from date of delinquency to the date of
sale together with interest on said purchase
price at 15% per annum from date of purchase
to date of redemption.
Difference between Distraint and Levy
Distraint
Levy
personal property
real property
forfeiture by government, forfeiture by government
not provided
authorized where there is
no bidder or the highest
bid is not sufficient to pay
the taxes, penalties and
costs.
Taxpayer no given the Taxpayer
can
redeem
right of redemption
properties levied upon and
sold/forfeited
to
the
government.
1.
2.

Both are summary remedies for collection of


taxes.
Both cannot be availed of where amount
involved is not more than P100.

NOTE:
1. It is the duty of the Register of Deeds concerned
upon registration of the declaration of forfeiture,
to transfer the title to the property with out of an
order from a competent court
2. The remedy of distraint or levy may be repeated
if necessary until the full amount, including all
expenses, is collected.
C. GARNISHMENT
Bank Accounts garnishment
1. Serve warrant upon taxpayer and president, manager,
treasurer or responsible officer of the bank.
2. Bank shall turn over to CIR so much of the bank
accounts as may be sufficient.

2.
3.

Conducted by Legal Officer of BIR


Must be with the approval of the CIR, in
case of action, for recovery of taxes, or
enforcement of a fine, penalty or
forfeiture.

A. CIVIL CASES (SECS 203,222,NIRC)


Three (3)years from the following,
whichever comes later:
3. The last day prescribed by law for
filing the return
4. The day when the return was
actually filed
Ten (10) years after the discovery of the
falsity, fraud or omission in case of:
3. False or fraudulent return with
intent to evade tax, or
4. Failure to file a return
Within the period agreed upon, when
both the TP and the Commissioner have
agreed in writing, before the expiration
of the period in Sec. 203 for the
assessment of the tax.
Where to File
1) Court of Tax Appeals- where the principal amount of
taxes and fees exclusive of charges and penalties claimed
is one million pesos and above
2) RTC, Mun. TC, Metro TC- where the principal
amount of taxes and fees, exclusive of charges and
penalties claimed is less thanP1,000,000.00 (Sec 7[c], RA
9282)
The approval of the CIR is essential in
civil cases (Sec. 220). However under
Sec. 7 of
NIRC, the Commissioner may delegate
suchpower to a Regional Director.

When:

E. JUDICIAL REMEDIES IN DETAIL (SEC 220, NIRC)


1. Period within which the action may be filed
Civil and Criminal Actions:
1. Brought in the name of the Government
of the Philippines.

37

BIR

Actions instituted by the government to collect


internal revenue taxes in regular courts (RTC or
MTCs, depending on the amount involved). It
includes filing by the government with the
probate court claims against the deceased
taxpayer.
Resorted to when the tax liability becomes final
and unappealable, or when the decision of the
Commissioner becomes final or executory.

A tax is assessed and the assessment becomes


final and unappealable because the taxpayer
fails to file an administrative protest with the
within 30 days from the receipt of the
assessment.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2

When an administrative protest filed by the


taxpayer against the assessment is denied, in
whole and in part or Is not acted upon within
180 days from submission of the documents,
and
The taxpayer adversely affected by the decision
or inaction fails to file an appeal with the CTA
within 30 days from receipt of said decision or
from the lapse of the180 day period.

B. CRIMINAL CASES ( TITLE X, NIRC; SEC.


281, NIRC)

All violations of any provision of the tax code


shall prescribe after five (5) years.

NOTE:
When should it commence: The five (5) year
prescriptive period shall begin to run from the
a. If known, day of the commission of the
violation.
b. If not known, from the time of discovery and
the institution of judicial proceeding for its
investigation and punishment.
When is it interrupted:
a. When a proceeding is instituted against the
guilty person
b. When the offender is absent from the
Philippines.
When should it run again:
When the
proceeding is dismissed for reason not
constituting jeopardy.
Where to file
1) Court of Tax Appeals- on criminal offenses arising
from violations of the NIRC or TCC and other laws
administered by the BIR and the BOC, where the
principal amount of taxes and fees, exclusive of charges
and penalties claimed is P1,000,000.00 and above.
2) RTC, Mun. TC, Metro TC- on criminal offenses arising
from violations of the NIRC or TCC and
other laws administered by the BIR and the BOC, where
the principal amount of taxes and fess
exclusive of charges and penalties claimed is less than
P1,000,000.00 or where there is no specified amount
claimed (Sec 7[b], RA 9282)
CASES:
REPUBLIC V. HIZON, DEC. 13, 1999 (re: approval of
filing of civil and criminal actions)
Revenue Adm. Order No. 10-95 specifically
authorizes the Litigation and Prosecution
section of the Legal Division of regional district
offices to institute the necessary civil and

38

criminal actions for tax collection. As the


complaint filed in this case was signed by the
BIRs Chief of Legal Division for Region 4 and
verified by the Regional Director, there was,
therefore, compliance with the law.
Sec. 7 of NIRC, authorizes the BIR
Commissioner to delegate the powers vested in
him under the pertinent provision of the Code to
any subordinate official with the rank
equivalent to a division chief or higher.

CIR V. LA SUERTE CIGAR, JULY 04, 1992 (re:


participation of the Office of the Solicitor General)
The institution or commencement before a
proper court of civil and criminal actions and
proceedings arising under the Tax Reform Act
which "shall be conducted by legal officers of
the Bureau of Internal Revenue" is not in
dispute. An appeal from such court, however, is
not a matter of right. Section 220 of the Tax
Reform Act must not be understood as
overturning the long established procedure
before this Court in requiring the Solicitor
General to represent the interest of the Republic.
This Court continues to maintain that it is the
Solicitor General who has the primary
responsibility to appear for the government in
appellate proceedings.

PNOC V. CA, APRIL 26, 2005

LIM V. CA, OCT. 18, 1990 ( re: prescription of


criminal actions, Sec, 281, NIRC)

should be filed 5 years from the (1) day of the


commission of the violation of the law, and if
the same shall be not known, from the (2)
discovery thereof and the institution of the
judicial proceedings for its investigation and
punishment.

MARCOS II V. CA, JUNE 5, 1997 (re: enforcement of tax


liability during pendency of probate proceedings)
The BIR is authorized to collect estate tax
deficiency through the summary remedy of the
levying upon and sale of properties of a
decedent, without the cognition and authority of
the court sitting in probate over the supposed
will of the deceased, because the collection of
estate tax is executive in character. As such the
estate tax is exempted from the application of
the statute of the non claims, and this is
justified by the necessity of the government

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


finding, immortalized in the maxim that taxes
are the lifeblood of the government
E. EFFECTS OF FAILURE TO PAY THE TAX ON
TIME: ADDITIONS TO THE TAX (CHAPTER I,
TITLE X, NIRC)
1. SURCHARGES- a civil penalty imposed by
law as an addition to the main tax required to be
paid. It is not a criminal penalty but a civil
administrative sanction provided primarily as
safeguard
for the protection of the State
revenue and to reimburse the government for the
expenses of investigation and the loss resulting
from the taxpayers fraud. A surcharge added to the
main tax
is subject to interest.
a. ORDINARY (SEC. 248A, NIRC)
Penalty: 25% of the amount due, in addition to the tax
required to be paid
a.

Failure to file any return and to pay the


tax due thereon as required by the NIRC
or rules.
b. Filing a return with an internal revenue
officer other than those with whom the
return is required to be fired. Not
authorized officer.
c. Failure to pay the deficiency tax within
the time prescribed for its payment in
the notice of assessment.
d. Failure to pay the full or part of the
amount of tax shown on any return, or
the full amount of tax due for which no
return is required to be filed, on or
before the date prescribed for its
payment.
b. FRAUD PENALTY (SEC. 248B, NIRC)
Penalty: 50% of the amount due, in addition to the tax
required to be paid
a.
b.

In case of willful neglect to file the


return within the period prescribed by
the NIRC or rule.
In case a false or fraudulent return is
willfully made.

CASE: CIR V. JAVIER, JULY 31, 1991


There was no actual intentional fraud in
filing the return. Private respondents
notation on the tax return was at most
an error or mistake of fact or law not

39

constituting fraud,
an invitation for
investigation and private respondent
had literally laid his cards on the table.
2. INTEREST- This is an increment on any
unpaid amount of tax assessed at the rate of 20% per
annum or such higher rate as may be prescribed
by the regulations from the date prescribed for
payment until the amount is fully paid.
Classes of interest
1.
2.
3.

Deficiency interest
Delinquency interest
Interest on extended payment

Deficiency interest

Any deficiency in the tax due shall be subject to


the interest of 20% per annum which shall be
assessed and collected from the date prescribed
for its payment until the full payment thereof.

When delinquency interest imposed?

Delinquency interest is imposed 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 tax due for which no return
is required; or
3. A deficiency tax or any surcharge or interest
thereon on the issue date appearing in the
notice and demand of the Commissioner.

Rate is 20% per annum until the amount is fully


paid which interest shall form part of the tax.

Interest on Extended Payment.


1) any person who is qualified and elects to pay the tax
on installment but fails to pay the tax, or any
installment, or any part on or before the date prescribed;
or
2) where the Commissioner has authorized an extension
of time within which to pay a tax or a deficiency tax or
any part thereof,
3) from the date of notice and demand until it is paid.
Compromise Penalty
1. It is a certain amount of money which the
taxpayer pays to compromise a tax violation.
2. It is pain in lieu of a criminal prosecution.
3. Since it is voluntary in character, the same may
be collected only if the taxpayer is willing to pay
them.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Failure to File Certain Information Returns (Sec. 250,
NIRC)
A) Penalty: P 1,000 for each failure
B) The aggregate amount for all such failure shall not
exceed P 25,000 during a calendar year
C) Upon notice and demand by the Commissioner
D) Unless it is shown that such failure is due to
reasonable cause and not to willful neglect.
In the case of each failure to file:
1) information return;
2) statement or list;
3) keep any record;
4) supply any information
E) required by this Code or by the Commissioner on the
date prescribed thereof.
LOCAL TAXATION
A. Local Taxation: General Concepts
1. Nature of Local Taxing Power
a.

Constitutional Provision (Section 5, Article X)


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.

b.

Delegated Power
i. City of San Pablo Laguna vs. Reyes,
March 25, 1999
The power to tax is primarily vested in
Congress. However, in our jurisdiction,
it may be exercised by local legislative
bodies, no longer merely by virtue of a
valid delegation as before, but pursuant
to direct authority conferred by Section
5, Article X of the Constitution. The
important legal effect of Section 5 is that
henceforth, in interpreting statutory
provisions on municipal fiscal powers,
doubts will have to resolved in favor of
municipal corporations.
ii. Meralco vs. Province of Laguna, May 5,
1999

BAR OPERATIONS COMMITTEE

40

Prefatorily, it might be well to recall


that local governments do not have the
inherent power to tax except to the
extent that such power might be
delegated to them either by the basic
law or by statute. Presently, under
Article X of the 1987 Constitution, a
general delegation of that power has
been given in favor of local government
units. The 1987 Constitution has a
counterpart provision in the 1973
Constitution, which did come out with a
similar delegation of revenue making
powers to local governments. Under
the regime of the 1935 Constitution no
similar delegation of tax powers was
provided, and local government units
instead derived their tax powers under
a limited statutory authority. Whereas,
then, the delegation of tax powers
granted at that time by statute to local
governments was confined and defined
(outside of which the power was
deemed
withheld),
the
present
constitutional rule (starting with the
1973 Constitution), however, would
broadly confer such tax powers subject
only to specific exceptions that the law
might prescribe.
Under the now
prevailing Constitution, where there is
neither a grant nor a prohibition by
statute, the tax power must be deemed
to exist although Congress may provide
statutory limitations and guidelines.
The basic rationale for the current rule is
to safeguard the viability and selfsufficiency of local government units by
directly granting them general and
broad tax powers. Nevertheless, the
fundamental law did not intend the
delegation
to
be
absolute
and
unconditional;
the
constitutional
objective obviously is to ensure that,
while the local government units are
being strengthened and made more
autonomous, the legislature must still
see to it that (a) the taxpayer will not be
over-burdened or saddled with multiple
and unreasonable impositions; (b) each
local government unit will have its fair
share of available resources, (c) the
resources of the national government
will not be unduly disturbed; and (d)

REVIEW NOTES FOR TAXATION 2


local taxation will be fair, uniform, and
just.

national leadership. It has also


dampened the spirit of initiative,
innovation and imaginative resilience in
matters of local development on the part
of local government leaders. The only
way to shatter this culture of
dependence is to give the LGUs a wider
role in the delivery of basic services, and
confer them sufficient powers to
generate their own sources for the
purpose. To achieve this goal, section 3
of Article X of the 1987 Constitution
mandates Congress to enact a local
government code that will, consistent
with the basic policy of local autonomy,
set the guidelines and limitations to this
grant of taxing powers.

iii. Mactan Cebu International Airport


Authority vs. Marcos, September 11,
1996
The taxing powers of local government
units cannot extend to the levy of, inter
alia, taxes, fees and charges of any kind
on the National Government, its
agencies and instrumentalities, and local
government units; however, pursuant
to Section 232, provinces, cities, and
municipalities in the Metropolitan
Manila Area may impose the real
property tax except on, inter alia, 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, as provided in item (a) of the
first paragraph of Section 234.

41

iv. NAPOCOR vs. City of Cabanatuan,


April 9, 2003
In recent years, the increasing social
challenges of the times expanded the
scope of state activity, and taxation has
become a tool to realize social justice
and the equitable distribution of wealth,
economic progress and the protection of
local industries as well as public welfare
and similar objectives. Taxation assumes
even greater significance with the
ratification of the 1987 Constitution.
Thenceforth, the power to tax is no
longer vested exclusively on Congress;
local legislative bodies are now given
direct authority to levy taxes, fees and
other charges pursuant to Article X,
section 5 of the 1987 Constitution.
This paradigm shift results from the
realization that genuine development
can be achieved only by strengthening
local
autonomy
and
promoting
decentralization of governance. For a
long time, the countrys highly
centralized government structure has
bred a culture of dependence among
local government leaders upon the
BAR OPERATIONS COMMITTEE

Extent of the Power of Congress in Local


Taxation
City Govt. of Quezon City vs. Bayantel,
March 6, 2006
The power to tax is primarily vested in the
Congress; however, in our jurisdiction, it
may be exercised by local legislative bodies,
no longer merely be virtue of a valid
delegation as before, but pursuant to direct
authority conferred by Section 5, Article X of
the Constitution. Under the latter, the
exercise of the power may be subject to such
guidelines and limitations as the Congress
may provide which, however, must be
consistent with the basic policy of local
autonomy.
Clearly then, while a new slant on the
subject of local taxation now prevails in the
sense that the former doctrine of local
government units delegated power to tax
had been effectively modified with Article
X, Section 5 of the 1987 Constitution now in
place, .the basic doctrine on local taxation
remains essentially the same. For as the
Court stressed in Mactan, "the power to tax
is [still] primarily vested in the Congress."
In net effect, the controversy presently
before the Court involves, at bottom, a clash
between the inherent taxing power of the
legislature, which necessarily includes the
power to exempt, and the
local

42

REVIEW NOTES FOR TAXATION 2


governments delegated power to tax under
the aegis of the 1987 Constitution.
2.

Fundamental Principles in the exercise of Local


Taxing Power (Sec. 130, LGC)

3.

Exercise of Local Taxing Power

from the business tax as provided for in


Section 133 (j), of the Local Government
Code, to wit:
"Section 133. Common Limitations on the
Taxing Powers of Local Government Units.

Unless otherwise provided herein, the


exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall
not extend to the levy of the following :

B. Common Limitations on the Exercise of Local


Taxing Power
1.

2.

The Principle of Preemption / Exclusionary


Rule (Sec. 133, LGC)
- If the national government elects to tax a
particular
subject
within
a
Local
Government
Unit,
it
is
impliedly
withholding the power of LGU to tax the
same.
- Adopted in the Philippines despite nonprohibition of double taxation unless
expressly allowed by Congress.
Cases:
a. Province of Bulacan vs. CA, November 27,
1998
A province may not levy excise taxes on
articles already taxed by the National
Internal Revenue Code.
It is clearly
apparent from Section 151 of the National
Internal Revenue Code levies a tax on all
quarry resources, regardless of origin,
whether extracted from public or private
land. Thus, a province may not ordinarily
impose taxes on stones, sand, gravel, earth
and other quarry resources, as the same are
already taxed under the National Internal
Revenue Code. The province can, however,
impose a tax on stones, sand, gravel, earth
and other quarry resources extracted from
public land because it is expressly
empowered to do so under the Local
Government Code. As to stones, sand,
gravel, earth and other quarry resources
extracted from private land, however, it
may not do so, because of the limitation
provided by Section 133 of the Code in
relation to Section 151 of the National
Internal
Revenue
Code.
b.

xxx

xxx

(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 this
Code."
It is clear that the legislative intent in
excluding from the taxing power of the local
government unit the imposition of business
tax against common carriers is to prevent a
duplication of the so-called "common
carrier's tax."
Petitioner is already paying three (3%)
percent common carrier's tax on its gross
sales/earnings under the National Internal
Revenue Code.[19] To tax petitioner again
on its gross receipts in its transportation of
petroleum business would defeat the
purpose of the Local Government Code.
c.

First Philippine Industrial Corp. vs. CA,


December 9, 1998 (Section 133j; Local Tax on
Common Carriers)
There is no doubt that petitioner is a
"common carrier" and, therefore, exempt

xxx

BAR OPERATIONS COMMITTEE

Palma Development Corp. vs. Municipality


of Malangas, October 16, 2003 (Sec. 133e)
By express language of Sections 153 and 155
of RA No. 7160, local government units,
through their Sanggunian, may prescribe
the terms and conditions for the imposition
of toll fees or charges for the use of any
public road, pier or wharf funded and
constructed by them. A service fee imposed
on vehicles using municipal roads leading to
the wharf is thus valid. However, Section
133(e) of RA No. 7160 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

REVIEW NOTES FOR TAXATION 2


surveillance on the goods, because any other
form of imposition on goods passing
through the territorial jurisdiction of the
municipality is clearly prohibited by Section
133(e).
d. Batangas Power Corp. vs. Batangas City,
April 28, 2004 (Section 133g)
Sec. 133 (g) of the LGC, which proscribes
local government units (LGUs) from levying
taxes on BOI-certified pioneer enterprises
for a period of six years from the date of
registration, applies specifically to taxes
imposed by the local government, like the
business tax imposed by Batangas City on
BPC in the case at bar. Reliance of BPC on
the provision of Executive Order No.
226,[18] specifically Section 1, Article 39,
Title III, is clearly misplaced as the six-year
tax holiday provided therein which
commences from the date of commercial
operation refers to income taxes imposed by
the national government on BOI-registered
pioneer firms. Clearly, it is the provision of
the Local Government Code that should
apply to the tax claim of Batangas City
against the BPC. The 6-year tax exemption
of BPC should thus commence from the date
of BPCs registration with the BOI on July
16, 1993 and end on July 15, 1999.
3.

4.

Local Taxing Power cannot extend to:


-

Those already covered by the National


Internal Revenue Code, i.e. Income tax,
Transfer tax, VAT, percentage tax,
Excise Tax, Documentary Stamp Tax;

Those already covered by the Tariff and


Customs Code;
- Duties upon products about to
be exported and goods
passing through territorial
jurisdiction cannot be taxed
by LGUs.

Taxation of the National Government,


including
its
agencies
and
instrumentalities as we as local
government units;
Those subjects not within the ambit of
real taxation by reason of public policy,
i.e. Cooperatives registered under RA
6938 (CDA);

43

Those enjoying privileges as granted by


the Board of Investments (Investments
Priorities Plan);
- Both pioneer and non-pioneer
enterprises enjoy such kind of
privileges under the Omnibus
Investments Code.

Taxes on agricultural or aquatic


products sold by marginal enterprises;

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.

LTO vs. Butuan Congress has no


intention to delegate issuance of permits
to LGUs. The intention of the law is to
centralize issuance of permits to drive
motor vehicles including tricycles is to
monitor the operation of the same.
Section 133(l) is only for franchise
where to grant the same is within the
discretion of LGUs. The permit to drive
is issued by LTO.

Time of Payment (Section 167, LGC)


Unless otherwise provided in LGC, all local
taxes, fees, and charges shall be paid within the
first twenty (20) days of January or of each
subsequent quarter, as the case may be. The
Sanggunian concerned may, for a justifiable
reason or cause, extend the time for payment of
such taxes, fees, or charges without surcharges
or penalties, but only for a period not exceeding
six (6) months.

5.

Surcharges, Interests and Penalties

C. Residual Power to Tax (Sec. 186)


- The power of LGU to tax even of not
expressly granted by the LGC provided that
there is no express prohibition.
D. Specific Taxing Units
1. Provinces may tax:
i. Transfer of Real Property ownership
- Onerous or gratuitous
- Preemption rule is not applicable
- of 1%

BAR OPERATIONS COMMITTEE

44

REVIEW NOTES FOR TAXATION 2


ii. Printing and Publication
REMEDIES IN LOCAL TAXATION
iii. Franchise Tax
- Government franchise, whether primary
or secondary, i.e. public utility companies
- If the franchise grants tax exemption and
the same was executed prior to 1991 LGC,
it is deemed revoked by reason of the
laws blanket revocation.
- At a rate not exceeding of 1% of the
Gross Amount receipt of the preceding
calendar year

A. REMEDIES OF THE GOVERNMENT


a.

1) Local Governments Lien (Sec 173,


LGC)
2) Assessment by the Local Treasurer
3) Distraint of goods, chattels or effect
and other personal properties of
whatever character (Sec. 174 and 175,
LGC)

iv. Professional Tax


- Those who have passed government
licensure examinations are the ones liable
- Amount not exceeding Php 300.00
- Imposed by the city or province where the
taxpayers principal office is located
- With employer-employee relationship
liability to PTR depends on the extent of
services provided. If services provided is
exclusive to the employer, PTR is not
necessary, otherwise, the employee is
liable.

Cities may tax those that may be taxed by a


province and a municipality. They may impose
a tax rate which is 50% higher than the rates
being imposed by provinces and municipalities.

3.

Municipalities
i. Business permit
ii. Community Taxes
iii. May levy taxes, fees, and charges not
otherwise levied by provinces (Sec. 142)

Seizure

b.

Accounting of distrained goods

c.

Publication

e.

Procedure of sale

f.

Disposition of proceeds

4) Levy (Sec. 174 and 176,. LGC)


Contents of assessment:
1.

vii. Taxes on Delivery trucks


2.

a.

d. Release of distrained property upon


payment prior to sale

v. Sand and Gravel Tax


- Imposed on extraction of sand, gravel and
other quarry resources
- Not more than 10% of the FMV of what
was extracted
- Case: Province of Bulacan vs. CA
vi. Amusement Tax
- As high as 30%
- Applies to theaters, cinemas, concert halls,
boxing stadiums, circuses and other places
of amusements.

ADMINISTRATIVE

BAR OPERATIONS COMMITTEE

Meralco vs. Barlis (Feb. 1, 2002) - A notice of


assessment as provided for in the Real
Property Tax Code should effectively inform
the taxpayer of the value of a specific
property, or proportion thereof subject to tax,
including the discovery, listing, classification,
and appraisal of properties. The petitioner is
also correct in pointing out that the last
paragraph of the said notices that inform the
taxpayer that in case payment has already
been made, the notices may be disregarded is
an indication that it is in fact a notice of
collection. It could only qualify as a notice of
collection if there is an unmistakable demand
for payment of back taxes.

45

REVIEW NOTES FOR TAXATION 2

assessment by administrative or
judicial action

Who is entitled to the notice of assessment


1.

Talusan vs. Tayag, (April 04, 2001) - Cases


involving an auction sale of land for the
collection of delinquent taxes are in
personam. Thus, notice by publication,
though sufficient in proceedings in rem, does
not as a rule satisfy the requirement of
proceedings in personam.
As such, mere
publication of the notice of delinquency
would not suffice, considering that the
procedure in tax sales is in personam. It was,
therefore, still incumbent upon the city
treasurer to send the notice of tax
delinquency directly to the taxpayer in order
to protect the interests of the latter.
In the present case, the notice of
delinquency was sent by registered mail to
the permanent address of the registered
owner in Manila. In that notice, the city
treasurer of Baguio City directed him to settle
the charges immediately and to protect his
interest in the property. Under the
circumstances, we hold that the notice sent
by registered mail adequately protected the
rights of the taxpayer, who was the
registered owner of the condominium unit.
For purposes of the real property tax,
the registered owner of the property is
deemed the taxpayer. Hence, only the
registered owner is entitled to a notice of tax
delinquency and other proceedings relative
to the tax sale. Not being registered owners
of the property, petitioners cannot claim to
have been deprived of such notice. In fact,
they were not entitled to it.
b.

c.

OTHER PROVISIONS
Accrual of the tax (Sec. 166, LGC)

- General rule: All local taxes, fees, and charges


shall accrue on the 1st day of January of each
year.
- Except:
i. Unless otherwise provided in the LGC,
ii. New taxes, fees or charges, or changes in the
rates thereof, shall accrue on the 1st day of the
quarter next following the effectivity of the
ordinance imposing such new levies or rates
Time of payment (Sec. 167, LGC)
- General Rule: All local taxes, fees and charges
shall be paid within the first 20 days of
January or of each subsequent quarter, as the
case may be.
- Except:
i. Unless otherwise provided by the LGC
ii. The Sanggunian concerned may, for a
justifiable reason or cause, extend the time
for payment of such taxes, fees, or charges or
penalties, but only for a period not exceeding
6 months.
Surcharges, Interests and Penalties (Sec.
168, LGC)
- Sanggunian may impose:
i. Surcharge not exceeding 25% of the amount
of taxes, fees or charges not paid on time and

JUDICIAL (Sec. 174, LGC)


1) Civil Action in the court
2) Filed by Local Treasurer
3) Within 5 years from the date the
taxes, fees or charges became
due

ii. Interest not exceeding 2% per month of the


unpaid taxes, fees or charges, including
surcharges, until such amount is fully paid,
BUT in no case shall the total interest on the
unpaid amount or portion thereof exceed 36
months.
B. REMEDIES OF THE TAXPAYER

Period within which to collect


within 5 years from the date of
BAR OPERATIONS COMMITTEE

a.

ADMINISTRATIVE

REVIEW NOTES FOR TAXATION 2

barred. At this point, it is apropos to


state that the timeframe fixed by law
for parties to avail of their legal
remedies before competent court is not
a "mere technicality" that can be easily
brushed aside. The periods stated in
the section are mandatory. Ordinance
No. 28 is a revenue measure adopted
by the municipality of Hagonoy to fix
and collect public market stall rentals.
Being its lifeblood, collection of
revenues by the government is of
paramount importance. The funds for
the operation of its agencies and
provision of basic services to its
inhabitants are largely derived from its
revenues and collections. Thus, it is
essential that the validity of revenue
measures is not left uncertain for a
considerable length of time. Hence, the
law provided a time limit for an
aggrieved party to assail the legality of
revenue measures and tax ordinances.

Appeal to the Secretary of Justice; Re:


newly enacted tax ordinance (Sec. 187,
LGC) Any question on the
constitutionality or legality of tax
ordinances or revenue measures;
Within 30 days from its effectivity.
1. Drilon vs. Lim, (August 4, 1994) Section 187 authorizes the Secretary of
Justice
to
review
only
the
constitutionality or legality of the tax
ordinance and, if warranted, to revoke
it on either or both of these grounds.
When he alters or modifies or sets aside
a tax ordinance, he is not also
permitted to substitute his own
judgment for the judgment of the local
government that enacted the measure.
Secretary Drilon did set aside the
Manila Revenue Code, but he did not
replace it with his own version of what
the Code should be. He did not
pronounce the ordinance unwise or
unreasonable as a basis for its
annulment. He did not say that in his
judgment it was a bad law. What he
found only was that it was illegal. All
he did in reviewing the said measure
was determine if the petitioners were
performing
their
functions
is
accordance with law, that is, with the
prescribed procedure for the enactment
of tax ordinances and the grant of
powers to the city government under
the Local Government Code. As we see
it, that was an act not of control but of
mere supervision.
2. Hagonoy Market Vednors Assn. vs.
Municipality of Hagonoy. Bulacan,
(February 6, 2002) - Sec. 187, LGC
requires that an appeal of a tax
ordinance or revenue measure should
be made to the Secretary of Justice
within 30 days from effectivity of the
ordinance and even during its
pendency, the effectivity of the assailed
ordinance shall not be suspended. In
the case at bar, Municipal Ordinance
No. 28 took effect in October 1996.
Petitioner filed its appeal only in
December 1997, more than a year after
the effectivity of the ordinance in 1996.
Clearly, the Secretary of Justice
correctly dismissed it for being timeBAR OPERATIONS COMMITTEE

46

3. Ty vs. Trampe, (December 1, 1995)


Petitioners failed to appeal the
assessment of their properties to the
Board of Assessment Appeal within
sixty (60) days from the date of receipt
of the written Notice of Assessment,
and if it is true that petitioner, as
alleged in their pleadings, was not
afforded the opportunity to appeal to
the board of assessment appeal, then
they could have availed of the
provisions of Section 252, of the same
R.A. 7160 by paying the real estate tax
under protest. Because of petitioners
failure to avail of either Sections 226 or
252 of R.A. 7160, they failed to exhaust
administrative remedies provided for
by law before bringing the case to
Court. Therefore the filing of this case
before this Court is premature, the
same not falling under the exception
because the issue involved is not a
question of law but of fact.
Appeal to the Board of Assessment
Appeals (Secs. 226 and 252, LGC)
-

Sec. 226, LGC Any owner or person


who is not satisfied with the action of
the provincial, city or municipal
assessor in the assessment of his

47

REVIEW NOTES FOR TAXATION 2


property; Within 60 days from receipt
of the written notice of assessment;
Appeal to the BAA of the province or
city by filing a petition under oath and
copies of the tax declarations and
affidavits or documents in support of
appeal.
-

The provincial or city treasurer shall


decide the claim for refund or credit
within 60 days from receipt

In case the claim is denied, the taxpayer


may appeal to the BAA.
Remedies from a denial of the protest
and refund

Sec. 252 (d), LGC In the event that the


protest is denied or upon the lapse of
the 60-day period to decide, the
taxpayer may appeal to the BAA.

It should not only be the written claim


before the treasurer that must be filed
in 2 years but the taxpayer must also be
able to file a case in court before the
expiration of the 2 year period.

There is no appellate remedy from the


denial of the treasurer before the
regular court but an independent and
original action for refund.

Protest of the assessment (Sec. 226 and


252, LGC)
-

Pay under protest and such shall be


annotated in the tax receipt

Protest in writing must be filed within


30 days from payment of the tax to the
provincial, city or municipal treasurer,
who shall decide the protest within 60
days from receipt.

b. JUDICIAL

The tax or a portion thereof paid under


protest shall be held in trust by the
treasurer concerned.

REAL PROPERTY TAXATION

Protest decided in favor of taxpayer


the amount or portion of the tax
protested shall be refunded to the
protestant or applied as tax credit
against his existing or future tax
liability.

Protest denied or upon lapse of the


period to decide - appeal to the BAA.
Claim for refund (Sec. 253, LGC)

When an assessment of basic real


property tax, or any other tax levied 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 of taxes and
interests

With the provincial or city treasurer

Within 2 years from the date the


taxpayer is entitled to such reduction
or adjustment.

Questioning Tax Sale

Real Property Tax, defined


A direct tax on ownership of lands and
buildings or other improvements thereon
Payable regardless of whether the
property is used or not,
although the value may vary in
accordance with such factor.
A.

Governing Law
Historical Background:
1.
Commonwealth Act No. 470 Old
Assessment Law
- since 1920
2. Real Property Tax Code (Presidential Decree
No. 464, as amended)
- June 1, 1974
3. Local Government Code (Republic Act No.
7160)
- January 1, 1992
- The changes however were only on the
tax rate ceilings and assessment
levels.
The Local Government Code covers the
administration, appraisal, assessment, levy
and
collection of Real Property Tax, i.e. tax on land and
building and other
structures and improvements
on it, including machineries. (Subject to the definition
given by Art. 415 of the New Civil Code)

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


B. Nature of Real Property Tax National or Local?
Hybrid of national and local tax
Provisions of LGC are applied
nationwide but rates imposed are
different per LGU ordinance
The real property tax has been considered and
held to be national, despite the fact that in practice it is
local in its imposition and utilization.
Justice Vitug points out that: The real property
tax has been considered and held to be a national, not a
local tax in Meralco Securities Industrial Corp v. CBAA,
114 SCRA 260. The Court said that realty tax has always
been imposed by the national law-making body. The
real estate tax is enforced throughout the Philippines
and not in a particular political subdivision, although
the bulk of the tax proceeds accrue to the various local
government units where the property is located. Under
the Local Government Code, local government units are
mandated to fix a uniform rate of basic real property tax
applicable to their respective localities, the proceeds of
which exclusively accrue to them. (See Secs. 233 and 271,
LGC), [Page 479, Tax Law and Jurisprudence, 2000
Edition by Justice Vitug and Judge Acosta].
CHARACTERISTIC OF REAL PROPERTY TAX:
1. Direct tax on the ownership of real property
2. Ad Valorem tax. The value is based on the tax
base
3. Proportion - the tax is calculated on the basis
of a certain percentage of the value
assessed
4. Indivisible single obligation
5. Local Tax
C. Fundamental Principles Governing Appraisal and
Assessment of Real Property (Section 198,
LGC)
1.
Real property shall be appraised at its
current and fair market value.
2.
Real property shall be classified for
assessment purposes on the basis of its
actual use.
3.
Real property shall be assessed on the
basis of a uniform standard within each
local government unit.
4.
The
appraisal,
assessment,
and
collection of real property tax shall not be let
to any private person; and
5.
The appraisal and assessment of real
property shall be equitable.

D. Properties Covered (Sec. 232, LGC)


1.
Land,
2.
Buildings
3.
Machinery and
4.
Other improvements not
exempted under said code (Sec 232, LGC)

48

otherwise

Machinery embraces machines, equipment,


mechanical
contrivances,
instruments,
appliances or apparatus which may or may not be
attached, permanently or temporarily, to the real
property. It includes the physical facilities for
production, the installations and appurtenant
service facilities, those which are mobile,
selfpowered or self-propelled, and those not
permanently attached to the real property which are
actually, directly, and exclusively used to meet the
needs of the particular industry, business or
activity and which by their very nature and
purpose are designed for, or necessary to its
manufacturing, mining, logging, commercial,
industrial or agricultural purposes. (Sec. 199
[o], LGC)
Machinery which are of general purpose use
including but not limited to office equipment,
typewriters, telephone equipment, breakable or
easily damaged containers (glass or cartons),
microcomputers, facsimile machines, telex
machine, cash dispensers, furnitures and
fixtures, freezers, refrigerators, display cases or
racks, fruit juice or beverage automatic
dispensing machines which are not directly and
exclusively used to meet the needs of a
particular industry, business or activity shall
not be considered within the definition of
machinery. (Sec. 290 [o], IRR of RA 7160)
Improvements include valuable additions made
to a property or an amelioration in its condition,
amounting to more than a mere repair or
replacement of parts involving capital
expenditures and labor, which is intended to
enhance its value, beauty or utility or to adopt it
for new or further purposes.
Note: Although the term real property has not been
expressly defined in the LGC, early decisions of the Supreme
Court in Mindanao Bus Co. v City Assessor of Cagayan de
Oro, 6 SCRA `97; Board of Assessment Appeals v
Meralco, 119 PHIL 328; Manila Electric Co. v Board of
Assessment Appeals,10 SCRA 68) seem to suggest that Art.
415
of the Civil Code could also be controlling, to wit:.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Art. 415. The following are immovable
property:
(1) Land, buildings, roads and constructions of
all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they
are attached to the land or form an integral part
of an immovable;
(3) Everything attached to an immovable in a
fixed manner, in such a way that it cannot be
separated therefrom without breaking the
material or deterioration of the object;
(4) Statues, reliefs, paintings or other objects for
use or ornamentation, placed in buildings or on
lands by the owner of the immovable in such a
manner that it reveals the intention to attach
them permanently to the tenements;
(5) Machinery, receptacles, instruments or
implements intended by the owner of the
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 industry or works;
(6) Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in
case their owner has placed them or preserves
them with the intention to have them
permanently attached to the land, and forming a
permanent part of it; the animals in these places
are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the
matter thereof forms part of the bed, and waters
either running or stagnant;
(9) Docks and structures which, though floating,
are intended by their nature and object to
remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes
and other real rights over immovable property.

In Caltex vs. CBAA, May 31, 1982:


Machinery and equipment, consisting of
underground tanks, elevated tanks, water tanks,

49

gasoline pumps, computing pumps, water


pumps, car washer, car and truck hoists, air
compressors and similar articles, installed by
Caltex (Philippines) Inc. in its gasoline stations,
located on leased land, have been held to be real
property subject to the tax. (real properties
which have characteristics of permanency, the
lease is for a long period of time)
2001 BAR QUESTION: Under Article 415
of the Civil Code, in order for machinery
and equipment to be considered real
property, they must be placed by the
owner of the land and, in addition, must
tend to directly meet the needs of the
industry or works carried on by the
owner. Oil companies, such as Caltex and
Shell, install underground tanks in the
gasoline stations located in land leased by
the oil companies from others. Are those
underground tanks, which were not
placed there by the owner of the land but
by the lessee, considered real property for
purposes of real property taxation under
the LGC?
SUGGESTED ANSWER FROM UP LAW
CENTER: Yes. The underground tanks
although installed by the lessee, Shell and
Caltex, are considered as real property for
purposes of the imposition of real
property taxes. It is only for purposes of
executing a final judgment that these
machinery and equipment, installed by
the lessee on a leased land, would not be
considered as real property. But in the
imposition of real property tax, the
underground tanks are taxable as
necessary fixtures of the gasoline station
without which the gasoline station would
not be operational. (Caltex v. CBAA, 114
SCRA 296).
SPECIAL CLASSES OF REAL PROPERTY (Sec. 216,
LGC)
1.
HOSPITALS
2.
CULTURAL and SCIENTIFIC purposes
3.
owned and used by LOCAL WATER
DISTRICTS
4.
GOCCs rendering essential public
services in the supply and distribution of
water and/or generation or transmission of
electric power.
E. Properties Exempt

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


1. Section 234, LGC
a. Real property owned by the Republic
of the Philippines or any of its
political subdivisions except when the beneficial
use thereof has been
granted, for consideration or otherwise, to a
taxable person;
- except: when beneficial use
thereof is granted to a taxable person
- cases of MIAA and MCAA:
GOCCs are not automatically exempt
from real property tax, depending on its
charter giving it exemption
- charter enacted after LGC so
that the exemption is not revoked
b.

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.
- traditional exemptees

c. All pieces of machinery and


equipment that are actually, directly,
and exclusively used by local water
districts, and government owned or
controlled corporations engaged in the
supply and distribution of water and/or
generation and transmission of electric
power.
d. All real property owned by duly
registered cooperatives as provided for
under RA 6938, and
e. Machinery and equipment used for
pollution control and environmental
protection.
2. Section 238, LGC
Idle Lands Exempt From Tax:
By reason of:
a.
force majeure
b.
civil disturbance
c.
natural calamity
d.
any
cause
which
legally/physically prevents the owner of the
property
or
person having legal interest therein from

cultivating the same


LGC)

50
improving, utilizing, or

What Are Considered as Idle Lands: (Sec. 237,

1. Agricultural lands More than 1 hectare if


more than of which remain uncultivated or
unimproved by the owner of the property or person
having legal interest therein.
Not Idle Lands:
Agricultural lands planted to permanent or
perennial crops with at least 50 trees to a hectare
Lands actually used for grazing purposes
2. Non-Agricultural Lands More than 1,000
sq. m. in area if more than of which remain
uncultivated or unimproved by the owner of the
property or person having legal interest therein.
Proof of Tax Exemption:
Every person by or for whom real property is
declared who shall claim the exemption shall file with
the provincial, city or municipal assessor within 30 days
from date of
declaration of real property sufficient
documentary evidence in support of such claim (i.e.
corporate charters, title of ownership,articles of incorporation,
contracts, affidavits, etc.)
3. Constitutional Exemptions
- actually, directly, exclusively used for
religious, educational and charitable
purposes are exempt from real property
tax
Query: To where does the exemption attach?
To the property or to the entity?
Case: X owns a parcel of land, leased by
church. May X claim exemption from Real
Property Taxation? Yes, exemption attaches on
property as long as exclusively used for
religious purchases.
Case: School - not subject to Real Property Tax
if directly used for educational purposes.
A. Has a mansion near the school where
the president of the school resides and
where guests may be accommodated incidental, president has to live near school

BAR OPERATIONS COMMITTEE

B. Near the school is a hospital where


medical students are trained - incidental to
operation of the school (Herrera vs. CBAA
use as trainee students)

REVIEW NOTES FOR TAXATION 2


C. Near the school is a mens dorm, a
student center
exempt, incidental to operation of the
school
D. Near the school is another school
building with 2 floors used as classrooms
while 2 floors are for commercial stores.
- incidental to operation of school (Bishop of
Neva Segovia Case vegetable garden near
convent is incidental to convent operation)
- that part not used for educational purpose
is subject to real property tax
- As to the land, pro-rate according to use,
one-half taxed pursuant to Abra
Valley
College Case

Note:

Incidental
exemptions
promulgated prior to 1987 Constitution
meant, primarily used for the purposes
even if not solely.
CASES:

1.
In MIAA v. Paranaque, July 20,
2006, the Court declared the Airport
Lands and Buildings of the Manila
International Airport Authority exempt
from the real estate tax imposed by the
City of Paraaque. The Court declared
void all the real estate tax assessments
issued by the City of Paraaque on the
Airport Lands and Buildings of the
MIAA, except for the portions that the
MIAA has leased to private parties. The
Court based its ruling under Section
2(10) and (13) of the Introductory
Provisions of the Administrative Code,
which governs the legal relation and
status of government units, agencies
and
offices
within
the
entire
government machinery, under which
MIAA is a government instrumentality
and not a government-owned or
controlled corporation. Under Section
133(o) of the Local Government Code,
MIAA as a government instrumentality
is not a taxable person because it is not
subject to "[t]axes, fees or charges of any
kind" by local governments. The only
exception is when MIAA leases its real

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51

property to a "taxable person" as


provided in Section 234(a) of the Local
Government Code, in which case the
specific real property leased becomes
subject to real estate tax. Thus, only
portions of the Airport Lands and
Buildings leased to taxable persons like
private parties are subject to real estate
tax by the City of Paraaque.
Under Article 420 of the Civil
Code, the Airport Lands and Buildings
of MIAA, being devoted to public use,
are properties of public dominion and
thus owned by the State or the Republic
of
the
Philippines.
Article
420
specifically mentions "ports x x x
constructed by the State," which
includes public airports and seaports, as
properties of public dominion and
owned by the Republic. As properties of
public dominion owned by the
Republic, there is no doubt that the
Airport Lands and Buildings are
expressly exempt from real estate tax
under Section 234(a) of the Local
Government Code.
Furthermore, the Court made a
distinction between a GOCC and an
instrumentality. Thus:
Government-owned
or
controlled
corporation refers to any agency
organized as a stock or non-stock
corporation, vested with functions
relating to public needs whether
governmental or proprietary in nature,
and owned by the Government directly
or through its instrumentalities either
wholly, or, where applicable as in the
case of stock corporations, to the extent
of at least fifty-one (51) percent of its
capital stock: x x x
A government-owned or controlled
corporation must be "organized as a
stock or non-stock corporation." MIAA
is not organized as a stock or non-stock
corporation. MIAA is not a stock
corporation because it has no capital
stock divided into shares. MIAA has no
stockholders or voting shares.

REVIEW NOTES FOR TAXATION 2


MIAA is also not a non-stock
corporation because it has no members.
Since MIAA is neither a stock nor a nonstock corporation, MIAA does not
qualify as a government-owned or
controlled corporation.
Thus, for an entity to be considered as a
GOCC, it must either be organized as a
stock or non-stock corporation. Two
requisites must concur before one may
be classified as a stock corporation,
namely: (1) that it has capital stock
divided into shares, and (2) that it is
authorized to distribute dividends and
allotments of surplus and profits to its
stockholders. If only one requisite is
present, it cannot be properly classified
as a stock corporation. As for non-stock
corporations, they must have members
and must not distribute any part of their
income to said members.
2.
In Lung Center of the Philippines
vs. Quezon City, June 29, 2004, the Court
held that Lung Center of the Philipines,
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. However,
those portions of its real property that
are leased to private entities are not
exempt from real property taxes as these
are not actually, directly and exclusively
used for charitable purposes.
Under the 1973 and 1987
Constitutions and Rep. Act No. 7160 in
order to be entitled to the exemption,
the petitioner is burdened to prove, by
clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real
properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable
purposes. "Exclusive" is defined as
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52

possessed and enjoyed to the exclusion


of others; debarred from participation or
enjoyment; and "exclusively" is defined,
"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 exclusively" without
doing violence to the Constitutions and
the law. Solely is synonymous with
exclusively.
What is meant by actual, direct
and exclusive use of the property for
charitable purposes is the direct and
immediate and actual application of the
property itself to the purposes for which
the charitable institution is organized. It
is not the use of the income from the
real property that is determinative of
whether the property is used for taxexempt purposes.
The
petitioner
failed
to
discharge its burden to prove that the
entirety of its real property is actually,
directly and exclusively used for
charitable purposes. While portions of
the hospital are used for the treatment
of patients and the dispensation of
medical services to them, whether
paying or non-paying, other portions
thereof are being leased to private
individuals for their clinics and a
canteen. Further, a portion of the land is
being leased to a private individual for
her business enterprise under the
business name "Elliptical Orchids and
Garden Center."
Accordingly, the Court held
that the portions of the land leased to
private entities as well as those parts of
the
hospital
leased
to
private
individuals are not exempt from such
taxes. On the other hand, the portions of
the land occupied by the hospital and
portions of the hospital used for its
patients, whether paying or non-paying,
are exempt from real property taxes.

REVIEW NOTES FOR TAXATION 2


Analysis:
Is Lung Center liable for Real Property Tax?
Yes.
a. exclusively used means
solely used for charitable
purposes
b. exemption in its charter
revoked by new LGC
c. incidental exemption no
longer recognized
d. taxed
on
orchidarium,
canteen, private clinics

franchise, respondent Province of


Pangasinan can only levy real property
tax on the remaining real properties of
the grantee located within its territorial
jurisdiction not part of the above-stated
classification. Said exemption, however,
merely applies from the time of the
effectivity of petitioner DIGITELs
legislative franchise and not a moment
sooner.
5. In Philippine Fisheries Development
Authority vs. Court of Appeals, July 31,
2007, the Court reversed the Court of
Appeals decision which held that
petitioner
Philippine
Fisheries
Development Authority is liable to pay
real property taxes on the land and
buildings of the Iloilo Fishing Port
Complex which are owned by the
Republic of the Philippines but operated
and governed by the Authority.

Query: are the older cases now not


applicable so that they are
now taxable?
- not clear as to the extent
of Lung Center case as
to areas which used to
be considered as real
property tax exempted
as incidental
- If city decides to tax
SLU on its hospital,
parking lot, etc., use as
ground that they should
be exempt due to
necessity, do not use the
word incidental

The Court ruled that the


Authority is not a GOCC but an
instrumentality
of
the
national
government which is generally exempt
from payment of real property tax.
However, said exemption does not
apply to the portions of the IFPC which
the Authority leased to private entities.
With respect to these properties, the
Authority is liable to pay real property
tax.

3. In LRTA vs. CBAA, October 12, 2000,


though the creation of the LRTA was
impelled by public service to provide
mass transportation in MM- its
operations undeniably partakes of
ordinary business. . . Given that it is
engage in a service-oriented commercial
endeavour, its carriage ways and
terminal stations are patrimonial
property subject to tax, notwithstanding
its claim of being a GOCC.
Under its charter, LRT is not
exempt from real property tax. Taxation
is the rule and exemption is the
exception.
4. In DIGITEL vs. Province of Pangasinan,
February 23, 2007, the Court ruled that in
view of the unequivocal intent of
Congress to exempt from real property
tax those real properties actually,
directly and exclusively used by
petitioner DIGITEL in the pursuit of its

53

The Authority should be


classified as an instrumentality of the
national government. As such, it is
generally exempt from payment of real
property tax, except those portions
which have been leased to private
entities.
F. May LGUs grant exemption? Yes
Power to Grant Local Exemptions (Sec. 192 LGC)
- LGUs, may through ordinances duly approved, grant
tax exemptions, incentives or reliefs under such terms
and conditions, as they may deem necessary.
- Although powerless to grant RPT exemption, LGU in
MM can exempt the 5% ad valorem
tax on idle lands.

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


- LGUs (within and outside MM) may also grant
condonation which actually partake of
exemption.
G. Who are liable for the Real Property Taxes
1. Ownership vs. Use
Doctrine of Ownership
- owner is liable
Doctrine of Use
- property is exempt due to Use
(REC-religious,
educational,
charitable)
Actual Use of Property as Basis for
Assessment (Sec. 217, LGC)
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.
Beneficial User May Be Liable if:
* he leased property from the
government
* he leased property from an
exempt owner
* use is not exempt from real
property tax
2. In Testate Estate of Concordia Lim vs. Manila,
February 21, 1990, GSIS
foreclosed the property
mortgaged by Lim and for failure to redeem, owned by
GSIS for the years 1977 to 1978.
In 1979, heirs
of Lim repurchased the property. Manila
sought
to levy real property tax on heirs for back taxes covering
1977 and 1978.
Who is lible for the back taxes?
a. not the heirs because they were not the
owners nor beneficial owners at the time
b. not GSIS because at the time it was exempt
c. beneficial users or those using the property for
commercial use must pay
however not made liable since not impleaded
H.

Procedure in Real Property Taxation

In Lopez vs. City of Manila, February 19, 1999, the


Court discussed the steps to be followed for the
mandatory conduct of General Revision of Real Property
assessments, pursuant to the provision of Sec. 219, of
R.A. No. 7160 which are as follows:

Values.

54

1. The preparation of Schedule of Fair Market

2. The enactment of Ordinances:


a) levying an annual "ad valorem" tax
on real property and an additional tax
accruing to the SEF.
b) fixing the assessment levels to be
applied to the market values of real
properties;
c) providing necessary appropriation to
defray expenses incident to general
revision
of real property assessments; and
d) adopting the Schedule of Fair Market
Values prepared by the assessors.
The preparation of fair market values as a preliminary
step in the conduct of general revision was set forth in
Section 212 of R.A. 7160, to wit: (1) The city or municipal
assessor shall prepare a schedule of fair market values
for the different classes of real property situated in their
respective Local Government Units for the enactment of
an ordinance by the sanggunian concerned. (2) The
schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or
municipality concerned or the posting in the provincial
capitol or other places as required by law.
The Court also laid down the procedure in
computing the real property tax. With the introduction
of assessment levels, tax rates could be maintained,
although tax payments can be made either higher or
lower depending on their percentage (assessment level)
applied to the fair market value of property to derive its
assessed value which is subject to tax. Moreover, classes
and values of real properties can be given proper
consideration, like assigning lower assessment levels to
residential properties and higher levels to properties
used in business. The procedural steps in computing the
real property tax are as follows:
1) Ascertain the assessment level of the property
2) Multiply the market value by the applicable
assessment level of the property
3) Find the tax rate which corresponds to the
class (use) of the property and multiply the
assessed value by the applicable tax rates.

The computation of real property tax is cited below:

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


Market Value
Pxxx
Multiplied
by
(x %)

Assessment

Assessed Value

Level

Pxxx

Multiplied by Rate of Tax


(x %)
Real Property Tax
Pxx
1. Declaration of Real Properties whose duty?
DECLARATION OF REAL PROPERTY
It shall be the responsibility of the owner,
administrator or their representatives to
declare, under oath, the true value of real
property, taxable or exempt, within 60
days after the acquisition. The sworn
declaration shall be filed once every 3
years before June 30th of the year
commencing 1992. The failure or refusal
to make that declaration within the
prescribed period would authorize the
provincial or city assessor to declare the
property in the name of the defaulting
owner, if known, or against an unknown
owner as the case may be, and to assess
the property for taxation. (Secs. 201-204
LGC).
In the case of Testate Estate of Concordia Lim
V. City of Manila, February 21, 1990, it was held that
the unpaid tax attaches to the property and is 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 real property tax on the
subsequent owner who 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.

LGC)

a.

Owner or Administrator (Secs. 202-203,

When: once every 3 years during the


period from January 1 to June 30

55

What: file a sworn declaration with the


assessor with description of the
property
IF newly acquired property a. files with assessor within 60 DAYS
from date of transfer a
b. SWORN statement containing FMV
and description of property
IF improvement on real property
a. file w/in 60 DAYS upon completion
or occupation (whichever is
earlier)
b. SWORN statement containing FMV
and description of property
b.
Provincial / City / Municipal Assessor
(Sec. 204)
WHEN only when the person under Sec 202
refuses or fails to make the
declaration within the prescribed time. No oath
by assessor is required
NOTE: IF FILING FOR EXEMPTION (Sec.
206)
WHAT person claiming exemptions must file
with assessor sufficient
documentary
evidence to support claim
WHEN within 30 days from the date of
DECLARATION of property
IF required evidence is not submittedwithin
30 days, the property will be listed as taxable in the roll
IF proven to be tax-exempt, property will be
dropped from the roll
NOTE: IF PROPERTY DECLARED FOR THE
FIRST TIME (Sec. 222)
If declared for 1st time, real property shall be
assessed for back taxes
a) for not more than ten (10) years prior
to the date of initial assessment
b) taxes shall be computed on the basis
of applicable schedule of values in force during the
corresponding periods
*Assessor will compare the entry on file with the
Registry of Deeds and the assessment roll in his office.
c. building officials
Prior to construction of building, as required in
procuring building permit.
Permit transmitted by building officials to
Registry of Deeds.
d. Geodetic engineers - For lands surveyed
e. Notaries Public - For document notarization,
must furnish the assessors a
copy
2. Valuation by Assessors

BAR OPERATIONS COMMITTEE

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56

Assessment
- the act or process of determining the value of a
property, or proportion thereof subject to tax, including
the discovery, listing, classification, and appraisal of
properties.

APPRAISAL AND VALUATION OF REAL


PROPERTY
(Sec 212-214, 224-225)

Appraisal
- the act or process of determining the value of property
as of a specific date for a specific purpose.

For Land
1. Assessor of the province/city or municipality may
summon the owners of the properties to be affected and
may take depositions concerning the property, its
ownership amount, nature and value. (sec. 213,LGC)
2. Assessor prepares a schedule of FMV for different
classes of properties.
3. Sanggunian enacts an ordinance.
4. The schedule of FMV is published in a newspaper of
general circulation in the province city or municipality
concerned or in the absence thereof shall be posted in
the provincial capitol city or municipal hall places
therein (Sec. 212, LGC)

LISTING OF REAL PROPERTY IN THE


ASSESSMENT ROLLS
(Secs. 205, 207)
Listing of all Real Property whether taxable or exempt
within the jurisdiction of LGU in the assessment roll.
o Undivided real property in the name of the estate or
heirs or devisees
o Corporation, partnership and association same as
individuals
o Owned by the Republic of the Philippines, its
instrumentalities, political subdivisions, beneficial use
is transferred to a taxable person in the name of the
possessor
All declarations shall be kept and filed under a
uniform classification system to be established by the
provincial, city or municipal assessor.
Steps in assessment of Real Property :
1. Listing of all properties subject to the tax; and
2. The valuation of such properties.
In Callanta vs. Ombudsman, January 30, 1998,
where the issue was whether officials and employees of
the Office of the City Assessor may reduce the new
assessed values of real properties upon requests of the
affected property owners, the Court ruled that forestall
the practice of initially setting unreasonably high
reassessment values only to eventually change them to
unreasonably lower values upon "requests" of property
owners, the law gives no such authority to the city
assessor or his subalterns.. . Thus,
petitioners'
unauthorized reduction of the assessed values
ineluctably resulted in the local government's
deprivation of the corresponding revenues. Lost or
reduced revenues undeniably translate into damages or
injury within the contemplation of the law. The city
government of Cebu, therefore, had every legal right to
feel aggrieved and to institute the proceeding against
petitioners.
3. Preparation of Schedule of Fair Market Values

How to determine Fair Market Value:

Classification of Land for purposes of assessment - Sec


218, LGC
1. Commercial land devoted principally for the object
of profit and is not classified as agricultural, industrial,
mineral, timber, or residential land
2. Agricultural land devoted principally to the planting
of trees, raising of crops,
livestock and poultry,
dairying, salt making, inland fishing and similar
aquacultural
activities,
and
other
agricultural
activities
3. Residential land principally devoted to habitation
4.Mineral- lands which minerals, metallic or nonmetallic, exist in sufficient quantity or grade to justify
the necessary expenditures to extract and utilize such
materials
5. Industrial-land devoted principally to industrial
activity as capital investment and is not classified
as
agricultural, commercial, timber, mineral or residential
land
6. Timberland
7.
Special
- Classification of lands made by respective sanggunian
in accordance with zoning
ordinances.
-It is based on actual use. Actual use refers to the
purpose for which the property is principally or
predominantly utilized by the person in
possession thereof.
For Machinery
1. For Brand New machinery : FMV is acquisition cost
2. In all other cases:
FMV = Remaining economic life x Replacement
cost

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


DETERMINE ASSESSED VALUE (Sec. 218)

1.

Procedure
1. take the schedule of FMV (Fair Market Value)
2. Assessed value = FMV x Assessment level
3. Real Property Tax = Assessed value x Allowable Real
Property Tax rate
4.Enactment of a Real Property Tax Ordinance

2.
3.
4.

Barangays cannot impose realty taxes.


Municipalities cannot fix real estate tax rates.

57

infrastructure
project
financed
by
government whereby real property owners
benefit from it
not more than 60% of actual cost of
project
not less than five but not more than ten
years
thru an ordinance
a. nature of project
b. extent of project
c. cost spent
d. metes and bounds

Procedure:
a.hearing and modification of prepared schedule
b.publication
c.adoption of the schedule
d.adoption of real property ordinance with
assessment levels

What may be done:


i. levy ad valorem taxes (see above)
ii. Fix Assessment levels
Assessment level is the percentage applied to
the fair market value to determine the taxable
or
taxation value of the property.

Coverage / Types of Real Property Tax:


1. Basic real property tax / Annual Ad Valorem Tax
For real property not specifically exempted
a.Provinces not more than 1% of assessed
value;
b.Cities, Municipalities in MM not more than
2% of assessed value

In City Assessor of Cebu City vs. Association of


Benevola de Cebu, June 8, 2007, applying Secs. 215-216, of
LGC, in line with City Tax Ordinance LXX of Cebu City,
the 10% special assessment should be imposed for the
Chong Hua Hospital Medical Arts Center (CHHMAC)
building which should be classified as special. Sec.
216, LGC states that:

2. Special levies:
a. Special Education Fund (SEF)
- 1% additional real estate tax to finance the SEF
(Sec.236) within MM area only

SEC. 216. Special Classes of Real


Property.All lands, buildings,
and other improvements thereon
actually, directly and exclusively
used for hospitals, cultural or
scientific purposes, and those
owned and used by local water
districts, and government-owned
or
controlled
corporations
rendering
essential
public
services in the supply and
distribution of water and/or
generation and transmission of
electric power shall be classified
as special.

b. Additional Ad Valorem on the Lands


not exceeding 5% of the assessed value of the
property (Sec. 236, LGC)
c. Special Assessments/ For Public Works
- on lands specially benefited by public works,
projects or improvements funded by the LGU
- May be imposed even by municipalities
outside MM provided:
- Special levy shall not exceed 60% of
the actual cost of such projects and improvements,
including the costs of acquiring land and such other real
property in connection therewith not apply to lands
exempt from basic real property tax and the remainder
of the land have been donated to the local government
unit concerned for the construction of said projects.
(Sec. 240, LGC).
Special Levy
Requirements for validity:

iii. Provide for appropriations


iv. Adopt Schedule of Fair Market Values
Fair Market Value and Assessed Value Whats the
difference?
Fair Market Value (FMV)
price at which a property may be sold
by a seller who is not compelled to sell and
bought by a buyer who is not compelled to buy
Assessed Value or Assessment Value (AV)

BAR OPERATIONS COMMITTEE

REVIEW NOTES FOR TAXATION 2


fair market value of the real property
multiplied by the assessment level.
It is
synonymous with taxable value.
Payment of Tax
When: January 1 of every year (Sec 246)
The tax shall constitute as superior lien (Sec. 246)
How:
a. basic real prop tax in 4 equal installments (Mar 31,Jun
30,Sep 30, Dec 31)
b. special levy - governed by ordinance
Interest for Late Payment
- two percent (2%) each month on unpaid amount until
the delinquent amt is paid.
- provided in no case shall the total interest exceed
thirty-six (36) months
Advance and Prompt Payment
a) advance payment - discount not exceeding 20% of
annual tax (Sec 251, LGC)
b) prompt payment - discount not exceeding 10% of
annual tax due(Art 342 IRR)
Collection of Tax (Sec.247, LGC)
The collection of the real property tax with
interest thereon and related expenses and the
enforcement of the remedies provided by the LGC or
any applicable laws shall be the responsibility of the city
or municipal treasurer concerned.
The city or municipal treasurer my deputize the
barangay treasurer to collect all taxes on real property
located in the barangay provided the barangay treasurer
is properly bonded.
Who Collects:
The provincial, city, municipal or barangay treasurer
Period Within Which To Collect (Sec 270):
Within five (5) yrs from the date they become due within
ten (10) yrs. from discovery of fraud, in case there is
fraud or intent to evade
Period of prescription shall be SUSPENDED when:
(Sec 270, LGC)
1. local treasurer is legally prevented to collect tax
2. the owner of prop requests for reinvestigation and
writes a waiver before
expiration of period to
collect
3. the owner of the property is out of the country or
cannot be located
BAR OPERATIONS COMMITTEE

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