Income taxation

Basic Structural and Definitional Concepts

Meaning of Income
d No definition in the NIRC
Sec. 32 defines what Gross Income is by enumeration. However, the list is NOT exclusive
No guidelines on how to determine whether a particular item is included in the income or not
d The US case Eisner v. Macomber provides a definition
Issue: Taxpayer challenges the tax imposed on stock dividends as being unconstitutional
The SC drew a line between whats income and whats not:
Income may be defined as the gain derived from capital, from labor, or from both combined, including
profit gained through sale or conversion of capital. Mere growth or increment of value in a capital
investment is not income; income is essentially a gain or profit, in itself, of exchangeable value,
proceeding from capital, severed from it, and derived or received by the taxpayer for his separate use,
benefit, and disposal.

A stock dividend, evincing merely a transfer of an accumulated surplus to the capital account of the
corporation, takes nothing from the property of the corporation and adds nothing to that of the
shareholder; a tax on such dividends is a tax on capital increase, and not on income, and, to be valid
under the Constitution, such taxes must be apportioned according to population in the several states.
Conwi v. CTA used a similar definition as the Eisner case:
An amount of money coming to a person or corporation within a specified time, whether as payment
for services, interest or profit from investment. Unless otherwise specified, it means cash or its
equivalent. Income can also be thought of as flow of the fruits of one's labor.
Sec. 36 of RR No. 2 provides that the gain or profit must be realized

Realization
d For income to be realized, it must be severed from labor or capital
Increase in the value of assets is NOT taxable because otherwise owners would be forced to
sell/mortgage the asset just to pay the tax
d The use of the word derived in Sec. 32(A) NIRC refers to the requirement of realization
d Sec. 38 of RR No. 2: Realization is a CONDITION PRECEDENT for taxability
d CIR v. CA, CTA & Anscor: Subsequent redemption of stock dividends would trigger realization
General Rule: Sec. 83(b) of the 1939 NIRC was taken from the Section 115(g)(1) of the U.S. Revenue Code
of 1928. It laid down the general rule known as the proportionate test wherein stock dividends once
issued form part of the capital and, thus, subject to income tax. Specifically, the general rule states that:
A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax.
Under the US Revenue Code, this provision originally referred to "stock dividends" only, without any
exception. Stock dividends, strictly speaking, represent capital and do not constitute income to its
recipient. So that the mere issuance thereof is not yet subject to income tax as they are nothing but an
enrichment through increase in value of capital investment." As capital, the stock dividends postpone
the realization of profits because the "fund represented by the new stock has been transferred from
surplus to capital and no longer available for actual distribution." Income in tax law is "an amount of
money coming to a person within a specified time, whether as payment for services, interest, or profit
from investment." It means cash or its equivalent. It is gain derived and severed from capital, from labor
or from both combined so that to tax a stock dividend would be to tax a capital increase rather than
the income. In a loose sense, stock dividends issued by the corporation, are considered unrealized gain,
and cannot be subjected to income tax until that gain has been realized. Before the realization, stock
dividends are nothing but a representation of an interest in the corporate properties. As capital, it is not

SPIT Reviewer
Prof. Baniqued
yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or
fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition
of income tax is whether any gain or profit was derived from a transaction.

Exception: However, if a corporation cancels or redeems stock issued as a dividend at such time and in
such manner as to make the distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable income to the extent it represents a distribution
of earnings or profits accumulated after March first, nineteen hundred and thirteen.
In a response to the ruling of the American Supreme Court in the case of Eisner v. Macomber (that pro
rata stock dividends are not taxable income), the exempting clause above quoted was added because
provision corporation found a loophole in the original provision. They resorted to devious means to
circumvent the law and evade the tax. Corporate earnings would be distributed under the guise of its
initial capitalization by declaring the stock dividends previously issued and later redeem said dividends
by paying cash to the stockholder. This process of issuance-redemption amounts to a distribution of
taxable cash dividends which was lust delayed so as to escape the tax. It becomes a convenient
technical strategy to avoid the effects of taxation.
Thus, to plug the loophole the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the "time" and "manner" it was made, is essentially
equivalent to a distribution of taxable dividends," making the proceeds thereof "taxable income" "to
the extent it represents profits". The exception was designed to prevent the issuance and cancellation
or redemption of stock dividends, which is fundamentally not taxable, from being made use of as a
device for the actual distribution of cash dividends, which is taxable.
Although redemption and cancellation are generally considered capital transactions, as such. they are
not subject to tax. However, it does not necessarily mean that a shareholder may not realize a taxable
gain from such transactions. Simply put, depending on the circumstances, the proceeds of redemption
of stock dividends are essentially distribution of cash dividends, which when paid becomes the absolute
property of the stockholder. Thereafter, the latter becomes the exclusive owner thereof and can
exercise the freedom of choice. Having realized gain from that redemption, the income earner cannot
escape income tax.
As qualified by the phrase "such time and in such manner," the exception was not intended to
characterize as taxable dividend every distribution of earnings arising from the redemption of stock
dividend. So that, whether the amount distributed in the redemption should be treated as the
equivalent of a "taxable dividend" is a question of fact, which is determinable on "the basis of the
particular facts of the transaction in question. No decisive test can be used to determine the application
of the exemption under Section 83(b). The use of the words "such manner" and "essentially equivalent"
negative any idea that a weighted formula can resolve a crucial issue Should the distribution be
treated as taxable dividend.

Imputed Income
d This arises when a person, who is said to have received/realized a gain, is NOT taxed for any of the ff:
Lack of statute Ex: exchange of services between doctors and lawyers instead of payment in money
Taxing him would be cumbersome there may be some basis for taxing, but its too cumbersome to do
so Ex: goods purchased for his own consumption
Recovery of Capital Investment
d The taxpayer must first be allowed to recover his costs/investment
d Sec. 40(A): Computation of gain/loss
Formula:
Amount Realized [selling price]
(Adjusted Basis)
GAIN

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Prof. Baniqued

Where:
o
o

Amount realized = sum of money + FMV

Adjusted Basis = original cost + improvements depreciation
F (+) improvements/capital expenditures
F (-) depreciation over time

Windfall Receipts
d No statutory basis
d CIR v. Glenshaw Glass: Exemplary and punitive damages received by are includable in the successful litigants
taxable income
The taxpayer argued that the receipts did NOT constitute income within the Eisner definition
SC ruled that the Eisner doctrine is NOT all encompassing:
Nor can we accept respondents' contention that a narrower reading of 22(a) is required by the
Court's characterization of income in Eisner v. Macomber, as "the gain derived from capital, from labor,
or from both combined." The Court was there endeavoring to determine whether the distribution of a
corporate stock dividend constituted a realized gain to the shareholder, or changed "only the form, not
the essence," of his capital investment. It was held that the taxpayer had "received nothing out of the
company's assets for his separate use and benefit." The distribution, therefore, was held not a taxable
event. In that context -- distinguishing gain from capital -- the definition served a useful purpose. But it
was not meant to provide a touchstone to all future gross income questions.
Here, we have instances of undeniable accessions to wealth, clearly realized, and over which the
taxpayers have complete dominion. The mere fact that the payments were extracted from the
wrongdoers as punishment for unlawful conduct cannot detract from their character as taxable income
to the recipients. Respondents concede, as they must, that the recoveries are taxable to the extent that
they compensate for damages actually incurred. It would be an anomaly that could not be justified in the
absence of clear congressional intent to say that a recovery for actual damages is taxable, but not the
additional amount extracted as punishment for the same conduct which caused the injury. And we find
no such evidence of intent to exempt these payments.
d

Q: Would windfall receipts, as defined by case law, include economic gain derived from income found (finders
keepers)?
Ex: You bought a piano and discovered money inside it; unclaimed bank deposits; un-utilized pre-paid
cards

Recovery of Deducted Items: Tax Benefit Principles

d Taxpayers are taxed on the amount received unless they have benefited from the income received from prior
taxable period allowed to deduct tax paid
Ex: creditor in bad debt
d Applies to reimbursements to previously deducted losses
Ex: insurance losses
Indirect Payments
d Old Colony Trust Co. v. CIR: Taxpayer argued that there was a tax on tax
Facts: The company adopted a resolution to shoulder all income taxes that may become due and
payable upon the salaries of all the officers, including its president, to the end that they shall receive
their salaries in full.
Issue: Whether a taxpayer, having induced a third person to pay his income tax or having acquiesced in
such payment has made in discharge of an obligation to him, may avoid the making of a return thereof
and the payment of a corresponding tax NO.
SC held: The payment of the tax by the employers was in consideration of the services rendered by the
employee, and was again derived by the employee from his labor. The form of the payment is expressly
declared to make no difference. It is therefore immaterial that the taxes were directly paid over to the
government. The discharge by a third person of an obligation to him is equivalent to receipt by the
person taxed. The certificate shows that the taxes were imposed upon the employee, that the taxes

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Prof. Baniqued
were actually paid by the employer, and that the employee entered upon his duties in the years in
question under the express agreement that his income taxes would be paid by his employer. This is
evidenced by the terms of the resolution passed August 3, 1916, more than one year prior to the year in
which the taxes were imposed. The taxes were paid upon a valuable consideration namely, the
services rendered by the employee and as part of the compensation therefor. We think, therefore, that
the payment constituted income to the employee.
It is next argued against the payment of this tax that, if these payments by the employer constitute
income to the employee, the employee will be called upon to pay the tax imposed upon this additional
income, and that the payment of the additional tax will create further income which will in turn be
subject to tax, with the result that there would be a tax upon a tax. This, it is urged, is the result of the
government's theory, when carried to its logical conclusion, and results in an absurdity which Congress
could not have contemplated. Not resolved by the SC
d

Pyramiding tax to the extent that the seller agrees, in the contract, to absorb additional tax, the tax will
continuously be imposed never-ending tax
Its very risky to put a provision for this in the contract
What will stop the BIR from imposing tax on other layers of the transactions?

Discharge of Indebtedness Income

d The amount borrowed by a person is NOT included in his gross income therefore there is NO gain
d Problem arises when the creditor condones the debt, either wholly or partially
Why? Because to the extent of improvement in the taxpayers financial condition, theres a strong basis
for the BIR to argue that the debtor received discharge
US v. Kirby Lumber Co: The taxpayer argued that there was no realized income under the Eisner doctrine
o SC: Improvement in financial status is an economic gain
F In the Philippines, the BIR agreed that if the debtor remains insolvent even after the
discharge of his indebtedness, then there is NO realized income
d Problem: W/N there is a cancellation of indebtedness or donation
Ex: Your grandfather loans you money for your law studies. After you become a lawyer, you land a job at
a big law firm and earn lots of money. When you try to pay your grandfather, he tells you that he
condones your debt and tears the PN you gave him.
o Under the circumstances, there seems to be a donation therefore theres donors tax
Fringe Benefits
d Background: Before the tax provision, companies would report only 30% as compensation income of its EEs and
lump the 70% as fringe benefits
Ex: housing facilities to key executives, credit cards, transportation (luxury cars) deducted as business
expenses
The easier way wouldve been to impose withholding taxes, i.e. EEs are the ones taxed. However, the
ERs do not want to cooperate. So, the US Congress opted to tax the ERs.
d

Definition: Any good, service or other benefit furnished or granted in cash or in kind by an employer to an
individual employee, including, but not limited to the ff (See RR 3-98 for valuations):
Housing See Henderson case
Expense
o So that expense accounts will NOT be taxable, the ff must concur:
F Must be duly receipted in the ERs name and
F Not for the EEs benefit, i.e. not personal expense
o Ex: grocery receipt of EE but in the name of ER taxable despite the fact that the receipt is in
the ERs name
Vehicle of any kind
o Company fleet for EEs use NOT taxable
Household personnel, such as maid, driver and others
Interest on loan at less than market rate to the extent of the difference between the market rate and
actual rate granted

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Prof. Baniqued

o If interest-free the interest rate is subject to tax

o Benchmark is 12%
Membership fees, dues and other expenses borne by the employer for the employee in social and
athletic clubs or other similar organizations;
Expenses for foreign travel;
o Business meetings, conventions and seminars shall NOT be taxable if the EE is able to
substantiate his attendance, the actual occurrence of the meeting and official communication
of organizers of the event
o Should be business or economy class only; if first class, 30% shall be subject to tax
Holiday and vacation expenses;
Educational assistance to the employee or his dependents; and
o Except: scholarship grants directly connected to the business of the ER and the ER and EE
entered into an agreement that the EE will remain/return with the company for a certain
period of time
Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the
law allows.

How tax is imposed:

General rule: Fringe benefits are subject 32% FWT (Sec. 33 and RR 3-98)
Except: The ff fringe benefits are NOT taxable:
o Fringe benefits which are authorized and exempted from tax under special laws; (Sec. 33)
o Contributions of the employer for the benefit of the employee to retirement, insurance and
hospitalization benefit plans; (Sec. 33)
o Benefits given to the rank and file employees, whether granted under a collective bargaining
agreement or not; (Sec. 33)
F Applies to MANAGERIAL and SUPERVISORY EEs only
F Benefits given to rank and file EEs are included in compensation income
F SUMMARY:
Rank and File
Managerial and Supervisory
Subject to final tax no longer returnable
Compensation income
EE not required to report in ITR
ER is NOT the statutory taxpayer
ER is the statutory taxpayer
NOT taxable:

Necessary to trade and business of ER

Those that fall under Convenience of ER rule

De minimis benefit
Global
Schedular
o De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the Commissioner; (Sec. 33)
F Limited to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill, contentment, or
efficiency of his employees.
F The ff are some of the benefits (See the RRs for full list):

Vacation leave credits

Rice subsidy

Uniform and clothing allowance

Laundry allowance
F According to the BIR, the list is EXCLUSIVE
o If the grant of fringe benefits to the employee is required by the nature of, or necessary to the
trade, business or profession of the employer; (RR 3-98) or
o If the grant of the fringe benefit is for the convenience of the employer. (RR 3-98)
F Lodging and meals provided by the ER:

If living quarters or meals are furnished to an employee for the convenience

of the employer, the value thereof need not be included as part of
compensation income. (Sec. 2.78.1A(2), RR 2-98)

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The value of lodging furnished to an employee by or on behalf of the

employer shall be excluded from the employee's gross income, if the
lodging is furnished in the business premises of the employer; and the
employee is required to accept such lodging as a condition of his
employment. (Sec. 2, Rev. Audit Mem. Order No. 1-87)
The value of meals furnished to an employee by or on behalf of his
employer shall be excluded from the employee's gross income if the meals
are furnished on the business premises of the employer and the meals are
furnished for the convenience of the employer. Meals furnished without
charge to an employee as regarded as furnished for the convenience of the
employer where they are furnished to the employee during his work day to
have the employee available for work during his meal period. (Sec. 2, Rev.
Audit Mem. Order No. 1-87)
Collector v. Henderson: But the exigencies of the husband-taxpayer's high
executive position, not to mention social standing, demanded and
compelled them to live in a more spacious and pretentious quarters like the
ones they had occupied. Although entertaining and putting up houseguests
and guests of the husband-taxpayer's employer-corporation were not his
predominant occupation as president, yet he and his wife had to entertain
and put up houseguests in their apartments. That is why his employercorporation had to grant him allowances for rental and utilities in addition
to his annual basic salary to take care of those extra expenses for rental and
utilities in excess of their personal needs. Hence, the fact that the taxpayers
had to live or did not have to live in the apartments chosen by the husbandtaxpayer's employer-corporation is of no moment, for no part of the
allowances in question redounded to their personal benefit or was retained
by them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors.

Likewise, the findings of the Court of Tax Appeals that the wife-taxpayer
had to make the trip to New York at the behest of her husband's employercorporation to help in drawing up the plans and specifications of a
proposed building, is also supported by the evidence. Neither was a part
thereof retained by them. The fact that she had herself operated on for
tumors while in New York was but incidental to her stay there and she must
have merely taken advantage of her presence in that city to undergo the
operation.
The mere fact that the EEs needs and wants are likewise satisfied does not mean
that the benefits should be taken out of this test the benefits are merely
INCIDENTAL to your employment therefore they should not be taxable

Computation:
FORMULA: GMV * 32%, where GMV=Actual Monetary Value/68%
Gross Monetary Value represents the whole amount of income realized by the employee which includes
the (1) net amount of money or net monetary value of property which has been received plus the (2)
amount of fringe benefit tax thereon otherwise due from the employee but paid by the employer for
and in behalf of his employee, pursuant to the provisions of this Section
o Valuations (RR 3-98):
F Money amount granted or paid for by the ER
F Property (ownership transferred to EE) FMV
F Property (ownership not transferred to EE) depreciation value
o Why gross up? Because you are considering the subsidy granted by the ER to EE

Income from Unlawful Activities

d Basis for taxing:
US Congress removed the word lawful from the Tax Code. Hence, both lawful and unlawful income
are taxable

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Prof. Baniqued

Sec. 34(A) NIRC: income derived from WHATEVER SOURCE

Amounts received under claim of right doctrine includes amounts received by mistake, those erroneously
remitted, and those where theres controversy as to the amount received
Ex: Sirs officemate who was erroneously credited by her bank

Damage Awards
d These are NOT includable in the gross income because these are not derived from labor or capital (Eisner)
d Raytheon Production Corp. v. CIR: Whether an amount received by the taxpayer in compromise settlement of as
suit for damages under the Federal Anti-Trust Laws is a non-taxable return of capital or income.
Damages recovered in an antitrust action are not necessarily nontaxable as a return of capital. As in
other types of tort damage suits, recoveries which represent a reimbursement for lost profits are
income. The reasoning is that since the profits would be taxable income, the proceeds of litigation which
are their substitute are taxable in like manner. Damages for violation of the anti-trust acts are treated as
ordinary income where they represent compensation for loss of profits. Where the suit is not to recover
lost profits but is for injury to good will, the recovery represents a return of capital and, with certain
limitations to be set forth below, is not taxable.
But, to say that the recovery represents a return of capital in that it takes the place of the business good
will is not to conclude that it may not contain a taxable benefit. Although the injured party may not be
deriving a profit as a result of the damage suit itself, the conversion thereby of his property into cash is a
realization of any gain made over the cost or other basis of the good will prior to the illegal interference.
Thus A buys Blackacre for $5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A
sues and recovers $50,000 tort damages from B. Although no gain was derived by A from the suit, his
prior gain due to the appreciation in value of Blackacre is realized when it is turned into cash by the
money damages.

Definition of Gross Income

Memorize the items INCLUDED in gross income + items which CONSTITUTE income even if they are not under any of the
express enumerations in the NIRC.
Statutory Definition
d Except when otherwise provided in the Code, gross income includes ALL INCOME DERIVED from WHATEVER
SOURCE (Sec. 32A)
d Also include ALL ACCESSIONS to WEALTH
Items included in Gross Income
d COMPENSATION FOR SERVICES
Sec. 32A(1): Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items
Name and mode of payment is IRRELEVANT (Sec. 2.78.1A(2), RR 2-98)
Remuneration for services constitutes compensation even if the relationship of employer and employee
does not exist any longer at the time when payment is made between the person in whose employ the
services had been performed and the individual who performed them. (Sec. 2.78.1A(2), RR 2-98)
d INCOME FROM BUSINESS OR EXERCISE OF PROFESSION [Sec. 32A(2)]
d GAINS FROM DEALINGS IN PROPERTY [Sec. 32A(3)] Will be discussed in later topics
d PASSIVE INCOME INTEREST, RENT, ROYALTY & DIVIDENDS [Sec. 32A(4-7)]
d PRIZES & WINNINGS [Sec. 32A(9)]
d PENSIONS & ANNUITIES [Sec. 32A(8 and 10)]
d PARTNERS DISTRIBUTIVE SHARE IN NET INCOME OF GPP [Sec. 32A(11)]
Not taxable per se tax is paid by the partners and not by the entity
Query: Isnt the distributive share income from profession?

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Prof. Baniqued

Exclusions from Gross Income

Life Insurance Proceeds
d Sec. 32B(1): Paid to the heirs or beneficiaries upon the death of the insured, whether in a single sum or otherwise
If the ER is the beneficiary of the EEs insurance policy EXCLUDED because the law does not make a
distinction (beneficiary)
o Ex: Mortgage Redemption Insurance in exchange for loan with the bank, the debtor shall
execute this document
d Interest payments shall be included in gross income
d El Oriente v. Posadas: Whether the proceeds of insurance taken by a corporation on the life of an important
official to indemnify it against loss in case of his death, are taxable as income NO.
It will be recalled that El Oriente, Fabrica de Tabacos, Inc., took out the insurance on the life of its manager, who
had had more than thirty-five years' experience in the manufacture of cigars in the Philippines, to protect itself
against the loss it might suffer by reason of the death of its manager. We do not believe that this fact signifies
that when the plaintiff received P104,957.88 from the insurance on the life of its manager, it thereby realized a net
profit in this amount. It is true that the Income Tax Law, in exempting individual beneficiaries, speaks of the
proceeds of life insurance policies as income, but this is a very slight indication of legislative intention. In reality,
what the plaintiff received was in the nature of an indemnity for the loss which it actually suffered because of the
death of its manager.
Return of Premiums
d Sec. 32B(2): Premiums paid under life insurance, endowment, or annuity contracts, either during the term or at the
maturity of the term mentioned in the contract or upon surrender of the contract.
d Interest component: taxable because there is income realized
d Amount returned
Mere return of premiums = return of capital no taxable income
Anything in excess taxable income
But how do you determine which is which? Do you prorate or do you apply the profit to your capital
first?
o US regulations: PRORATE
o No BIR guidelines
Gifts, Bequests and Devices
d Sec. 32B(3): Value of the property acquired by gift, bequest, devise, or descent shall be excluded
Proviso: The ff are included in gross income
o Income from such property
o Gift, bequest, devise or descent of income from any property, in cases of transfers of divided
interest
A
(life tenant)

B
(remainder man)

Enjoys use of
property

Corpus is transferred
(legal title)

TAXABLE
d

NOT TAXABLE

Problem: How to determine if the property vests in the transferee as a gift or otherwise
GIFT: only if the property is transferred DETACHED and DISINTERESTED GENEROSITY (out of love and
affection) was the reason for the transfer
o Pirovano v. CIR: The insurance policy taken out by the company for its manager and the former
as the beneficiary. After managers death, ER donated the proceeds to heirs but for a certain

SPIT Reviewer
Prof. Baniqued
period ER retained the proceeds and paid the interests to the heirs. SC held that the donation
was valid but REMUNERATIVE in nature. The consideration was not the services rendered by
the manager but rather the PAST SERVICES rendered:
There is nothing on record to show that when the late Enrico Pirovano rendered services as
President and General Manager of the De la Rama Steamship Co. he was not fully
compensated for such services, or that, because they were "largely responsible for the rapid
and very successful development of the activities of the company" (Res. of July 10, 1946).
Pirovano expected or was promised further compensation over and in addition to his regular
emoluments as President and General Manager. The fact that his services contributed in a
large measure to the success of the company did not give rise to a recoverable debt, and the
conveyances made by the company to his heirs remain a gift or donation. This is emphasized
by the directors' Resolution of January 6, 1947, that "out of gratitude" the company decided to
renounce in favor of Pirovano's heirs the proceeds of the life insurance policies in question.
The true consideration for the donation was, therefore, the company's gratitude for his
services, and not the services themselves.
What is more, the actual consideration for the cession of the policies, as previously shown, was
the Company's gratitude to Pirovano; so that under section 111 of the Code there is no
consideration the value of which can be deducted from that of the property transferred as a
gift. Like "love and affection," gratitude has no economic value and is not "consideration" in
the sense that the word is used in this section of the Tax Code

REMUNERATION for SERVICES: forms part of taxable income

o CIR v. Duberstein: Despite the characterization as a gift, it was clear that the Cadillac was
meant as a recompense for the services done by Duberstein and for future services he will
render:
This Court has indicated that a voluntary executed transfer of his property by one to another,
without any consideration or compensation therefor, though a common-law gift, is not
necessarily a "gift" within the meaning of the statute. For the Court has shown that the mere
absence of a legal or moral obligation to make such a payment does not establish that it is a
gift. And, importantly, if the payment proceeds primarily from "the constraining force of any
moral or legal duty," or from "the incentive of anticipated benefit" of an economic nature, it is
not a gift. And, conversely,"[w]here the payment is in return for services rendered, it is
irrelevant that the donor derives no economic benefit from it." A gift in the statutory sense, on
the other hand, proceeds from a "detached and disinterested generosity," "out of affection,
respect, admiration, charity or like impulses." And in this regard, the most critical
consideration, as the Court was agreed in the leading case here, is the transferor's
"intention." "What controls is the intention with which payment, however voluntary, has been
made."

Problem: How to determine if the transfer was due to generosity or otherwise

Case: Testator gave X amount to executors in lieu of commissions. SC held that the amount is excluded
criticized because theres service rendered in exchange of the amount
Case: Amounts received in a will contest. SC held that these amounts are excluded because the language
used by Congress was broad enough to cover all properties received through inheritance

Compensation for Personal Injuries or Sickness

d Sec. 32B(4): Amounts received, through Accident or Health Insurance or under Workmen's Compensation Acts +
Amounts of any damages received, whether by suit or agreement, on account of such injuries or sickness
Award for criminal offenses = excluded
d Does the law refer only to PHYSICAL INJURIES? US courts held that the law also includes NON-PHYSICAL
WRONGS, i.e. libel and slander, but DOES NOT include COMMERCIAL AWARDS
d Compensation for lost wages is EXCLUDED exception to the general rule that compensation received shall be
included in gross income
Why? Social justice

SPIT Reviewer
Prof. Baniqued
Income Exempt pursuant to a Treaty
d Sec. 32B(5): Treaty obligation of the Philippines pacta sunt servanda
d Ex: salaries of ADB personnel, diplomats and consuls under the Vienna Convention
Retirement Benefits, Pensions, Gratuities, Etc.
d Sec. 32B(6)(a): Retirement benefits received under Republic Act No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer
Reasonable private benefit plan pension, gratuity, stock bonus or profit-sharing plan maintained by
an ER for the benefit of some or all of his officials or EEs, wherein contributions are made by such ER for
the officials or EEs, or both, for the purpose of distributing to such officials and EEs the earnings and
principal of the fund thus accumulated
REQUIREMENTS:
o Retiring official/EE has rendered at least 10yrs service
o Not less than 50 years old at the time of retirement
o Benefits shall be availed of only once
o The plan must be submitted to the BIR for accreditation
CIR v. CA and Castaneda: Rationale behind the EEs entitlement to an exemption from withholding tax on
his terminal pay: The Government encourages unused leaves to be accumulated. The Government
recognizes that for most public services, retirement pay is always less than generous if not meager and
scrimpy. Terminal leave payments are given not only at the same time but also for the same policy
considerations governing retirement benefits.
IBC v. Amarilla: Thus, for the retirement benefits to be exempt from the withholding tax, the taxpayer is
burdened to prove the concurrence of the following elements: (1) a reasonable private benefit plan is
maintained by the employer; (2) the retiring official or employee has been in the service of the same
employer for at least 10 years; (3) the retiring official or employee is not less than 50 years of age at the
time of his retirement; and (4) the benefit had been availed of only once. Respondents were qualified to
retire optionally from their employment with petitioner. However, there is no evidence on record that
the 1993 CBA had been approved or was ever presented to the BIR; hence, the retirement benefits of
respondents are taxable.
d Sec. 32B(6)(b): Amount received by official/EE or his heirs from ER as a consequence of separation from service
due to death, sickness or other physical disability or for any cause beyond the control of the official/EE
INVOLUNTARY reasons retrenchment and redundancy
If you cant avail of the exemption in letter (a) because you lack one of the requirements, use this
d Sec. 32B(6)(c): Social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or non-resident citizens or aliens who come to reside permanently from foreign government agencies and
other public or private institutions
d Sec. 32B(6)(d): Those coming from the US administered by the US Veterans Administration
d Sec. 32B(6)(e): SSS benefits
d Sec. 32B(6)(f): GSIS benefits
Miscellaneous Items
d INCOME DERIVED BY FOREIGN GOVERNMENT [Sec. 32B(7)(a)]
Income from investments in the Philippines (loans, stocks, bonds or other domestic securities), or from
interest on deposits in banks in the Philippines by:
o Foreign governments
o Financing institutions owned, controlled, or enjoying refinancing from foreign governments
o International or regional financial institutions established by foreign governments
d

INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL SUBDIVISIONS [Sec. 32B(7)(b)]

Income from public utilities or from the exercise of any essential governmental functions
Does NOT apply to income earned by GOCCs or agencies/instrumentalities performing proprietary
functions
Sec. 27C: GSIS, SSS, PHIC and PCSO are EXEMPT from payment

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d

PRIZES AND AWARDS [Sec. 32B(7)(c)]

Those received in recognition of religious, charitable, scientific, educational, artistic, literary, or civic
achievement provided that the ff. are met:
o Recipient was selected WITHOUT any action on his part to enter the contest; and
o Recipient is NOT required to render SUBSTANTIAL FUTURE SERVICES as a condition for
receiving the prize/award
If youre shortlisted (required to provide personal data sheet and be interviewed) still eligible because
what happens AFTERWARDS should not make you ineligible from the exemption

PRIZES AND AWARDS IN SPORTS COMPETITIONS [Sec. 32B(7)(d)]

Those granted to athletes in local and international competitions, whether held in the Philippines or
abroad and sanctioned by their national sports associations

13TH MONTH PAY AND OTHER BENEFITS [Sec. 32B(7)(e)]

Includes the GROSS BENEFITS received by public and private employees
PROVISO: The total exclusion under this subparagraph shall NOT exceed P30k (see provision for
enumeration)
o Cf: DE MINIMIS BENEFITS the Tax Code enumerates items which are considered as having
relatively small value and the threshold amount per item
F Anything in EXCESS of the amount of the de minimis items and those NOT INCLUDED
in the enumeration of de minimis items could be LUMPED with the P30k, if theres still
an excess. Hence, those amounts can become exempt from income tax.
o NO THRESHOLD for those covered by Convenience of the ER
o Hence, the ff. benefits are EXCLUDED:
F De minimis benefits
F Fringe benefits
F Those not exceeding P30k

GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS [Sec. 32B(7)(f)]

GAINS FROM SALE OF BONDS, DEBENTURES OR OTHER CERTIFICATE OF INDEBTEDNESS [Sec. 32B(7)(g)]
Gains from sale, exchange or retirement of bonds, etc. with a maturity of more than 5yrs.

GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND [Sec. 32B(7)(h)]

Gains realized by investors upon redemption of shares in a mutual fund company
Sec. 22BB: Mutual fund company open-end and close-end investment company as defined in the
Investment Company Act

Income Already Subjected to Final Tax

d Those subject to final tax are NOT included in the computation of gross income
d Compared with Creditable Tax: credited or deducted from the tax paid; required to be reported
d Effective this taxable year, for returns to be filed on January 2012, final taxes should already be reported
d Ex: capital gains tax, dividends, interest income from bank deposits
d CIR v, PAL: The definition of gross income is broad enough to include all passive incomes subject to specific rates
or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at
source, they are no longer included in the computation of gross income, which determines taxable income.
Earnings of OFWs
d Sec. 23B: NR citizen is taxable on his income derived from sources WITHIN
d Sec. 23C: OFWs are taxable only on income derived from sources WITHIN

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Deductions from Gross Income

Formula
d For a MANUFACTURER/TRADER:
Gross Sales
(Sales Returns, Allowances, Discounts)
(Cost of Goods Sold)
GROSS INCOME
(Deductions)
NET INCOME
Where, Cost of Goods Sold includes ALL business expenses directly incurred to produce the merchandise EXCEPT
administrative expenses.
d

For a PROFESSIONAL:
Gross Receipts
(Discounts)
GROSS INCOME
(Deductions)
NET INCOME

Deductions under sec. 34, nirc

d ORDINARY AND NECESSARY BUSINESS EXPENSES
Requirements for Deductibility:
o Ordinary and necessary expenses = REASONABLENESS
F Kuenzle & Streiff v. CIR: There is no fixed test for determining the reasonableness of a
given bonus as compensation. This depends upon many factors, one of them being
"the amount and the quality of the services performed with relation to the business."
Other tests suggested are: payment must be "made in good faith"; "the character of
the taxpayer's business, the volume and amount of its net earnings, its locality, the
type and extent of the services rendered, the salary policy of the corporation"; "the
size of the particular business"; "the employees' qualifications and contributions to
the business venture"; and "general economic conditions" (4 Mertens, Law of
Federal Income Taxation, Sec. 25.44, 25.49, 25.50, 25.51, pp. 407-412). However, "in
determining whether the particular salary or compensation payment is reasonable,
the situation must be considered as a whole.

Ordinarily, no single factor is decisive. It is important to keep in mind that it seldom

happens that the application of one test can give satisfactory answer, and that
ordinarily it is the interplay of several factors, properly weighted for the particular
case, which must furnish the final answer"
Paid or incurred during the taxable year
F CIR v. Isabela Cultural Corp: For a taxpayer using the accrual method, the
determinative question is, when do the facts present themselves in such a manner
that the taxpayer must recognize income or expense? The accrual of income and
expense is permitted when the all-events test has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.
The ALL-EVENTS TEST requires the right to income or liability be fixed, and the
amount of such income or liability be determined with reasonable accuracy.
However, the test does not demand that the amount of income or liability be known
absolutely, only that a taxpayer has at his disposal the information necessary to

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compute the amount with reasonable accuracy. The all-events test is satisfied where
computation remains uncertain, if its basis is unchangeable; the test is satisfied
where a computation may be unknown, but is not as much as unknowable, within the
taxable year. The amount of liability does not have to be determined exactly; it must
be determined with "reasonable accuracy." Accordingly, the term "reasonable
accuracy" implies something less than an exact or completely accurate amount.

From the nature of the claimed deductions and the span of time during which the
firm was retained, ICC can be expected to have reasonably known the retainer fees
charged by the firm as well as the compensation for its legal services. The failure to
determine the exact amount of the expense during the taxable year when they could
have been claimed as deductions cannot thus be attributed solely to the delayed
billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence
could have inquired into the amount of their obligation to the firm, especially so that
it is using the accrual method of accounting. For another, it could have reasonably
determined the amount of legal and retainer fees owing to its familiarity with the
rates charged by their long time legal consultant.
Incurred in carrying on or which are directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise of profession

Ordinary Expenditures v. Capital Expenditures:

o CIR v. General Foods: Whether the media advertising expense for Tang is an ordinary expense
or a capital expense Capital
There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of an
advertising expense. There being no hard and fast rule on the matter, the right to a deduction
depends on a number of factors such as but not limited to: the type and size of business in
which the taxpayer is engaged; the volume and amount of its net earnings; the nature of the
expenditure itself; the intention of the taxpayer and the general economic conditions. It is the
interplay of these, among other factors and properly weighed, that will yield a proper
evaluation.
We find the subject expense for the advertisement of a single product to be inordinately large.
Therefore, even if it is necessary, it cannot be considered an ordinary expense deductible
under then Section 29 (a) (1) (A) of the NIRC.
Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole or in
part, to create or maintain some form of goodwill for the taxpayers trade or business or for
the industry or profession of which the taxpayer is a member. If the expenditures are for the
advertising of the first kind, then, except as to the question of the reasonableness of amount,
there is no doubt such expenditures are deductible as business expenses. If, however, the
expenditures are for advertising of the second kind, then normally they should be spread out
over a reasonable period of time.
We agree with the Court of Tax Appeals that the subject advertising expense was of the
second kind. Not only was the amount staggering; the respondent corporation itself also
admitted, in its letter protest8 to the Commissioner of Internal Revenues assessment, that the
subject media expense was incurred in order to protect respondent corporations brand
franchise, a critical point during the period under review.
The protection of brand franchise is analogous to the maintenance of goodwill or title to ones
property. This is a capital expenditure which should be spread out over a reasonable period of
time.

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Respondent corporations venture to protect its brand franchise was tantamount to efforts to
establish a reputation. This was akin to the acquisition of capital assets and therefore expenses
related thereto were not to be considered as business expenses but as capital expenditures.

Includes the ff:

o Salaries, wages and other forms of compensation for personal services actually rendered +
GMV of fringe benefits
o Travel expenses here and abroad in pursuit of trade, business or profession
o Rentals and/or other payments which are required as a condition for the continued use or
possession of property as a lessee, user or possessor
o Entertainment, amusement and recreation expenses that are (1) directly connected to the
development, management and operation of the trade, business or profession or (2) directly
related to or in furtherance of the conduct of his/its trade, business or profession
F The expense must NOT exceed the ceilings prescribed
F Must NOT be contrary to law, morals, public policy or public order

Bribes, kickbacks, etc. directly or indirectly given to officials or employees of the ff. are NOT deductible
o National government
o LGUs
o GOCCs
o Foreign government
o Private corporation
o GGPs

ADDITIONAL DEDUCTION for Private Educational Institutions (see Sec 27B for definition) OPTIONS:
o Deduct expenditures otherwise considered as capital outlays of depreciable assets incurred
during the taxable year for the expansion of school facilities
o Deduct allowance for depreciation

SUBSTANTIATION REQUIREMENTS:
o Official receipts or other adequate records must substantiate the amount and its direct
connection to the development, management, operation and/or conduct of the trade,
business or profession
o The ORs and invoices must be in the name of the business/ER cf. Zamora case

CASES:
o

Expense was not allowed as deduction

F C.M. Hoskin v. CIR: Considering that in addition to being Chairman of the board of
directors of petitioner corporation, which bears his name, Hoskins, who owned 99.6%
of its total authorized capital stock while the four other officers-stockholders of the
firm owned a total of four-tenths of 1%, or one-tenth of 1% each, with their respective
nominal shareholdings of one share each was also salesman-broker for his company,
receiving a 50% share of the sales commissions earned by petitioner, besides his
monthly salary of P3,750.00 amounting to an annual compensation of P45,000.00
and an annual salary bonus of P40,000.00, plus free use of the company car and
receipt of other similar allowances and benefits, the Tax Court correctly ruled that
the payment by petitioner to Hoskins of the additional sum of P99,977.91 as his equal
or 50% share of the 8% supervision fees received by petitioner as managing agents of
the real estate, subdivision projects of Paradise Farms, Inc. and Realty Investments,
Inc. was inordinately large and could not be accorded the treatment of ordinary and
necessary expenses allowed as deductible items within the purview of Section 30 (a)
(i) of the Tax Code.
F Aguinaldo v. CIR: Whether or not the bonus given to the officers of the petitioner upon
the sale of its Muntinglupa land is an ordinary and necessary business expense
deductible for income tax purposes
There is absolutely no evidence of any service actually rendered by petitioner's
officers which could be the basis of a grant to them of a bonus out of the profit
derived from the sale. This being so, the payment of a bonus to them out of the gain

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realized from the sale cannot be considered as a selling expense; nor can it be
deemed reasonable and necessary so as to make it deductible for tax purposes.
Esso Standard Eastern v. CIR: Since the margin fees in question were incurred for the
remittance of funds to petitioner's Head Office in New York, which is a separate and
distinct income taxpayer from the branch in the Philippines, for its disposal abroad, it
can never be said therefore that the margin fees were appropriate and helpful in the
development of petitioner's business in the Philippines exclusively or were incurred
for purposes proper to the conduct of the affairs of petitioner's branch in the
Philippines exclusively or for the purpose of realizing a profit or of minimizing a loss
in the Philippines exclusively. If at all, the margin fees were incurred for purposes
proper to the conduct of the corporate affairs of Standard Vacuum Oil Company in
New York, but certainly not in the Philippines.

ESSO has not shown that the remittance to the head office of part of its profits was
made in furtherance of its own trade or business. The petitioner merely presumed
that all corporate expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires. This is error. The public respondent is
correct when it asserts that "the paramount rule is that claims for deductions are a
matter of legislative grace and do not turn on mere equitable considerations ... . The
taxpayer in every instance has the burden of justifying the allowance of any
deduction claimed."
Borderline cases: BUSINESS v. PERSONAL EXPENSES
F Deny outright those expenses that are inherently personal

Ex: stylish professional clothes unless your profession requires you to dress
like that; family vacations
F Disallow only the excess cost

Ex: While on a holiday, you got a call that one prospective client wants to
have a meeting so you transfer from your hotel to the 5-star hotel where
the client is staying

Cf. Henderson case

F Allocate between business and personal

Collector v. Jamir: Although petitioner had disallowed one-half (1/2) of these

claims, it appearing that the car was used by Jamir for personal and
business purposes, the lower court allowed, as deductions, three-fourths
(3/4) of said amounts, the car having been used by Jamir "more for business
than for personal purpose".

Zamora v. Collector: Considering, as heretofore stated, that the application

of Mrs. Zamora for dollar allocation shows that she went abroad on a
combined medical and business trip, not all of her expenses came under the
category of ordinary and necessary expenses; part thereof constituted her
personal expenses. There having been no means by which to ascertain
which expense was incurred by her in connection with the business of
Mariano Zamora and which was incurred for her personal benefit, the
Collector and the CTA in their decisions, considered 50% of the said amount
of P20,957.00 as business expenses and the other 50%, as her personal
expenses. We hold that said allocation is very fair to Mariano Zamora, there
having been no receipt whatsoever, submitted to explain the alleged
business expenses, or proof of the connection which said expenses had to
the business or the reasonableness of the said amount of P20,957.00.
F Purely business activity primary purpose + use for personal activity as incidental
expense

INTEREST
GENERAL RULE: Deductible
o Requirements for deductibility:
F There is an indebtedness
F Interest is paid or incurred during the taxable year
F Incurred in connection with the taxpayers profession, trade or business

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o

OPTION of taxpayer in case interest is incurred to acquire property:

F Deduction
F Capital expenditure spread over the economic life of the property
Delinquent tax liabilities are indebtedness therefore deductible
F CIR v. Palanca: While "taxes" and "debts" are distinguishable legal concepts, in
certain cases as in the suit at bar, on account of their nature, the distinction becomes
inconsequential. This qualification is recognized even in the United States. Thus,
The term "debt" is properly used in a comprehensive sense as embracing
not merely money due by contract, but whatever one is bound to render to
another, either for contract or the requirements of the law.
Where statutes impose a personal liability for a tax, the tax becomes at
least in a broad sense, a debt.

In our jurisdiction, the rule is settled that although taxes already due have not, strictly
speaking, the same concept as debts, they are, however obligations that may be
considered as such. (Sambrano vs. Court of Tax Appeals, G.R. no. L-8652, March 30,
1957). In a more recent case Commissioner of Internal Revenue vs. Prieto, G.R. No. L13912, September 30, 1960, we explicitly announced that while the distinction
between "taxes" and "debts" was recognized in this jurisdiction, the variance in their
legal conception does not extend to the interests paid on them, at least insofar as
Section 30 (b) (1) of the National Internal Revenue Code is concerned.
CIR v. Vda de Prieto: Although interest payment for delinquent taxes is not deductible
as tax under Section 30(c) of the Tax Code and section 80 of the Income Tax
Regulations, the taxpayer is not precluded thereby from claiming said interest
payment as deduction under section 30(b) of the same Code.

EXCEPTIONS: Not deductible

o Interest is paid in ADVANCE through discount or otherwise
F Paid in whole Interest expense shall be deductible in the year the indebtedness is
PAID
F Payable in PERIODIC AMORTIZATIONS Amount of interest which corresponds to
the amount of the principal amortized or paid during the year shall be deductible
o Taxpayer and person to whom payment has been made or is to be made are RELATED
TAXPAYERS (Sec. 36B)
F Family members brothers, sisters, spouse, ancestors and lineal descendants
F Individual and corporation more than 50% of outstanding stock owned by individual
F 2 corporations more than 50% of outstanding stock of each owned by or for the
same individual
F Grantor and fiduciary of a trust
F Fiduciary of a trust and fiduciary of another trust same person
F Fiduciary and beneficiary of a trust
o Indebtedness is incurred to finance PETROLEUM EXPLORATION

TAX ARBITRAGE: limited to interest income subject to final tax;

o

Example:
X invested in treasury bills (P10M) which is subject to 20% FWT. The T bill rate is 8% (P800k). In
order to finance, X borrowed P10M from BDO at 10% interest p.a.
Interest expense = P1M
Deductible interest income subject to FWT of 33% (P800k * .33 = P264k)
P1M P264k = P736k (deductible interest expense)
Reason: tax authority would like to curtail artificial interest expense deduction
F Some companies which do not need money borrow money and invest that money in
something with a lower tax rate

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d

TAXES

GENERAL RULE: Deductible

o Requirements for deductibility:
F Taxes paid or incurred within the taxable year
F Incurred in connection with taxpayers profession, trade or business
o When the taxes are refunded or credited, they shall form part of the gross income in the year of
receipt to the extent of the income tax benefit of the deduction.
o Limitations on Deductions: NRA engaged in trade or business in the Philippines and resident
foreign corporation deductions shall be allowed only if and to the extent that they are
connected with income from sources within the Philippines
EXCEPTIONS: Not deductible
o Income tax under NIRC
o Income tax imposed by a foreign country
F Optional: Credited instead of deducted if the taxpayer signifies in his return that he
wants to avail of the benefits of TAX CREDIT

How credited:
Citizen and domestic corporation amount of income taxes paid
or incurred during the taxable year to any foreign country
Partnerships and estates proportionate share of taxes of the
GPP or estate/trust paid or incurred during the taxable year to a
foreign country if his distributive share of income is reported for
taxation
NOTE: Alien individuals and corporations are NOT allowed tax
credits

Limitations on Credit:
Per country limit
Worldwide limit
F Default: Shall be allowed as a deduction in case the taxpayer does NOT signify in his
return his desire to have the benefits of TAX CREDIT
o Estate and donors taxes
o Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed

LOSSES
Requirements for deductibility:
o Loss actually sustained by taxpayer during the taxable year
F Incurred in connection with trade, business or profession
F Casualty losses of property: fire, storms, shipwreck or other casualties, robbery, theft
or embezzlement

Taxpayer shall submit a declaration of loss sustained

NOT required to be incurred in connection with T/B/P

o Not compensated for by insurance or other form of indemnity
o Loss must NOT have been claimed as a deduction for estate tax purposes
When to claim as deduction:
o GENERAL RULE: Must be claimed in the year the loss is actually sustained
o EXCEPTION: May be CARRIED OVER to succeeding taxable years
F Net Operating Loss Carry-over (NOLCO) Net operating loss of a business/enterprise
which had NOT been previously offset as a deduction shall be CARRIED OVER for the
next 3 consecutive taxable years immediately following the year of such loss.

Net Operating Loss = the excess of allowable deduction over gross

income of the business in a taxable year

Primary purpose: To ameliorate effect of peculiar business cycles

First in, first out

Any net loss incurred in a taxable year during which the taxpayer was
EXEMPT from income tax NOT allowed as a deduction

NOLCO shall be allowed only if there has been NO SUBSTANTIAL CHANGE in

the ownership of the business/enterprise (applies only to mergers and
consolidations and not in buy-outs)

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Not less than 75% in nominal value of outstanding issued chares is

held by or on behalf of the same persons; OR
Not less than 75% of the paid up capital of the corporation is held
by or on behalf of the same persons

X company

Y company
2

100 NOLCO

Shareholder B

150 NOLCO

1
A

1) BUY OUT: Not covered by the proviso NOLCO stays with X (change of
ownership only)
2) X merges into Y, B ends up a shareholder in Y and the NOLCO transfers
from X to Y. B now owns 50% of Y. Y claims 100 NOLCO of X therefore 50
taxable income remains
Net Capital Loss Carry-over (NCLCO) Net capital loss sustained from the sale or
exchange of a capital asset (held for not more than 1yr) by an individual taxpayer
shall be CARRIED OVER in the succeeding taxable year

Securities which become worthless during the taxable year shall be

considered as a loss from the sale or exchange of capital assets
Must be evidenced by closed and completed transactions
o Premature deduction of losses are NOT allowed by the BIR Fernandez Hermanos v. CIR: The
Tax Court correctly held that the losses "are deductible in 1952, when the mines were
abandoned, and not in 1950 and 1951, when they were still in operation." The taxpayer's claim
that these expeditions should be allowed as losses for the corresponding years that they were
incurred, because it made no sales of coal during said years, since the promised road or outlet
through which the coal could be transported from the mines to the provincial road was not
constructed, cannot be sustained. Some definite event must fix the time when the loss is
sustained, and here it was the event of actual abandonment of the mines in 1952.
o Ex: sale of shares of stocks shrunk in value; property becomes worthless, demolished and
machineries disposed; abandonment of property
F

BAD DEBTS
Requirements for deductibility
o Debts must be due to the taxpayer
o Actually ascertained to be worthless
F Fernandez Hermanos v. CIR: Is the said amount deductible as a bad debt? As already
stated, petitioner gave advances to Palawan Manganese Mines, Inc., without
expectation of repayment. Petitioner could not sue for recovery under the
memorandum agreement because the obligation of Palawan Manganese Mines, Inc.
was to pay petitioner 15% of its net profits, not the advances. No bad debt could arise
where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting debt and that the
debtor was incapable of paying the debt in 1951, when petitioner wrote off the
advances and deducted the amount in its return for said year, yet the debt is not
deductible in 1951 as a worthless debt. It appears that the debtor was still in
operation in 1951 and 1952, as petitioner continued to give advances in those years. It
has been held that if the debtor corporation, although losing money or insolvent was

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o
o
o

still operating at the end of the taxable year, the debt is not considered worthless
and therefore not deductible.
Charged off within the taxable year
Connected with profession, trade or business
There must be indebtedness
F Philex Mining v. CIR: The advances were not "debts" of Baguio Gold to petitioner
inasmuch as the latter was under no unconditional obligation to return the same to
the former under the "Power of Attorney". As for the amounts that petitioner paid
as guarantor to Baguio Gold's creditors, we find no reason to depart from the tax
court's factual finding that Baguio Gold's debts were not yet due and demandable at
the time that petitioner paid the same. Verily, petitioner pre-paid Baguio Gold's
outstanding loans to its bank creditors and this conclusion is supported by the
evidence on record.
In sum, petitioner cannot claim the advances as a bad debt deduction from its gross
income. Deductions for income tax purposes partake of the nature of tax
exemptions and are strictly construed against the taxpayer, who must prove by
convincing evidence that he is entitled to the deduction claimed. In this case,
petitioner failed to substantiate its assertion that the advances were subsisting debts
of Baguio Gold that could be deducted from its gross income. Consequently, it could
not claim the advances as a valid bad debt deduction.

Philippine Refining Co. v. CIR: In Collector v. Goodrich, we held that for debts to be considered as
worthless, and thereby qualify as bad debts making them deductible, the taxpayer should show
that (1) there is a valid and subsisting debt; (2) the debt must be actually ascertained to be worthless and
uncollectible during the taxable year; (3) the debt must be charged off during the taxable year; and (4)
the debt must arise from the business or trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed uncollectible even in the future.
Furthermore, there are steps outlined to be undertaken by the taxpayer to prove that he exerted
diligent efforts to collect the debts, viz: (1) sending of statement of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; and (4) filing a collection case in court.

COST RECOVERY, DEPRECIATION AND AMORTIZATION

Requirements for deductibility:
o Reasonable allowance for wear and tear
o Property must be used in the trade or business
Basilan Estates, Inc. v. CIR: Depreciation is the gradual diminution in the useful value of tangible property
resulting from wear and tear and normal obsolescense. The term is also applied to amortization of the
value of intangible assets, the use of which in the trade or business is definitely limited in duration.2
Depreciation commences with the acquisition of the property and its owner is not bound to see his
property gradually waste, without making provision out of earnings for its replacement. It is entitled to
see that from earnings the value of the property invested is kept unimpaired, so that at the end of any
given term of years, the original investment remains as it was in the beginning.
The income tax law does not authorize the depreciation of an asset beyond its acquisition cost. Hence, a
deduction over and above such cost cannot be claimed and allowed. The reason is that deductions from
gross income are privileges, not matters of right. They are not created by implication but upon clear
expression in the law.

DEPLETION
Reasonable allowance for depletion or amortization of oil and gas wells or mines computed in
accordance with the cost-depletion method

CHARITABLE AND OTHER CONTRIBUTIONS

Requirements for deductibility
o Actually paid or made to or for the use of the Government or any of its agencies or and political
subdivision exclusively for public purposes, or to accredited domestic corporations or

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associations organized and operated exclusively for religious, charitable, scientific, youth and
sports development, cultural or educational purposes, etc.
F Government = limited and full deductibility (Sec. 34:Notwithstanding the provisions
of the preceding subparagraph)
o Made within the taxable year
o General Rule: LIMITED DEDUCTIBILITY 10% for individuals and 5% for corporations
F Exception: FULL DEDUCTIBILITY

Government or any of its agencies or political subdivisions, including GOCCs

donations used exclusively to finance, to provide for, or to be used in
undertaking priority activities

Foreign institutions or international organizations deductible in

compliance with agreements, treaties or commitments entered into by the
Government

Accredited NGOs problem area because there are so many fake NGOs
PCNC accredits + BIR approval/qualification
Without certification, the donation shall be subject to donors tax
Requirement for utilization of donation administrative expense cannot exceed 30%
Roxas v. CTA: The contributions to the Christmas funds of the Pasay City Police, Pasay City Firemen and
Baguio City Police are not deductible for the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of said entities. Under Section 39(h), a
contribution to a government entity is deductible when used exclusively for public purposes. For this
reason, the disallowance must be sustained. On the other hand, the contribution to the Manila Police
trust fund is an allowable deduction for said trust fund belongs to the Manila Police, a government
entity, intended to be used exclusively for its public functions.

RESEARCH AND DEVELOPMENT EXPENDITURE

Requirements for deductibility
o Paid or incurred during the taxable year
o In connection with trade, business or profession
o Ordinary and necessary expense which is not chargeable to capital account
The ff shall NOT be deductible
o Expenditure for the acquisition or improvement of land, or for the improvement of property to
be used in connection with research and development of a character which is subject to
depreciation and depletion
o Expenditure paid or incurred for the purpose of ascertaining the existence, location, extent or
quality of any deposit of ore or other mineral, including oil and gas

CONTRIBUTIONS TO EMPLOYEES PENSION TRUSTS

Requirements for deductibility
o Employer established a pension trust for employees
o Amount has not been allowed as a deduction
o Apportioned in equal parts over a period of 10 consecutive years beginning with the year in
which the transfer or payment is made

PREMIUM PAYMENTS ON HEALTH AND/OR HOSPITALIZATION INSURANCE

Amount must NOT exceed P2,400 per family or P200 a month paid during the taxable year
Insurance taken by taxpayer for himself including his family
Provisos:
o Familys gross income not more than P250k for the taxable year
o In case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to deduction

OPTIONAL STANDARD DEDUCTION (OSD)

General rule: ITEMIZED deduction
o Exception: OSD if taxpayer is lazy or does not want to be inconvenienced but he must elect in
his return his choice to avail of OSD
F Irrevocable for the entire taxable year
Standard deduction of 40% of

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Prof. Baniqued
o
o
o

Individual other than a NRA gross sales/receipts

Corporations gross income
GPPS (see IRRs)
F If GPP itemized

Partner cannot choose OSD

Partner can claim deductions for other expenses not otherwise previously
claimed by the GPP
F If GPP chose OSD, partner cant claim itemized nor OSD

WITHHOLDING REQUIREMENT (SEC. 34K)

d Some payments are required to be withheld by the taxpayer before they are allowed to be deducted
d Taxpayers should know which payments need to be withheld
d If you want to deduct payments, you must remit them to the BIR
Personal Exemptions (Sec, 35)
d Basic exemption: P50k
d Additional exemption for dependents: P25k for each but not to exceed 4
Claimed by one spouse only
If legally separated the spouse who has custody of the child or children
Total amount of exemption that may be claimed by both spouses shall not exceed the maximum
additional exemptions allowed
Dependents: legitimate, illegitimate or legally adopted children chiefly dependent upon and living with
the taxpayer; not more than 21yrs old, unmarried and not gainfully employed or regardless of age is
incapable of self-support because of mental or physical defect
d Change of status of taxpayer
Marries or shall have additional dependents may claim exemptions in FULL for such year
Dies during the taxable year estate may still claim the personal and additional exemptions for himself
and his dependents as if he died at the close of such year
Spouse or any of dependents dies or if an of dependents marries, becomes 21yrs or becomes gainfully
employed taxpayer may still claim the same exemption as if the spouse or any of the dependents dies,
or as if such dependents married, became 21 yrs old or became gainfully employed at the close of the
year
d NRAs not entitled to exemptions unless theres RECIPROCITY

Recognition of Gains and Losses from Sales of Property

COMPUTATION OF GAIN OR LOSS (sec. 40a)
d Definitions
GAIN = excess of the amount realized therefrom over the basis or adjusted basis
LOSS = excess of the basis or adjusted basis over the amount realized
AMOUNT REALIZED = sum of money received + FMV of the property

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Prof. Baniqued
d

BASIS of property
If acquired by
PURCHASE
If acquired by
INHERITANCE

The cost thereof (acquisition cost)

The fair market value as of the date of acquisition
The same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift,

If acquired by
GIFT

OR
The fair market value at the time the gift was made,
whichever is lower

If acquired for
LESS THAN AN ADEQUATE CONSIDERATION
in money or moneys worth
If acquired in a transaction where gain or loss is not
recognized under Section 40, paragraph (c) (2)

The amount paid by the transferee for the property

Defined in Section 40, paragraph (c) (5)

If acquired by gift basis is not the FMV notwithstanding that this was the basis for donors tax
o No step-up basis (same as if it would be in the hands of the donor)
o If basis > FMV at the time of donation (LOSS) = FMV is the basis

NON-RECOGNITION OF GAIN OR LOSS ON CERTAIN DISPOSITIONS (TAX-FREE EXCHANGES [Sec. 40C])

What is RECOGNIZED?
o General rule: ENTIRE amount of the gain or loss shall be recognized
o Exceptions: NO gain or loss shall be recognized
F In case of MERGER, CONSOLIDATION or DE FACTO MERGER (acquisition by one
corporation of all or substantially all the properties of another corporation solely for
stock; control is not given up) undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation (Sec. 40C(6)(b))

Corp A, which is a party to a merger or consolidation, exchanges property

solely for stock in Corp B, which is a party to a merger or consolidation;

A shareholder exchanges stock in Corp A, which is a party to the merger or

consolidation, solely for the stock Corp B also a party to the merger or
consolidation;

A security holder of Corp A, which is a party to the merger or consolidation,

exchanges his securities solely for stock or securities in Corp B, a party to the
merger or consolidation
F If PROPERTY IS TRANSFERRED to a corporation by a person in exchange for stock or
unit of participation in such corporation as a result of which said person, alone or
together with others, not exceeding 4 persons, gains control of said corporation

CONTROL = at least 51% of the total voting power of all classes of stock
entitled to vote
PURPOSE of exemption: to encourage pooling, combining or expanding resources conducive to
economic development of the country
BASIS of stock or securities received by the transferor upon the exchange: Historical Cost less than (1)
money received and (2) FMV of the other property received, plus (1) amount treated as dividend of the
shareholder and (2) amount of any gain that was recognized on the exchange
o TAX DEFERRAL only since the non-recognition arises from the use of the historical cost
o If stocks received are subsequently sold, the transaction shall be subject to tax
F Basis: when assets received pursuant to the exchange are sold
EXAMPLES:

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Prof. Baniqued

A acquires
control

ASSETS

(A)
Single
proprietorship

NewCo

* Transferor + property in exchange of stocks + gains control of

corporation
*Rationale: No substantial change in ownership of business since
what A owns directly before he now owns indirectly

Merchandising
business

Corp X

Corp X

NewCo

Merchandising
business
Construction
business

Basis of NewCo:
P500k

Construction +
assets

ASSETS
STOCKS

P1M ASSETS
Basis P500k

CAPITAL ASSET v. ORDINARY ASSET (PREFERENTIAL TREATMENT for capital gains)

d DISTINCTION (Sec. 39A(1))
Ordinary Asset
o Stock in trade
o Inventory property
o Property primarily for sale in the ordinary course of trade or business
o Depreciable property
o Real property used in trade or business
Capital Asset other than those enumerated as ordinary assets
d

IMPORTANCE of Distinction: Tax imposed depends on the kind of asset

How do we determine if an asset is capital or ordinary?
o Corn Products Refining Co. v. CIR: Taxpayer was engaged in hedging (corn futures trading). CIR
said that the transactions did not involve capital assets. Court agreed.
We find nothing in this record to support the contention that Corn Products' futures activity
was separate and apart from its manufacturing operation. On the contrary, it appears that the
transactions were vitally important to the company's business as a form of insurance against
increases in the price of raw corn. Not only were the purchases initiated for just this reason,
but the petitioner's sales policy, selling in the future at a fixed price or less, continued to leave
it exceedingly vulnerable to rises in the price of corn. Further, the purchase of corn futures
assured the company a source of supply which was admittedly cheaper than constructing
additional storage facilities for raw corn. Under these facts, it is difficult to imagine a program

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Prof. Baniqued
more closely geared to a company's manufacturing enterprise or more important to its
successful operation.
Nor can we find support for petitioner's contention that hedging is not within the exclusions of
117(a). Admittedly, petitioner's corn futures do not come within the literal language of the
exclusions set out in that section. They were not stock in trade, actual inventory, property held
for sale to customers, or depreciable property used in a trade or business. But the capital asset
provision of 117 must not be so broadly applied as to defeat, rather than further, the purpose
of Congress. Congress intended that profits and losses arising from the everyday operation of
a business be considered as ordinary income or loss, rather than capital gain or loss. The
preferential treatment provided by 117 applies to transactions in property which are not the
normal source of business income. It was intended "to relieve the taxpayer from . . . excessive
tax burdens on gains resulting from a conversion of capital investments, and to remove the
deterrent effect of those burdens on such conversions." Since this section is an exception from
the normal tax requirements of the Internal Revenue Code, the definition of a capital asset
must be narrowly applied, and its exclusions interpreted broadly. This is necessary to
effectuate the basic congressional purpose.
o

Tuason v. Lingad: Inherited piece of land is NOT a capital asset.

When the petitioner obtained by inheritance the parcels in question, transferred to him was
not merely the duty to respect the terms of any contract thereon, but as well the correlative
right to receive and enjoy the fruits of the business and property which the decedent had
established and maintained. Moreover, the record discloses that the petitioner owned other
real properties which he was putting out for rent, from which he periodically derived a
substantial income, and for which he had to pay the real estate dealer's tax (which he used to
deduct from his gross income). In fact, as far back as 1957 the petitioner was receiving rental
payments from the mentioned 28 small lots, even if the leases executed by his deceased
mother thereon expired in 1953. Under the circumstances, the petitioner's sales of the several
lots forming part of his rental business cannot be characterized as other than sales of noncapital assets.
The sales concluded on installment basis of the subdivided lots comprising Lot 29 do not
deserve a different characterization for tax purposes. The following circumstances in
combination show unequivocally that the petitioner was, at the time material to this case,
engaged in the real estate business: (1) the parcels of land involved have in totality a
substantially large area, nearly seven (7) hectares, big enough to be transformed into a
subdivision, and in the case at bar, the said properties are located in the heart of Metropolitan
Manila; (2) they were subdivided into small lots and then sold on installment basis (this manner
of selling residential lots is one of the basic earmarks of a real estate business); (3)
comparatively valuable improvements were introduced in the subdivided lots for the
unmistakable purpose of not simply liquidating the estate but of making the lots more saleable
to the general public; (4) the employment of J. Antonio Araneta, the petitioner's attorney-infact, for the purpose of developing, managing, administering and selling the lots in question
indicates the existence of owner-realty broker relationship; (5) the sales were made with
frequency and continuity, and from these the petitioner consequently received substantial
income periodically; (6) the annual sales volume of the petitioner from the said lots was
considerable, e.g., P102,050.79 in 1953; P103,468.56 in 1954; and P119,072.18 in 1957; and (7) the
petitioner, by his own tax returns, was not a person who can be indubitably adjudged as a
stranger to the real estate business. Under the circumstances, this Court finds no error in the
holding below that the income of the petitioner from the sales of the lots in question should
be considered as ordinary income.

Calasanz v. CIR: Upon an examination of the facts on record, We are convinced that the
activities of petitioners are indistinguishable from those invariably employed by one engaged
in the business of selling real estate.
One strong factor against petitioners' contention is the business element of development
which is very much in evidence. Petitioners did not sell the land in the condition in which they

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Prof. Baniqued
acquired it. While the land was originally devoted to rice and fruit trees, it was subdivided into
small lots and in the process converted into a residential subdivision and given the name Don
Mariano Subdivision. Extensive improvements like the laying out of streets, construction of
concrete gutters and installation of lighting system and drainage facilities, among others, were
undertaken to enhance the value of the lots and make them more attractive to prospective
buyers. The audited financial statements submitted together with the tax return in question
disclosed that a considerable amount was expended to cover the cost of improvements. As a
matter of fact, the estimated improvements of the lots sold reached P170,028.60 whereas the
cost of the land is only P 4,742.66. There is authority that a property ceases to be a capital
asset if the amount expended to improve it is double its original cost, for the extensive
improvement indicates that the seller held the property primarily for sale to customers in the
ordinary course of his business.
Another distinctive feature of the real estate business discernible from the records is the
existence of contracts receivables, which stood at P395,693.35 as of the year ended December
31, 1957. The sizable amount of receivables in comparison with the sales volume of
P446,407.00 during the same period signifies that the lots were sold on installment basis and
suggests the number, continuity and frequency of the sales. Also of significance is the
circumstance that the lots were advertised for sale to the public and that sales and collection
commissions were paid out during the period in question.
o

China Banking Corp. v. CA: An equity investment is a capital, not ordinary, asset of the investor
the sale or exchange of which results in either a capital gain or a capital loss. The gain or the
loss is ordinary when the property sold or exchanged is not a capital asset.
Thus, shares of stock; like the other securities defined in Section 20(t) of the NIRC, would
be ordinary assets only to a dealer in securities or a person engaged in the purchase and sale
of, or an active trader (for his own account) in, securities.
In the hands, however, of another who holds the shares of stock by way of an investment, the
shares to him would be capital assets. When theshares held by such investor become
worthless, the loss is deemed to be a loss from the sale or exchange of capital assets.
Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains
derived from the sale or exchange of capital assets, and not from any other income of the
taxpayer.
In the case at bar, First CBC Capital (Asia), Ltd., the investee corporation, is a subsidiary
corporation of petitioner bank whose shares in said investee corporation are not intended for
purchase or sale but as an investment. Unquestionably then, any loss therefrom would be a
capital loss, not an ordinary loss, to the investor.

Roxas v. CTA: It should be borne in mind that the sale of the Nasugbu farm lands to the very
farmers who tilled them for generations was not only in consonance with, but more in
obedience to the request and pursuant to the policy of our Government to allocate lands to
the landless. It was the bounden duty of the Government to pay the agreed compensation
after it had persuaded Roxas y Cia. to sell its haciendas, and to subsequently subdivide them
among the farmers at very reasonable terms and prices. However, the Government could not
comply with its duty for lack of funds. Obligingly, Roxas y Cia. shouldered the Government's
burden, went out of its way and sold lands directly to the farmers in the same way and under
the same terms as would have been the case had the Government done it itself. For this
magnanimous act, the municipal council of Nasugbu passed a resolution expressing the
people's gratitude.
The power of taxation is sometimes called also the power to destroy. Therefore it should be
exercised with caution to minimize injury to the proprietary rights of a taxpayer. It must be
exercised fairly, equally and uniformly, lest the tax collector kill the "hen that lays the golden
egg". And, in order to maintain the general public's trust and confidence in the Government
this power must be used justly and not treacherously. It does not conform with Our sense of

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Prof. Baniqued
justice in the instant case for the Government to persuade the taxpayer to lend it a helping
hand and later on to penalize him for duly answering the urgent call.
In fine, Roxas y Cia. cannot be considered a real estate dealer for the sale in question. Hence,
pursuant to Section 34 of the Tax Code the lands sold to the farmers are capital assets, and the
gain derived from the sale thereof is capital gain, taxable only to the extent of 50%.

Preferential treatment is given to CAPITAL ASSETS

o Reason: US Congress intention was to reward taxpayer for its investment and to encourage
saving. If burdensome tax was imposed on the act of converting the asset to capital, people
would not invest.
o Ex: Real properties
F If treated as ORDINARY 32% for individuals and 30% for corporations
AR
P100M
B
P100K
P99,900,000
6% of P100M is the better option
F

If treated as CAPITAL basis is not the gain but the GSP/zonal value, whichever is
higher and the rate is 6% (Sec. 24D)
AR
B

P100M
P99M
P1M
32% of P99M is the better option

Capital gains v. Capital Losses

o For taxpayers other than a corporation, the ff. percentages of gain/loss upon the
sale/exchange of a capital asset shall be considered in computing net capital gain, net capital
loss, and net income. (Sec. 39B)
F Capital asset held not more than 12mos (short-term) 100%
F Capital asset held for more than 12mos (long-term) 50%
o Limitation on capital losses: Losses from sales/exchanges of capital assets shall be allowed only
to the EXTENT OF THE GAINS from such sales/exchanges
o Net Capital Loss Carry-over (NCLCO):
F Cannot be availed of by corporations
F Loss shall be treated as a loss from the sale/exchange of a capital asset held for not
more than 12mos. in the succeeding taxable year
o Sell those assets that will incur losses within the same taxable year
o Jardine Davies v. CIR: Capital losses may offset capital gains CURRENTLY rather than wait until
the end of the year

SPECIAL TREATMENT OF SALE OF REAL PROPERTY AND SHARES OF STOCKS

d CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT TRADED IN THE STOCK EXCHANGE
Citizens, resident aliens, NRA ETB, domestic corporation and foreign corporation shares of stock in
DOMESTIC CORPORATIONS
5% if not over P100k and 10% on any amount in excess of P100k
d

CAPITAL GAINS FROM SALE OF REAL PROPERTY (Sec 24D)

General rule:
o 6% based on GSP or FMV, whichever is higher
o Property located in the Philippines + capital assets
Exception: sale or disposition of PRINCIPAL RESIDENCE by natural persons EXEMPT from capital gains
tax if
o Proceeds were fully utilized in acquiring or constructing a new principal residence within 18
calendar months from the date of sale or disposition

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Prof. Baniqued
o
o
o
d

Historical cost or adjusted basis of the property shall be carried over to the new principal
residence built or acquired
CIR has been duly notified by the taxpayer within 30days from date of sale or disposition
Tax exemption can only be availed of once every 10years

CAPITAL GAINS FROM SALE, EXCHANGE OR DISPOSITION OF LANDS AND/OR BUILDINGS (Sec 27D(5))
6% imposed on the gain presumed to have been realized
Lands and/or buildings NOT actually used in the business of a corporation + treated as capital assets

Kinds of Taxpayers and Situs Rules

Taxpayers
d INDIVIDUALS
INDIVIDUAL TAXPAYERS
Classification

Sub-classification

Definition

Resident Citizens

Citizens under the Constitution:

Citizens as of February 2, 1987

Those whose fathers or mothers are citizens

of the Philippines.

Those born before January 17, 1973, of Filipino

mothers + elect Philippine citizenship upon
reaching the age of majority

Those who are naturalized in accordance with

law.

Due to the protection

he gets from the
Philippine
government even
when he is outside
the country.

Citizens of
the
Philippines

Non-Resident Citizens

Aliens

Tax Liability
Taxable on his
worldwide income
from sources inside
and outside the
Philippines.

Resident Aliens

A citizen who establishes the fact of his

physical presence abroad + Definite intention
to reside therein

Citizen who leaves the Philippines to reside

abroad, either as immigrant or for
employment + on a permanent basis

Citizen who works and derives income from

abroad + employment thereat requires him to
be physically present abroad most of the time
during the taxable year

Citizen who has been previously considered a

non-resident citizen + arrives in the Philippines
to reside permanently, at any time during the
taxable year with respect to income derived
from sources abroad, until the date of his
arrival.
Individual whose residence is within the Philippines and
who is not a citizen thereof (Sec. 22[F])
Residence is not defined by guidelines provided by
Regulations

Not a mere transient or sojourner

Lives in the Philippines and has no definite

intention as to his stay

If purpose is of such a nature that an extended

stay may be necessary for its accomplishment,
and to that end makes his home temporarily

Taxable only on
income derived from
sources within the
Philippines.

Taxable only on his

income from
Philippine sources,
beginning January 1,
1998.
Income from foreign
sources not liable to
tax.

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Prof. Baniqued
o

Even though it may be his intention

at all times to return to his domicile
abroad when the purpose for which
he came has been consummated or
abandoned
If his intention to return to another country is
a mere floating intent, indefinite as to time.

A resident alien loses his residence status if he actually

leaves the Philippines and abandons his residency
thereof without any intention of returning.
An alien who has acquired residence in the Philippines
retains his status as a resident until he abandons the
same and actually departs from the Philippines. An
intention to change his residence does not change his
status to a non-resident alien.

Nonresident
Alien

Engaged
in
Business
in the
Philippines

NOT
Engaged
in
Business
in the
Philippines

Special
Classes of
Filipinos/Alien
Individuals

Individual whose residence is not within the Philippines

and who is not a citizen thereof + aggregate period of
his stay in the Philippines is MORE than 180 days during
any calendar year.
Regardless of whether he actually engages in trade or
business or not.

Individual whose residence is not within the Philippines

and who is not a citizen thereof + aggregate period of
his stay in the Philippines is LESS than 180 days during
any calendar year.
Regardless of whether he actually engages in trade or
business or not.

Employed by Regional or Area headquarters and regional operating headquarters

of multinational companies in the Philippines
Employees of offshore banking units established in the Philippines
Employees of foreign service contractor or subcontractor engaged in petroleum
operations in the Philippines

Taxed on his income

from sources within
the Philippines at the
graduated income
tax rates (5%-32%)
Passive investment
incomes shall
generally be subject
to 20% final tax.
Taxed on income
from all sources
within the Philippines
at the flat rate of 25%,
EXCEPT capital gains
tax or stock
transaction tax.
Entitled to 15%
preferential income
tax rate on their
gross compensation
income from sources
within the
Philippines.

CORPORATIONS
SEC. 22B: DEFINITION OF A CORPORATION
o Includes:
F Partnerships no matter how created or organized (registered or unregistered)
F Joint-stock companies
F Joint accounts
F Association
F Insurance companies
o Excludes:
F GPPs formed for the sole purpose of exercising common profession + no part of the
income is derived from engaging in trade or business
F Joint venture or consortium formed for undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to a
contract with the government
o CASES:

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Prof. Baniqued
F

Obillos v. CIR: This case is about the income tax liability of four brothers and sisters
who sold two parcels of land which they had acquired from their father.
We hold that it is error to consider the petitioners as having formed a partnership
under article 1767 of the Civil Code simply because they allegedly contributed
P178,708.12 to buy the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable unregistered partnership would
result in oppressive taxation and confirm the dictum that the power to tax involves
the power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners
pure and simple. To consider them as partners would obliterate the distinction
between a co-ownership and a partnership. The petitioners were not engaged in any
joint venture by reason of that isolated transaction.
Their original purpose was to divide the lots for residential purposes. If later on they
found it not feasible to build their residences on the lots because of the high cost of
construction, then they had no choice but to resell the same to dissolve the coownership. The division of the profit was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state. It had to be
terminated sooner or later.

Afisco Insurance Corp. v. CA: May the "clearing house" or "insurance pool" so formed
be deemed a partnership or an association that is taxable as a corporation under the
(NIRC)?
In the case before us, the ceding companies entered into a Pool Agreement 29 or an
association that would handle all the insurance businesses covered under their quotashare reinsurance treaty and surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered by Section 24 of the
NIRC:
(1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. This common fund
pays for the administration and operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for
each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically
useful to the business of the ceding companies and Munich, because
without it they would not have received their premiums. The ceding
companies share "in the business ceded to the pool" and in the "expenses"
according to a "Rules of Distribution" annexed to the Pool
Agreement. Profit motive or business is, therefore, the primordial reason
for the pool's formation.

RESIDENT FOREIGN CORPORATIONS

o Classic definition under the NIRC: organized under the laws of another country + engaged in
trade or business
o Cir v. British Overseas Airways Corp: BOAC is a resident foreign corporation. There is no specific
criterion as to what constitutes "doing" or "engaging in" or "transacting" business. Each case
must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to,
and in progressive prosecution of commercial gain or for the purpose and object of the
business organization. In order that a foreign corporation may be regarded as doing business

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Prof. Baniqued
within a State, there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent, and not one of a temporary character.
BOAC, during the periods covered by the subject - assessments, maintained a general sales
agent in the Philippines, That general sales agent, from 1959 to 1971, "was engaged in (1) selling
and issuing tickets; (2) breaking down the whole trip into series of trips each trip in the
series corresponding to a different airline company; (3) receiving the fare from the whole trip;
and (4) consequently allocating to the various airline companies on the basis of their
participation in the services rendered through the mode of interline settlement as prescribed
by Article VI of the Resolution No. 850 of the IATA Agreement." Those activities were in
exercise of the functions which are normally incident to, and are in progressive pursuit of, the
purpose and object of its organization as an international air carrier. In fact, the regular sale of
tickets, its main activity, is the very lifeblood of the airline business, the generation of sales
being the paramount objective. There should be no doubt then that BOAC was "engaged in"
business in the Philippines through a local agent during the period covered by the
assessments. Accordingly, it is a resident foreign corporation subject to tax upon its total net
income received in the preceding taxable year from all sources within the Philippines.
Tax is due because there is income coming from sources within the Philippines. The source of
an income is the property, activity or service that produced the income. For the source of
income to be considered as coming from the Philippines, it is sufficient that the income is
derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines
is the activity that produces the income. The tickets exchanged hands here and payments for
fares were also made here in Philippine currency. The site of the source of payments is the
Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory,
enjoying the protection accorded by the Philippine government. In consideration of such
protection, the flow of wealth should share the burden of supporting the government.
o

Marubeni Corp. v. CIR: Under the Tax Code, a resident foreign corporation is one that is
"engaged in trade or business" within the Philippines. Petitioner contends that precisely
because it is engaged in business in the Philippines through its Philippine branch that it must be
considered as a resident foreign corporation. Petitioner reasons that since the Philippine
branch and the Tokyo head office are one and the same entity, whoever made the investment
in AG&P, Manila does not matter at all. A single corporate entity cannot be both a resident and
a non-resident corporation depending on the nature of the particular transaction involved.
Accordingly, whether the dividends are paid directly to the head office or coursed through its
local branch is of no moment for after all, the head office and the office branch constitute but
one corporate entity, the Marubeni Corporation, which, under both Philippine tax and
corporate laws, is a resident foreign corporation because it is transacting business in the
Philippines.
The Solicitor General has adequately refuted petitioner's arguments in this wise:
The general rule that a foreign corporation is the same juridical entity as its branch
office in the Philippines cannot apply here. This rule is based on the premise that the
business of the foreign corporation is conducted through its branch office, following
the principal agent relationship theory. It is understood that the branch becomes its
agent here. So that when the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set aside.
The transaction becomes one of the foreign corporation, not of the branch.
Consequently, the taxpayer is the foreign corporation, not the branch or the resident
foreign corporation.
In other words, the alleged overpaid taxes were incurred for the remittance of dividend
income to the head office in Japan which is a separate and distinct income taxpayer from the
branch in the Philippines. There can be no other logical conclusion considering the undisputed
fact that the investment was made for purposes peculiarly germane to the conduct of the
corporate affairs of Marubeni Japan, but certainly not of the branch in the Philippines. It is thus
clear that petitioner, having made this independent investment attributable only to the head

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Prof. Baniqued
office, cannot now claim the increments as ordinary consequences of its trade or business in
the Philippines and avail itself of the lower tax rate of 10%.
CORPORATIONS
Classification

Sub-classification

DOMESTIC

Resident

Definition
Created or Organized in the Philippines or
under its laws.

A corporation that is not domestic +

ENGAGED in trade or business within the
Philippines

FOREIGN

Non-Resident

A corporation that is not domestic + NOT

engaged in trade or business within the
Philippines

Tax Liability
Taxable on all income derived from
sources within and without the
Philippines.
Taxable only on income derived from
sources within the Philippines.

Regional
operating
headquarters
of
multinational corporations
are
subject
to
10%
preferential income tax.

OBUs are taxed on their onshore interest income at 10%

final withholding tax.

Subject to 30% corporate

income tax based on their
net taxable income from
sources
within
the
Philippines, unless the 2%
minimum corporate income
tax computed on their gross
income is higher than the
normal corporate income
tax.
Taxable only on income derived from
sources within the Philippines.
Gross income paid to a non-resident
foreign corporation shall be subject to
the 30% final corporate income tax, to
be withheld by Philippine payor.

SOURCE RULES (sec. 42)

d INTEREST INCOME RESIDENCE OF DEBTOR/OBLIGOR
Examples:
o A (US citizen), resident of NY, lends money to B (single proprietor in Phils) $100k at 10%p.a.
Philippine source
o A has a relative in NY, C. B asked C to guaranty its indebtedness. B gambled the $100k. a now
collects from C, the latter pays. Is the interest income a Philippines source income? YES, B is
the debtor.
Does the rule apply to transactions involving interest payment other than indebtedness (loans)? YES.
It applies to a scenario where there might not be a loan but the parties agreed on the payment of
interests. (Ex: bonds, notes, contract for services)
o NDC entered into a contract with a Japanese company for the construction of a vessel.
Republic of the Philippines guaranteed the loan. NDC paid interest because of late payments.
The interest paid is subject to tax
What if you have solidary co-debtors, one is a resident and one is not?
d

DIVIDENDS depends on the PAYOR/DECLARANT

Domestic corporation taxable
Foreign corporation
o GENERAL RULE NOT taxable (without)

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Prof. Baniqued
o

EXCEPT TAXABLE: if 50% or more of its gross income for 3years ending with the close of its
taxable year preceding the declaration of dividends are sourced WITHIN the Philippines
F But only in an AMOUNT which bears the same ratio to such dividends as the gross
income of the corporation for such period derived from sources within the
Philippines bears to its gross income for all sources

COMPENSATION FOR SERVICES PLACE OF PERFORMANCE regardless of place of payment, execution of

contract or residence of payor
What if some services are to be performed within and some outside? look at the number of days (RR)
What if you dont know if payment is for compensation or as royalty?

ROYALTY AND RENTALS

Royalty PLACE OF EXPLOITATION/USE
o Use of or the right or privilege to use in the Philippines any copyright, patent, design or model,
plan, secret formula or process, goodwill, trademark, trade brand or other like property or
right TRADITIONAL ROYALTY
o Use of, or the right to use in the Philippines any industrial, commercial or scientific equipment
o Supply of scientific, technical, industrial or commercial knowledge or information
o Supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of
enabling the application or enjoyment of, any such property or right as is mentioned in
paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or
information as is mentioned in paragraph (c)
o Supply of services by a nonresident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or
other apparatus purchased from such nonresident person
o Technical advice, assistance or services rendered in connection with technical management or
administration of any scientific, industrial or commercial undertaking, venture, project or
scheme
o Use of or the right to use:
(i) Motion picture films;
(ii) Films or video tapes for use in connection with television; and
(iii) Tapes for use in connection with radio broadcasting
Rental LOCATION OF PROPERTY

SALE OF REAL PROPERTY LOCATION OF THE PROPERTY

SALE OF PERSONAL PROPERTY

General rule PLACE OF PASSAGE OF TITLE (PLACE OF SALE)
o Last par of Sec. 42E: Gains, profits and income from the purchase of personal property within
and its sale without the Philippines, OR from the purchase of personal property without and its
sale within the Philippines treated as derived ENTIRELY from sources within the country in
which SOLD
o Last sentence of first par of Sec. 42E: Gains, profits and income from the sale of personal
property produced (in whole or in part) by the taxpayer within and sold without the
Philippines, OR produced (in whole and in part) b the taxpayer without and sold within the
Philippines treated as derived PARTLY from the sources without the Philippines [PRORATE]
F Product was imported by the vendor from China where it was manufactured and was
sold in Manila TAXABLE
Except IF SHARES OF STOCKS ISSUED BY A DOMESTIC CORPORATION, ALWAYS WITHIN
REGARDLESS OF PLACE OF SALE

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Tax Rates
INDIVIDUAL TAXPAYERS
d COMPENSATION INCOME, BUSINESS AND/OR PROFESSIONAL INCOME 5-32% OF NET TAXABLE INCOME
Tax Rate on Compensation Income, Business and/or Professional Income
Section 24 (A) of NIRC
Not over P10,000

5%
P500
+ 10% of the excess over P10,000
P2,500
+ 15% of the excess over P30,000
P8,500
+ 20% of the excess over P70,000
P22,500
+ 25% of the excess over P140,000
P50,000
+ 30% of the excess over P250,000
P125,000
+ 32% of the excess over P500,000

Over P10,000 but not over P30,000

Over P30,000 but not over P70,000
Over P70,000 but not over P140,000
Over P140,000 but not over P250,000
Over P250,000 but not over P500,000
Over P500,000
d

SPECIAL CLASSES OF INCOMES

PASSIVE INCOMES
o Interests, royalties, prizes and other winning Basis: GROSS AMOUNT
Tax Rate on Interests, Royalties, Prizes, and Other Winnings
Section 24 (B) (1)
General Rule
Interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements
20%
Royalties
Prizes
Other winnings
Exceptions
Royalties on
Books
10%
Other literary works
Musical composition
Prizes amounting to P10,000 or less
Graduated income tax provided in 24 (A)
Philippine Charity Sweepstakes and Lotto winnings
Exempt from income tax
Interest income from a depositary bank under the
7.5%
expanded currency system
Interest income from long-term deposit or investment in
Exempt from income tax
the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and
other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas

PROVIDED:
Should the holder of the certificate pre-terminate the
deposit or investment before the 5th year,
a final tax shall be imposed on the entire income and
shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or

Tax to be imposed on the proviso is based on

the remaining maturity thereof:
4 years to
less than 5

5%

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Prof. Baniqued
investment
Reason behind the proviso: To encourage long term savings

years
3 years to
less than
4 years
Less than
3 years

12%
20%

Cash and/or property dividends

Tax Rate on Cash and/or Property Dividends
Section 24 (B) of NIRC

Cash and/or property dividends

actually or constructively received by an individual from a domestic corporation or from a joint
stock company, insurance or mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the distributable net income after
tax of a partnership (except a general professional partnership) of which he is a partner, or on
the share of an individual in the net income after tax of an association, a joint account, or a
joint venture or consortium taxable as a corporation of which he is a member or co-venturer

10%

CAPITAL GAINS FROM SALE OF SHARES OF STOCK NOT TRADED IN THE STOCK EXCHANGE
Tax Rate on Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange
Section 24 (C) of NIRC

Not over P100,000

On any amount in excess of P100,000

5%
10%

CAPITAL GAINS FROM SALE OF REAL PROPERTY

Tax Rate on Capital Gains from Sale of Real Property
Section 24 (D) of NIRC
General Rule

Capital gains presumed to have been realized from the

Sale
o Including pacto de retro and other form of
conditional sale
Exchange
Other disposition
of real property located in the Philippines, classified as a
capital asset.

Apply the capital gains tax, which may either

be:
6% of the gross selling price
-or6% of the fair market value at the time of the
sale of the real property
whichever is higher

Exceptions
Taxpayer has the option between:
If the buyer of the real property is
The government
Its political subdivisions
Its agencies
Government-owned or -controlled corporation
Sale of principal residence

Graduated tax rate provided for in 24 (A)

-andthe ones provided for above
(6% on gross selling price or fair market value)
Exempt from income tax

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d

SPECIAL TREATMENT OF CERTAIN FOREIGN INDIVIDUALS

ALIEN EMPLOYED BY REGIONAL OR AREA HEADQUARTERS AND REGIONAL OPERATING
HEADQUARTERS OF MULTINATIONAL COMPANIES
Tax on Non-Resident Alien Individual Employed by Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies
Section 25 (C) of NIRC
Gross income received as
Salaries
Wages
Annuities
Compensation
Remuneration
Other emoluments
allowances

15%
such

as

honoraria

and

ALIEN EMPLOYED BY OFFSHORE BANKING UNITS

Tax on Non-Resident Alien Individual Employed by Offshore Banking Units
Section 25 (D) of NIRC

Gross income received as

Salaries
Wages
Annuities
Compensation
Remuneration
Other emoluments
allowances

15%
such

as

honoraria

and

ALIEN EMPLOYED BY PETROLEUM SERVICE OCNTRACTOR AND SUBCONTRACTOR

o Subject to RECIPROCITY RULE (proviso)
o BIRs RR: Filipinos do not necessarily have to hold the same position; its enough that they are
discharging managerial and supervisory functions

Tax on Non-Resident Alien Individual Employed by Petroleum Service Contractor and Subcontractor
Section 25 (E) of NIRC
Gross income received as
Salaries
Wages
Annuities
Compensation
Remuneration
Other emoluments
allowances
d

15%
such

as

honoraria

and

MEMBERS OF GENERAL PROFESSIONAL PARTNERSHIPS persons shall be liable in their separate and individual
capacities
Net income of the partnership shall be computed in the same manner as a corporation for purposes of
determining the distributive share

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Corporate taxpayers
d CORPORATE INCOME TAX RATE OF 30%
DOMESTIC CORPORATION
Domestic Corporations in General
General rule
30% final rate on taxable income
Option (when allowed by the President upon recommendation
of the Sec. of Finance)
15% on gross income
Proprietary Educational Institutions and Non-profit Hospitals
10% final rate on taxable income except
General rule
certain passive income (those covered by
27D)
Exception:
When their gross income from unrelated trade, business or
other activity exceeds 50% of their total gross income derived
30% flat rate (imposed on corporations)
from all sources
GOCCs, Agencies and Instrumentalities
Same tax as those imposed upon corporations or associations engaged in a similar business, industry or activity

RESIDENT FOREIGN CORPORATION TAXABLE INCOME within the Philippines

NON-RESIDENT FOREIGN CORPORATION GROSS INCOME (No deductions allowed) within the
Philippines interests, dividends, rents, royalties, salaries, premiums, annuities, emoluments and
capital gains except for shares of stock not traded in the stock exchange

SPECIAL CLASSES OF INCOMES

PASSIVE INCOME domestic and resident foreign
o Exception: No capital gains tax for REAL PROPERTIES for resident foreign
Interests from deposit and yield or any other monetary benefit
Interest on currency bank deposit and yield etc.
derived from sources within the Phils.
20% final tax rate
Income derived from a depository bank under the
expanded foreign currency deposit system
7 % final tax rate
Capital gains from sale of share of stock not traded in the stock exchange
Not over P100,000
5%
Amount in excess of P100,000
10%
Income derived under the expanded foreign currency deposit system
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local commercial
10%
banks
Intercorporate dividends
Dividends received by a domestic corporation from
another domestic corporation
Not subject to tax
Capital gains from sale of real property (domestic only)
Gain presumed to have been realized on the sale,
6% on gross selling price or fair market value,
exchange or disposition of lands and/or buildings NOT
whichever is higher
actually used in the business of a corporation

TAX-SPARING PROVISION non-resident foreign the country in which the NR foreign corporation is
domiciled shall allow a credit against the tax due from the NR foreign corporation taxes deemed to have
been paid in the Philippines
Interest on Foreign Loans
Amount of foreign loans contracted after Aug. 1, 1986
20%
Intercorporate Dividends
General rule:
30%

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Prof. Baniqued
Exception: TAX SPARING (Sec. 28 B 5 (b))
15%
Capital gains from sale of shares of stocks not traded in the stock exchange
Not over P100,000
5%
Amount in excess of P100,000
10%
d

SPECIAL TREATMENT OF CERTAIN FOREIGN CORPORATIONS AND TRANSACTIONS

RESIDENT
International Carrier
Gross Philippine Billings of:
2 %
International air carrier
International shipping
Offshore Banking Units
Income derived from foreign currency transactions with local commercial banks,
including:
Branches of foreign banks (authorized by BSP to transact business with offshore
banking units)
10%
Interest income derived from foreign currency loans granted to residents
Income of non-residents from transactions with offshore banking units
Exempted
Branch Profit Remittances
Total profits applied or earmarked for remittance without any deduction for the tax
component thereof
15%
Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies
Regional or Area Headquarters
EXEMPT
Regional Operating Headquarters
10%
o

o
o

INTERNATIONAL CARRIERS Gross Philippine Billing of

F Air carriers gross revenue derived from carriage of persons, excess baggage, cargo
and mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of issue and the place of payment of the ticket or passage
document
F Shipping gross revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or payments of the
passage or freight documents
OFFSHORE BANKING UNITS interest income derived from foreign currency transactions with
residents
REGIONAL OR AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONAL COMPANIES
F RHQs branch established in the Philippines which do NOT earn or derive income
from the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries or branches in the Asia-Pacific Region and other
foreign markets (Sec. 22DD)
F ROQs branch established in the Philippines which are engaged in several activities
(Sec. 22EE)

Activities conducted must be for the benefit of their subsidiaries

BRANCH PROFIT REMITTANCE TAX BASIS: total profits applied or earmarked for remittance
without any deduction
F Exception: those activities which are registered with PEZA
F Examples:

Before the BPRT, foreign corporations preferred to put up branches instead

of subsidiaries

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Dividends
declared to US
Co.

US Company

15%
(tax-sparing)

Phil. Subsidiary
30% income tax

15% BPRT

US Company

Phil. Branch
30% income tax

NON-RESIDENT
Non-resident Cinematographic Film Owner, Lessor or Distributor
Gross income from all sources within the Philippines
Non-resident Owner or Lessor of Vessels Chartered by Philippine Nationals
Gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations as approved by the MARINA
Non-resident Owner or Lessor of Aircraft, Machineries and Other Equipment
Rentals, charter fees and other fees
o
o
o

25%
4 %

7 %

CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR

OWNER OR LESSOR OF VESSELS CHARTERED B PHILIPPINE NATIONALS gross rentals, lease
or charter fees from lessees or charterers to Filipino citizens or corporations
OWNER OR LESSOR OF AIRCRAFT, MACHINERIES AND OTHER EQUIPMENT gross rentals or
fees

MINIMUM CORPORATE INCOME TAX (MCIT) domestic and resident foreign

2% of gross income payable even if theres loss
o Beginning on the FOURTH TAXABLE YEAR immediately following the year of commencement
of business operations
o When the MCIT is > RCIT
Carry forward of excess claim MCIT as tax credit for the 3 immediately succeeding taxable years
o Any excess which is not claimed during the 3yrs shall be forfeited
Relief from MCIT imposition of MCIT shall be suspended if the corporation suffers losses on account of
prolonged labor disputes, force majeure or legitimate business reverses
Reason for imposition to ensure collection from the business
Example:
Year
1

Operation
commenced

MCIT

Carry
forward

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Prof. Baniqued

RCIT
MCIT
RCIT
MCIT

Year 6
20,000
10,000

Year 7
30,000
20,000

Year 8
70,000
50,000

20,000
20,000
0

30,000
20,000
10,000

70,000
0
70,000

Problem 1:
Sales
Less: Cost
Gross income
Less: Allowable
deductions
Taxable income

10,000,000
8,000,000
2,000,000
2,500,000
(500,000)

So,
Corporate income tax = 0
MCIT = 40,000 (2% of 2M)
MCIT > Corporate income tax therefore pay MCIT
o

Problem 2:
If taxable income = 100,000
Income tax = 30,000 (30% rate)
MCIT = 40,000
Therefore pay 10,000

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) 10%

On whom imposed:
o General rule: Imposed on every corporation formed or availed for the purpose of avoiding the
income tax by permitting earnings and profits to accumulate instead of being divided or
distributed
o Exceptions:
F Publicly-held corporations
F Banks and other non-bank financial institutions
F Insurance companies
F Taxable partnerships
F GPPs
F Non-taxable joint ventures
F Enterprises duly registered with PEZA
Evidence fact that earnings or profits are permitted to accumulate BEYOND THE REASONABLE NEDS
OF THE BUSINESS shall be determinative of the purpose to avoid tax
o IMMEDIACY TEST: Reasonable needs = includes reasonably anticipated needs of the business
Improperly accumulated taxable income
ADD:
Income exempt from tax
XXX
Income excluded from gross Income
XXX
Income
XXX
Income subject to final tax
Any NOLCO deducted
LESS:
Dividends paid
Income Tax Paid
IMPROPERLY ACCUMULATED TAXABLE INCOME

XXX
XXX
XXX
XXX
XXX
XXX

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d

EXEMPT CORPORATIONS
Those under Sec. 30 NON-STOCK AND NON-PROFIT; if theres profit, taxable
o Labor, agricultural or horticultural organization not organized principally for profit;
o Mutual savings bank not having a capital stock represented by shares, and cooperative bank
without capital stock organized and operated for mutual purposes and without profit;
o A beneficiary society, order or association, operating for t he exclusive benefit of the members
such as a fraternal organization operating under the lodge system, or mutual aid association or
a nonstock corporation organized by employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of such society, order, or association, or
nonstock corporation or their dependents;
o Cemetery company owned and operated exclusively for the benefit of its members;
o Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part
of its net income or asset shall belong to or inures to the benefit of any member, organizer,
officer or any specific person;
o Business league chamber of commerce, or board of trade, not organized for profit and no part
of the net income of which inures to the benefit of any private stock-holder, or individual;
o Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
o A nonstock and nonprofit educational institution;
o Government educational institution;
o Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
o Farmers', fruit growers', or like association organized and operated as a sales agent for the
purpose of marketing the products of its members and turning back to them the proceeds of
sales, less the necessary selling expenses on the basis of the quantity of produce finished by
them;
Income derived by the government or its political subdivisions in the exercise of GOVERNMENTAL
FUNCTIONS (Sec. 32)
o EXCEPT: Provisions of existing laws notwithstanding GSIS, SSS, PHIC, PCSO (Sec. 27C)
Those mentioned in SEC. 22B
2 high-rise
condos

Landowner

MEGAWORLD

30% of salable
area

70% of salable
area

10,000 hec
lands

For CONSTRUCTION EXEMPT

F When landowner hold title of the units = NO TAX because the distribution is merely a
return of capital (share in the investment)
F Megaworld will also not pay tax
F When will tax accrue? When the parties sell any part of the units
F What if theres pre-selling, should they pay taxes? YES. No longer a return of
investment
For ENERGY-RELATED PROJECT EXEMPT (Ex: Malampaya)

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Reallocation of Income and Deductions (Sec. 50)

d

This provision empowers the CIR to look into RELATED TAXPAYERS to determine if the distribution,
apportionment or allocation between the businesses was made to EVADE TAXES
CIR is authorized to distribute, apportion or allocate gross income or deductions between or among the
businesses
CIR v. Filinvest Development Corp: As may be gleaned from the definitions of the terms controlled and
"controlled taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would appear that
FDC and its affiliates come within the purview of Section 43 of the 1993 NIRC. Aside from owning
significant portions of the shares of stock of FLI, FAI, DSCC and FCI, the fact that FDC extended
substantial sums of money as cash advances to its said affiliates for the purpose of providing them
financial assistance for their operational and capital expenditures seemingly indicate that the situation
sought to be addressed by the subject provision exists. From the tenor of paragraph (c) of Section 179
of Revenue Regulation No. 2, it may also be seen that the CIR's power to distribute, apportion or
allocate gross income or deductions between or among controlled taxpayers may be likewise exercised
whether or not fraud inheres in the transaction/s under scrutiny. For as long as the controlled
taxpayer's taxable income is not reflective of that which it would have realized had it been dealing at
arm's length with an uncontrolled taxpayer, the CIR can make the necessary rectifications in order to
prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of distribution,
apportionment or allocation of gross income and deductions under Section 43 of the 1993 NIRC and
Section 179 of Revenue Regulation No. 2 does not include the power to impute "theoretical interests" to
the controlled taxpayer's transactions. Pursuant to Section 28 of the 1993 NIRC, after all, the term
gross income is understood to mean all income from whatever source derived, including, but not
limited to the following items: compensation for services, including fees, commissions, and similar items;
gross income derived from business; gains derived from dealings in property; interest; rents;
royalties; dividends; annuities; prizes and winnings; pensions; and partners distributive share of the
gross income of general professional partnership. While it has been held that the phrase "from
whatever source derived" indicates a legislative policy to include all income not expressly exempted
within the class of taxable income under our laws, the term "income" has been variously interpreted to
mean "cash received or its equivalent", "the amount of money coming to a person within a specific
time" or "something distinct from principal or capital." Otherwise stated, there must be proof of the
actual or, at the very least, probable receipt or realization by the controlled taxpayer of the item of
gross income sought to be distributed, apportioned or allocated by the CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible showing that the
advances FDC extended to its affiliates had resulted to the interests subsequently assessed by the
CIR. For all its harping upon the supposed fact that FDC had resorted to borrowings from commercial
banks, the CIR had adduced no concrete proof that said funds were, indeed, the source of the advances
the former provided its affiliates.

TAX EVASION v. TAX AVOIDANCE

International Exchange Bank v. CIR: While tax avoidance schemes and arrangements are not prohibited,
tax laws cannot be circumvented in order to evade payment of just taxes. To claim that time deposits
evidenced by passbooks should not be subject to DST is a clear evasion of the rule on equality and
uniformity in taxation that requires the imposition of DST on documents evidencing transactions of the
same kind, in this particular case, on all certificates of deposits drawing interest.

TRANSFER PRICING = shift of INCOME or EXPENSES from one business to another

SUBSTANTIAL UNDERDECLARATION (Sec. 248B) prima facie evidence of a false or fraudulent return

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Accounting Periods and Methods of Accounting

Accounting periods
d TWO PERIODS:
FISCAL YEAR Any accounting period of 12months
CALENDAR YEAR January to December
d CHANGE OF PERIOD approval of CIR is needed + submit short period return
Accounting methods
d CASH METHOD
Gross income shall be accounted for in the taxable year they are ACTUALLY OR CONSTRUCTIVELY
RECEIVED
Expenses ACTUALLY PAID shall be claimed as deductions regardless of the taxable year when service
was performed
d

ACCRUAL METHOD
income EARNED OR REALIZED regardless of whether or not it has been received
Expenses shall be deducted in the period they are INCURRED, not paid
CIR v. Isabela Cultural Corp: The requisites for the deductibility of ordinary and necessary trade, business,
or professional expenses, like expenses paid for legal and auditing services, are: (a) the expense must be
ordinary and necessary; (b) it must have been paid or incurred during the taxable year; (c) it must have
been paid or incurred in carrying on the trade or business of the taxpayer; and (d) it must be supported
by receipts, records or other pertinent papers.
Accounting methods for tax purposes comprise a set of rules for determining when and how to report
income and deductions. In the instant case, the accounting method used by ICC is the accrual method.
Revenue Audit Memorandum Order No. 1-2000, provides that under the accrual method of accounting,
expenses not being claimed as deductions by a taxpayer in the current year when they are incurred
cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which characterizes the cash method of accounting. Amounts
of income accrue where the right to receive them become fixed, where there is created an enforceable
liability. Similarly, liabilities are accrued when fixed and determinable in amount, without regard to
indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the determinative question is, when do the facts present
themselves in such a manner that the taxpayer must recognize income or expense? The accrual of
income and expense is permitted when the all-events test has been met. This test requires: (1) fixing of a
right to income or liability to pay; and (2) the availability of the reasonable accurate determination of
such income or liability.
The ALL-EVENTS TEST requires the right to income or liability be fixed, and the amount of such income
or liability be determined with reasonable accuracy. However, the test does not demand that the
amount of income or liability be known absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as unknowable, within the taxable year. The amount
of liability does not have to be determined exactly; it must be determined with "reasonable accuracy."
Accordingly, the term "reasonable accuracy" implies something less than an exact or completely
accurate amount.

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From the nature of the claimed deductions and the span of time during which the firm was retained, ICC
can be expected to have reasonably known the retainer fees charged by the firm as well as the
compensation for its legal services. The failure to determine the exact amount of the expense during the
taxable year when they could have been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, ICC, in the exercise of due diligence could have
inquired into the amount of their obligation to the firm, especially so that it is using the accrual method
of accounting. For another, it could have reasonably determined the amount of legal and retainer fees
owing to its familiarity with the rates charged by their long time legal consultant.
d

LONG-TERM CONTRACTS
Long-term contracts: building, installation or construction contracts covering a period in excess of 1yr
Reporting of income is upon the basis of percentage of completion

INSTALLMENT SALE used when collection of proceeds of sale and income extends over relatively long periods
of time and theres a strong possibility that full collection cannot be made
Sales of dealers in personal property report in installment
Sales of realty and casual sales of personal property used when initial payments do not exceed 25% of
the selling price
o Transactions covered:
F Casual sale or other casual disposition of personal property EXCEPT inventory
F Sale or disposition of real property
o Initial payments those received in cash or property other than evidences of indebtedness of
the purchaser during the taxable year in which the sale or other disposition is made
o If the initial payments exceed 25% - treated as CASH SALE therefore taxpayer should pay the
entire amount of tax due even if he has not received whole payment yet
o Banas, Jr. v. CA: Petitioner claims that the sale of land to Ayala was on installment basis.
As a general rule, the whole profit accruing from a sale of property is taxable as income in the
year the sale is made. But, if not all of the sale price is received during such year, and a statute
provides that income shall be taxable in the year in which it is "received," the profit from an
installment sale is to be apportioned between or among the years in which such installments
are paid and received.
Sec. 43 and Sec. 175 says that among the entities who may use the above-mentioned
installment method is a seller of real property who disposes his property on installment,
provided that the initial payment does not exceed 25% of the selling price. They also state what
may be regarded as installment payment and what constitutes initial payment. Initial payment
means the payment received in cash or property excluding evidences of indebtedness due and
payable in subsequent years, like promissory notes or mortgages, given of the purchaser
during the taxable year of sale. Initial payment does not include amounts received by the
vendor in the year of sale from the disposition to a third person of notes given by the vendee
as part of the purchase price which are due and payable in subsequent years. Such disposition
or discounting of receivable is material only as to the computation of the initial payment. If the
initial payment is within 25% of total contract price, exclusive of the proceeds of discounted
notes, the sale qualifies as an installment sale, otherwise it is a deferred sale.
Although the proceeds of a discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into cash. The subsequent
payments or liquidation of certificates of indebtedness is reported using the installment
method in computing the proportionate income to be returned, during the respective year it
was realized. Non-dealer sales of real or personal property may be reported as income under
the installment method provided that the obligation is still outstanding at the close of that
year. If the seller disposes the entire installment obligation by discounting the bill or the
promissory note, he necessarily must report the balance of the income from the discounting
not only income from the initial installment payment.
Where an installment obligation is discounted at a bank or finance company, a taxable
disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default. This rule

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prevails in the United States. Since our income tax laws are of American origin, interpretations
by American courts an our parallel tax laws have persuasive effect on the interpretation of
these laws.20 Thus, by analogy, all the more would a taxable disposition result when the
discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of
the buyer is discharged, while the seller acquires money for the settlement of his receivables.
Logically then, the income should be reported at the time of the actual gain. For income tax
purposes, income is an actual gain or an actual increase of wealth.21 Although the proceeds of a
discounted promissory note is not considered initial payment, still it must be included as
taxable income on the year it was converted to cash. When petitioner had the promissory
notes covering the succeeding installment payments of the land issued by AYALA, discounted
by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale on
installment since, a taxable disposition resulted and petitioner was required by law to report in
his returns the income derived from the discounting. What petitioner did is tantamount to an
attempt to circumvent the rule on payment of income taxes gained from the sale of the land to
AYALA for the year 1976.
d

INDIRECT METHODS
Consolidated Mines, Inc. v. CTA: Whether or not the accounting system used by the Company justifies
such a treatment of this item; and if not, whether said method used by the Company, and characterized
by the Commissioner as a "hybrid method," may be allowed under the aforequoted provisions of our tax
code
Here we have to distinguish between (1) the method of accounting used by the Company in determining
itsnet income for tax purposes; and (2) the method of computation agreed upon between the Company
and Benguet in determining the amount of compensation that was to be paid by the former to the latter.
The parties, being free to do so, had contracted that in the method of computing compensation the
basis were "cash receipts" and "cash payments." Once determined in accordance with the stipulated
bases and procedure, then the amount due Benguet for each month accrued at the end of that month,
whether the Company had made payment or not (see par. XIV of the agreement). To make the Company
deduct as an expense one-half of the "Accounts Receivable" would, in effect, be equivalent to giving
Benguet a right which it did not have under the contract, and to substitute for the parties' choice a
mode of computation of compensation not contemplated by them.
Since Benguet had no right to one-half of the "Accounts Receivable," the Company was correct in not
accruing said one-half as a deduction. The Company was not using a hybrid method of accounting, but
was consistent in its use of the accrual method of accounting.

Tax Returns and Payments

Tax returns
d INDIVIDUALS
Who?
o
o

Citizens, resident aliens and NRA ETB

EXCEPTIONS:
F Those with gross income of NOT MORE THAN their TOTAL PERSONAL and
ADDITIONAL EXEMPTIONS for dependents

Except: CITIZENS and ALIENS ETB, regardless of amount of gross income,

must file returns
F PURE COMPENSATION INCOME EARNER from sources within the Philippines which
has been withheld

Except:
Those deriving income from 2 or more ERs at any time during
taxable year
Compensation income from sources within the Philippines > P60k
F SOLE INCOME has already been subjected to FWT

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F Those exempted by the NIRC or other laws

Where? City or Municipality in which taxpayer has his
o Legal residence OR
o Principal place of business OR
o CIR office
When?
o On or before April 15
o For person subject to capital gains tax on sale of shares of stock
F Within 30days after each transaction
F Final consolidated return on April 15
o For person subject to capital gains tax on sale of real property within 30days after each sale

CORPORATIONS
Who? ALL corporations EXCEPT foreign corporation NOT ETB
What?
o QUARTERLY CORPORATE INCOME TAX
o FISCAL ADJUSTMENT RETURN covers total taxable income for preceding year
F If sum of quarterly income tax payments made does not equal total tax due on entire
taxable income, IRREVOCABLE OPTION:

Pay balance

Carry-over excess credit

Be credited/refunded with the excess amount paid

Tax payments
d IN GENERAL: Upon filing of ITR
d For those on INSTALLMENT BASIS (for individuals only)
1st payment: at the time ITR is filed
2nd payment: on or before July 15
d CAPITAL GAINS TAX: On the date of filing ITR
d DEFICIENCY TAX: Upon notice and demand
Withholding
d FINAL WITHHOLDING TAX
Who is liable for payment? PAYOR OF INCOME (withholding agent)
o In case payor fails to withhold tax deficiency tax shall be collected from him
The payee-recipient is NOT required to file an ITR for the income
d CREDITABLE WITHHOLDING TAX
Income recipient is REQUIRED to file ITR on income withheld

Income Taxation of Estates and trusts

d

SEC. 61: TAXABLE INCOME of ESTATES and TRUSTS = ALL those received or accumulated during the period of
administration or settlement of the estate
Exceptions: The amount will form part of the taxable income of the BENEFICIARIES
o Amount which is to be DISTRIBUTED CURRENTLY by the fiduciary to the beneficiaries
o Amount paid or credited during taxable ear to any legatee, heir or beneficiary (according to
the WISHES of the deceased)
SEC. 60: TAX IMPOSED = same as those imposed on INDIVIDUALS
Exception: NO TAX imposed on EMPLOYEES TRUST
o If contributions are made to the trust by ER, EEs or both for the purpose of distributing the
earnings and principal of the fund accumulated by the trust

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o

d
d

If under the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities
with respect to EEs under the trust, for any part of the income to be used for, or diverted to,
purposes other than for the exclusive benefit of his EEs
TAXABLE PERSONS
Estates administrator
Trusts trustee
EXEMPTIONS ALLOWED = P20k
REVOCABLE v. IRREVOCABLE TRUSTS
Irrevocable: Deed of Trust created on December 5. Ownership of properties transferred by A to B for
the benefit of As kids. The assets ear income during the period covered. As soon as kids reach 30yrs old,
the trust will terminate.
Revocable (Sec. 63): Trustor and beneficiary is A, trustee is B. There is no transfer of ownership
therefore Trustor must report in his ITP the income received

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Estate tax
Gross Estate
d

VALUE OF ESTATE DETERMINED AT THE TIME OF DEATH (Sec. 85)

COMPOSITION
o RESIDENTS ALL properties wherever situated
o NON-RESIDENTS Only that PART of the entire gross estate which is situated in the
Philippines
Lorenzo v. Posadas: But whatever may be the rule in other jurisdictions, we hold that a transmission by
inheritance is taxable at the time of the predecessor's death, notwithstanding the postponement of the
actual possession or enjoyment of the estate by the beneficiary, and the tax measured by the value of
the property transmitted at that time regardless of its appreciation or depreciation.

GENERAL DEFINITION OF GROSS ESTATE (Sec. 104) GROSS ESTATE includes real and personal property,
whether tangible or intangible or mixed, wherever situated
RESIDENTS
o Real or immovable property wherever situated
o Tangible personal property wherever situated
o Intangible personal property wherever situated; the ff are considered situated in the
Philippines:
F Franchise which must be exercised in the Philippines
F Shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines
F Shares, obligations or bonds by any foreign corporation 85% of the business is located
in the Philippines
F Shares, obligations or bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the Philippines
F Shares or rights in any partnership, business or industry established in the Philippines
NON-RESIDENT ALIENS
o Real or immovable property situated in the Philippines
o Tangible personal property situated in the Philippines
o Intangible personal property with a situs in the Philippines but NO tax shall be collected in the
ff instances:
F Foreign country does not impose transfer tax
F Foreign country imposes transfer tax but grants similar exemption

CONSTITUTION (Sec. 85)

PROPERTY IN WHICH DECEDENT HAD AN INTEREST To the EXTENT of the INTEREST of the decedent at
the time of his death

TRANSFERS IN CONTEMPLATION OF DEATH To the extent of any interest of which the decedent has at
the time of transfer, by trust or otherwise, IN CONTEMPLATION of DEATH
o Except: BONA FIDE SALE for an adequate and full consideration in money or moneys worth
o Dison v. Posadas: The argument advanced by the appellant that he is not an heir of his
deceased father within the meaning of section 1540 of the Administrative Code because his
father in his lifetime had given the appellant all his property and left no property to be
inherited, is so fallacious that the urging of it here casts a suspicion upon the appellants reason
for completing the legal formalities of the transfer on the eve of the latter's death. We do not
know whether or not the father in this case left a will; in any event, this appellant could not be
deprived of his share of the inheritance because the Civil Code confers upon him the status of a
forced heir. We construe the expression in section 1540 "any of those who, after his death,
shall prove to be his heirs", to include those who, by our law, are given the status and rights of

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heirs, regardless of the quantity of property they may receive as such heirs. That the appellant
in this case occupies the status of heir to his deceased father cannot be questioned. Construing
the conveyance here in question, under the facts presented, as an advance made by Felix
Dison to his only child, we hold section 1540 to be applicable and the tax to have been properly
assessed by the Collector of Internal Revenue.

TRANSFERS TAKING EFFECT AT DEATH Those INTENDED to TAKE EFFECT in POSSESSION or

ENJOYMENT at or AFTER DEATH
o Ganuelas v. Cawed: The distinguishing characteristics of a donation mortis causa are the
following:
1. It conveys no title or ownership to the transferee before the death of the
transferor; or, what amounts to the same thing, that the transferor should retain the
ownership (full or naked) and control of the property while alive;
2. That before his death, the transfer should be revocable by the transferor at will, ad
nutum; but revocability may be provided for indirectly by means of a reserved power
in the donor to dispose of the properties conveyed;
3. That the transfer should be void if the transferor should survive the transferee.
In the donation subject of the present case, there is nothing therein which indicates that any
right, title or interest in the donated properties was to be transferred to Ursulina prior to the
death of Celestina. The phrase "to become effective upon the death of the DONOR" admits of
no other interpretation but that Celestina intended to transfer the ownership of the properties
to Ursulina on her death, not during her lifetime.

TRANSFERS WITH RETAINED INTEREST Those transfers for which the decedent has RETAINED for his
LIFE or for ANY PERIOD which does not in fact end before his death, the
o Possession or enjoyment or the right to the income from the property
o The right, either alone or in conjunction with an person, to designate the person who shall
possess or enjoy the property or the income therefrom

REVOCABLE TRANSFERS Includes IRREVOCABLE trusts

o Enjoyment was subject at the date of his death to any change through the exercise of a power
IN WHATEVER CAPACITY EXERCISABLE by the decedent ALONE or by the decedent in
CONJUNCTION with any other person WITHOUT REGARD TO WHEN OR FROM WHAT SOURCE
THE DECEDENT ACQUIRED SUCH POWER to alter, amend, revoke or terminate or where such
power is relinquished in contemplation of the decedents death
F Provision that the owner may amend provided there is consent from the
beneficiaries property will be INCLUDIBLE in his estate
F Provision that the owner reserves the right to make himself a CO-TRUSTEE
property will be INCLUDIBLE in his estate (by the decedent in conjunction with any
other person)
F Owner did not retain any interest or power but the last trustee, before signing,
appointed the owner as a trustee property will be INCLUDIBLE in his estate
(without regard to when or from what source the decedent acquired)
o Power to alter, amend or revoke shall be considered the exist on the date of the decedents
death even though the exercise of the power is subject to a precedent giving of notice or even
though the alteration, amendment or revocation takes effect only on the expiration of a stated
period

PROPERTY PASSING UNDER GENERAL POWER OF APPOINTMENT To the extent of any property
passing under the GPA exercised by the decedent by WILL or by DEED executed in contemplation of, or
intended to take effect in possession or enjoyment at, or after his death, or by DEED under which he has
retained for his life or any period not ascertainable without reference to his death or for an period which
does not in fact end before his death
o Except: BONA FIDE SALE for an adequate and full consideration in money or moneys worth
o Illustration:

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Income
Property
Owner

Trustee

C
B

o
o

Power of
Appointment

B dies, is there anything includible in his estate? YES, by virtue of the GPA.
If B has a will and he in fact gave the property to C. from whom did C acquire the property?
OWNER and not B because the power of appointment was granted by the owner without
which C could not have received the property.
What if B has the power to choose among C, D and E and he chose C, will the property form
part of Bs estate? NO because the power of appointment is an SPA

TRANSFERS FOR INSUFFICIENT CONSIDERATION The EXCESS of the FMV, at the time of death, of the
property otherwise to be included on account of the transaction

PROCEEDS OF LIFE INSURANCE

o To the EXTENT of the amount RECEIVABLE by the ESTATE of the deceased, his executor or
administrator as insurance under policies taken out by the decedent upon his own life OR
o To the EXTENT of the amount RECEIVABLE By ANY BENEFICIARY designated in the policy of
insurance
F EXCEPT when it is expressly stipulated that the designation of the beneficiary is
irrevocable

EXEMPT TRANSFERS (Sec. 87)

MERGER or USUFRUCT in the owner of the naked title
TRANSMISSION or DELIVERY of the inheritance or legacy by the fiduciary heir or legatee to the
fideicommissary
TRANSMISSION from the first heir, legatee or donee in favor of another beneficiary, in accordance with
the desire of the predecessor
All BEQUESTS, DEVISES, LEGACIES or TRANSFERS to social welfare, cultural and charitable institutions,
no part of the net income of which inures to the benefit of any individual
o 30% of such shall be used by the institutions for administration purposes

EXCLUSION OF CONJUGAL SHARE OF SURVIVING SPOUSE (Sec. 85H) Deemed part of his or her gross estate

Deductions from Gross Estate

d

RESIDENTS
EXPENSES, LOSSES, INDEBTEDNESS AND TAXES (See RR for list of expenses)
o FUNERAL EXPENSES ACTUAL funeral expenses or in an amount EQUAL TO 5% of the GROSS
ESTATE, whichever is LOWER, but in no case to exceed P200k
o

JUDICIAL EXPENSES Testamentary or intestate proceedings

F CIR v. CA: Judicial expenses are expenses of administration. Administration expenses,
as an allowable deduction from the gross estate of the decedent for purposes of
arriving at the value of the net estate, have been construed by the federal and state
courts of the United States to include all expenses "essential to the collection of the
assets, payment of debts or the distribution of the property to the persons entitled
to it." In other words, the expenses must be essential to the proper settlement of the

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estate. Expenditures incurred for the individual benefit of the heirs, devisees or
legatees are not deductible. This distinction has been carried over to our jurisdiction.
Thus, in Lorenzo v. Posadas the Court construed the phrase "judicial expenses of the
testamentary or intestate proceedings" as not including the compensation paid to a
trustee of the decedent's estate when it appeared that such trustee was appointed
for the purpose of managing the decedent's real estate for the benefit of the
testamentary heir. In another case, the Court disallowed the premiums paid on the
bond filed by the administrator as an expense of administration since the giving of a
bond is in the nature of a qualification for the office, and not necessary in the
settlement of the estate. Neither may attorney's fees incident to litigation incurred
by the heirs in asserting their respective rights be claimed as a deduction from the
gross estate.
Coming to the case at bar, the notarial fee paid for the extrajudicial settlement is
clearly a deductible expense since such settlement effected a distribution of Pedro
Pajonar's estate to his lawful heirs. Similarly, the attorney's fees paid to PNB for
acting as the guardian of Pedro Pajonar's property during his lifetime should also be
considered as a deductible administration expense. PNB provided a detailed
accounting of decedent's property and gave advice as to the proper settlement of
the latter's estate, acts which contributed towards the collection of decedent's
assets and the subsequent settlement of the estate.
o

CLAIMS AGAINST THE ESTATE

F The debt instrument was duly notarized
F If the loan was contracted within 3years before the death of the decedent, the
administrator or executor shall submit a statement showing the disposition of the
proceeds of the loan
F Dizon v. CTA: "Claims against the estate," as allowable deductions from the gross
estate under Section 79 of the Tax Code, are basically a reproduction of the
deductions allowed under Section 89 (a) (1) (C) and (E) of Commonwealth Act No.
466 (CA 466), otherwise known as the National Internal Revenue Code of 1939, and
which was the first codification of Philippine tax laws. Philippine tax laws were, in
turn, based on the federal tax laws of the United States. Thus, pursuant to
established rules of statutory construction, the decisions of American courts
construing the federal tax code are entitled to great weight in the interpretation of
our own tax laws.
It is noteworthy that even in the United States, there is some dispute as to whether
the deductible amount for a claim against the estate is fixed as of the decedent's
death which is the general rule, or the same should be adjusted to reflect post-death
developments, such as where a settlement between the parties results in the
reduction of the amount actually paid.[61] On one hand, the U.S. court ruled that the
appropriate deduction is the "value" that the claim had at the date of the decedent's
death.[62] Also, as held in Propstra v. U.S., [63] where a lien claimed against the estate
was certain and enforceable on the date of the decedent's death, the fact that the
claimant subsequently settled for lesser amount did not preclude the estate from
deducting the entire amount of the claim for estate tax purposes. These
pronouncements essentially confirm the general principle that post-death
developments are not material in determining the amount of the deduction.
On the other hand, the Internal Revenue Service (Service) opines that post-death
settlement should be taken into consideration and the claim should be allowed as a
deduction only to the extent of the amount actually paid.[64] Recognizing the dispute,
the Service released Proposed Regulations in 2007 mandating that the deduction
would be limited to the actual amount paid.
In announcing its agreement with Propstra, the U.S. 5th Circuit Court of Appeals held:

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We are persuaded that the Ninth Circuit's decision...in Propstra correctly
apply the Ithaca Trust date-of-death valuation principle to enforceable
claims against the estate. As we interpret Ithaca Trust, when the Supreme
Court announced the date-of-death valuation principle, it was making a
judgment about the nature of the federal estate tax specifically, that it is a
tax imposed on the act of transferring property by will or intestacy and,
because the act on which the tax is levied occurs at a discrete time, i.e., the
instance of death, the net value of the property transferred should be
ascertained, as nearly as possible, as of that time. This analysis supports
broad application of the date-of-death valuation rule.
We express our agreement with the date-of-death valuation rule, made pursuant to
the ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States.[68] First.
There is no law, nor do we discern any legislative intent in our tax laws, which
disregards the date-of-death valuation principle and particularly provides that postdeath developments must be considered in determining the net value of the estate.
It bears emphasis that tax burdens are not to be imposed, nor presumed to be
imposed, beyond what the statute expressly and clearly imports, tax statutes being
construedstrictissimi juris against the government.[69] Any doubt on whether a
person, article or activity is taxable is generally resolved against taxation.[70] Second.
Such construction finds relevance and consistency in our Rules on Special
Proceedings wherein the term "claims" required to be presented against a
decedent's estate is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime, or
liability contracted by the deceased before his death. Therefore, the claims existing
at the time of death are significant to, and should be made the basis of, the
determination of allowable deductions.
o

CLAIMS AGAINST INSOLVENT PERSONS The value of the interest must be included in the
value of the gross estate

UNPAID DEBTS/MORTGAGES Must be included in the value of the gross estate

LOSSES Those incurred during the settlement of the estate arising from fires, storms,
shipwrecks or other casualties or from robbery, theft or embezzlement when such losses are
not compensated for by insurance or otherwise

VANISHING DEDUCTION
o Property which forms part of the gross estate of any person who died WITHIN 5YEARS prior to
the death of the decedent or transferred to the decedent by GIFT within 5YEARS prior to his
death
o Rates:
F 100% within 1 year prior to the death of the decedent or transfer
F 80% more than 1 year but not more than 2 years prior to the death of the decedent
or transfer
F 60% more than 2 years but not more than 3 years prior to the death of the
decedent or transfer
F 40% more than 3 year but not more than 4 years prior to the death of the decedent
or transfer
F 20% more than 4 year but not more than 5 years prior to the death of the decedent
or transfer
o Can be claimed only ONCE

TRANSFERS OF PUBLIC USE

FAMILY HOME Current FMV of the decedents family home up to P1M

o BIR Ruling 012-2002: Accordingly, being a bonafide resident of the Philippines as certified by
the Barangay Chairman of Barangay Merville, and coupled by the circumstances stated,

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SOFRONIO is considered a resident alien within the definition of Section 86(A) of the 1997 Tax
Code. As such, the value of the gross estate of SOFRONIO shall be determined by including the
value at the time of death of all property, real or personal, tangible or intangible, wherever
situated in accordance with Section 85 of the 1997 Tax Code. Accordingly, the estate of
SOFRONIO can avail of the deductions afforded to it under Section 86(A)(1) to (7) of the 1997
Tax Code, as implemented by Revenue Regulations No. 17-93 dated August 30, 1993, including
the deduction of the Family Home and the Standard Deduction of P1,000,000.00 each.

STANDARD DEDUCTION P1M

o BIR Ruling 009-99: The interpretation that must prevail, therefore is, that the above
enumerated items are separate and distinct items, independent of each other. As such, the
above enumerated items are properly authorized by law to be deducted as independent,
separate and distinct items of deduction, which may properly be deducted from the gross
estate of a resident decedent, subject to the limitations or conditions that are provided for
under each said item above.
Clearly, therefore, it is not a requirement of the law, that the amounts computed,
corresponding to the other remaining items in the enumeration (namely #s1-4 and 6-7 of
Section 86(A) of the Tax Code of 1997), be included in the standard deduction, in #5 above,
which will limit the entire deduction to the amount of the said item, amounting to One Million
Pesos (P1,000,000.00). This interpretation is certainly contrary to the intention of the law.

MEDICAL EXPENSES Those incurred by the decedent within 1 year prior to his death which shall be
duly substantiated with receipts up to P500k

DEATH BENEFITS FROM EMPLOYER under Sec. 32

NON-RESIDENT ALIENS
ALLOWABLE DEDUCTIONS
o EXPENSES, LOSSES, INDEBTEDNESS AND TAXES
o VANISHING DEDUCTIONS
o TRANSFERS FOR PUBLIC USE
Requirement before deduction is allowed The executor, administrator or any one of the heirs must
include in the return the value at the time of death of that part of the gross estate not situated here
FOREIGN TAX CREDITS
o WHAT IS CREDITED Amounts of any estate tax imposed by the authority of a foreign
country
o LIMITS
F PER COUNTRY LIMIT The amount of credit in respect to the tax paid to any country
shall NOT exceed the same proportion of the tax against which such credit is taken,
which the decedents estate situated within such country taxable under the NIRC
bears to his entire net estate
F WORLDWIDE LIMIT The total amount of the credit shall NOT exceed the same
proportion of the tax against which such credit is taken, which the decedents net
estate situated outside the Philippines taxable under the NIRC bears to his entire net
estate

Computation of Net Estate and Tax Payable

d

DETERMINATION OF THE VALUE (Sec. 88)

USUFRUCT Take into account the probable life of the beneficiary
PROPERTIES FMV at the time of death
o REAL properties FMV or Assessed Value, whichever is higher
o PERSONAL properties
F In general FMV

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F

Shares of stock depends on whether the shares are listed or not

Listed shares book value for common shares and par value for preferred
shares

Unlisted shares arithmetic mean between the highest and the lowest
quotation at a date nearest the date of death; if none is available, on the
date of death itself

COMPUTATION
GROSS ESTATE
Gross conjugal properties
Gross separate properties
Less: Allowable deductions
Ordinary deductions
Special deductions
Total deductions
Net conjugal estate
Less: Share of surviving spouse
Net estate
Tax rate
Estate tax
Less: Tax credit
Estate tax payable

TAX RATES
Over

P200,000
500,000
2,000,000
5,000,000
10,000,000

But not over

P200,000
500,000
2,000,000
5,000,000
10,000,000
And over

Pxx
xx

Pxx

xx
xx
xx
Pxx
(xx)
Pxx
%
Xx
(xx)
Pxx

Tax shall be
Exempt
0
15,000
135,000
465,000
1,215,000

Plus

Of the excess over

5%
8%
11%
15%
20%

P200,000
500,000
2,000,000
5,000,000
10,000,000

Administrative Provisions
d

NOTICE OF DEATH (Sec. 89)

WHEN REQUIRED

All cases of transfer

Exempt but the gross value of the estate exceeds P20k

WHEN GIVEN Within 2MONTHS after the decedents death

ESTATE TAX RETURN (Sec. 90)

WHEN REQUIRED

All cases of transfer

Exempt but the gross value of the estate exceeds P200k

Regardless of the gross vale, when the estate consists of registered or registrable property
(real property, motor vehicle, shares of stock) for which BIR clearance is required as a
condition precedent for the transfer in the name of the transferee
CONTENTS OF RETURN

Value of the gross estate at the time of death

Deductions allowed

Supplemental data
TIME FOR FILING within 6MONTHS from decedents death

May be extended but not exceeding 30days

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PLACE OF FILING authorized agent bank or RDO, Collection Officer or duly authorized Treasurer of the
city/municipality where the decedent was domiciled at the time of his death, or if theres no legal
residence, with the Office of the CIR

PAYMENT OF ESTATE TAX (Sec. 91)

TIME OF PAYMENT At the time the RETURN IS FILED; extendible to max of 5yrs (judicially settled) or
2yrs (extrajudicially settled)
LIABILITY FOR PAYMENT

PRIMARY LIABLE EXECUTOR OR ADMINISTRATOR shall pay the tax BEFORE DELIVERY to
any beneficiary of his distributive share of the estate

CIR v. Gonzales: At any rate, estate and inheritance taxes are satisfied from the
estate and are to be paid by the executor or administrator.1 Where there are two or
more executors, all of them are severally liable for the payment of the estate
tax.2 The inheritance tax, although charged against the account of each beneficiary,
should be paid by the executor or administrator.3 Failure to pay the estate and
inheritance taxes before distribution of the estate would subject the executor or
administrator to criminal liability under Section 107(c) of the Tax Code.
It is immaterial therefore that Lilia Yusay Gonzales administers only one-third of the
estate and will receive as her share only said portion, for her right to the estate
comes after taxes.4 As an administratrix, she is liable for the entire estate tax. As an
heir, she is liable for the entire inheritance tax although her liability would not exceed
the amount of her share in the estate.5 The entire inheritance tax which amounts to
P39,178.12 excluding penalties is obviously much less than her distributive share.

SUBSIDIARILY LIABLE BENEFICIARY to the extent of his distributive share shall be liable for
the payment of such portion

Vera v. Navarro: The liability of the herein respondents Eribal and Abanto to pay the
inheritance tax corresponding to the share of Bess Lauer in the inheritance must be
negated, The inheritance tax is an imposition created by law on the privilege to
receive property. 4 Consequently, the scope and subjects of this tax and other related
matters in which it is involved must be traced and sought in the law itself. An analysis
of our tax statutes supplies no sufficient indication that the inheritance tax, as a rule,
was meant to be the joint and solidary liability of the heirs of a decedent. Section
95(c) of the Tax Code, in fact, indicates that the general presumption must be
otherwise. The said subsection reads thus:
(c) xxx xxx xxx
The inheritance tax imposed by Section 86 shall, in the absence of contrary
disposition by the predecessor, be charged to the account of each beneficiary, in
proportion to the value of the benefit received, and in accordance with the scale
fixed for the class or group to which is pertains:Provided, That in cases where the
heirs divide extrajudicially the property left to them by their predecessor or
otherwise convey, sell, transfer, mortgage, or encumber the same without being the
estate or inheritance taxes within the period prescribed in the preceding subsections
(a) and (b), they shall be solidarity liable for the payment of the said taxes to the
extent of the estate they have received.

The statute's enumeration of the specific cases when the heirs may be held solidarity
liable for the payment of the inheritance tax is, in the opinion of this Court, a clear
indication that beyond those cases, the payment of the inheritance tax should be
taken as the individual responsibility, to the extent of the benefits received, of each
heir.
CONSEQUENCES OF NON-PAYMENT

Sec. 94: The judge will NOT AUTHORIZE the DELIVERY of the distributive share to any party
interested in the estate unless a CERTIFICATION from the CIR that the estate tax has been paid
is shown

Sec. 95: Duties of certain Officers

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The REGISTER OF DEEDS shall NOT register any document transferring real property
or real rights or chattel mortgage, by way of gifts inter vivos or mortis causa, legacy
or inheritance, UNLESS a CERTIFICATION from the CIR is shown

Any LAWYER, NOTARY PUBLIC, or any GOVERNMENT OFFICER who, by reason of his
official duties, INTERVENES in the preparation or acknowledgement of the
documents shall have the DUTY to furnish the CIR, Regional Director, RDO or RCO
with copies of the documents and any info whatsoever which may facilitate the
collection of taxes

The DEBTOR of the deceased shall NOT pay his debts to the heirs, legatees, executor
or administrator WITHOUT a CERTIFICATION from the CIR. He may pay the executor
or administrator if the credit is included in the inventory of the estate
Sec. 96: If after payment of tax, NEW OBLIGATIONS of the decedent appears and the person
interested have satisfied them through court order, they shall have a RIGHT to the
RESTITUTION of the PROPORTIONAL PART of the tax paid
Sec. 97: Any SHARE, OBLIGATION, BOND or RIGHT shall NOT be transferred without a
CERTIFICATION from the CIR
Imposition of 25% SURCHARGE (Sec. 248)
Imposition of 20% INTEREST (Sec. 249)

STATUS OF HEIRS PENDING PARTITION OF ESTATE

Rees v. RTC of Makati: Article 777 of the Civil Code declares that the successional rights are transmitted
from the moment of death of the decedent. Accordingly, upon Anastacia's death, her children acquired
legal title to her estate (which title includes her shareholdings in Zenith), and they are, prior to the
estate's partition, deemed co-owners thereof. This status as co-owners, however, does not immediately
and necessarily make them stockholders of the corporation. Unless and until there is compliance with
Section 63 of the Corporation Code on the manner of transferring shares, the heirs do not become
registered stockholders of the corporation. No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the corporation.
Simply stated, the transfer of title by means of succession, though effective and valid between the
parties involved (i.e., between the decedent's estate and her heirs), does not bind the corporation and
third parties. The transfer must be registered in the books of the corporation to make the transfereeheir a stockholder entitled to recognition as such both by the corporation and by third parties. [26]
We note, in relation with the above statement, that in Abejo v. Dela Cruz and TCL Sales Corporation v.
Court of Appeals we did not require the registration of the transfer before considering the transferee a
stockholder of the corporation (in effect upholding the existence of an intra-corporate relation between
the parties and bringing the case within the jurisdiction of the SEC as an intra-corporate controversy). A
marked difference, however, exists between these cases and the present one.
In Abejo and TCL Sales, the transferees held definite and uncontested titles to a specific number of
shares of the corporation; after the transferee had established prima facie ownership over the shares of
stocks in question, registration became a mere formality in confirming their status as stockholders. In
the present case, each of Anastacia's heirs holds only an undivided interest in the shares. This interest, at
this point, is still inchoate and subject to the outcome of a settlement proceeding; the right of the heirs
to specific, distributive shares of inheritance will not be determined until all the debts of the estate of
the decedent are paid. In short, the heirs are only entitled to what remains after payment of the
decedent's debts;[29]whether there will be residue remains to be seen. Justice Jurado aptly puts it as
follows:
No succession shall be declared unless and until a liquidation of the assets and debts left by the
decedent shall have been made and all his creditors are fully paid. Until a final liquidation is
made and all the debts are paid, the right of the heirs to inherit remains inchoate. This is so
because under our rules of procedure, liquidation is necessary in order to determine whether
or not the decedent has left any liquid assets which may be transmitted to his heirs.
Rodrigo must, therefore, hurdle two obstacles before he can be considered a stockholder of Zenith with
respect to the shareholdings originally belonging to Anastacia. First, he must prove that there are
shareholdings that will be left to him and his co-heirs, and this can be determined only in a settlement of

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the decedent's estate. No such proceeding has been commenced to date. Second, he must register the
transfer of the shares allotted to him to make it binding against the corporation. He cannot demand that
this be done unless and until he has established his specific allotment (and prima facie ownership) of the
shares. Without the settlement of Anastacia's estate, there can be no definite partition and distribution
of the estate to the heirs. Without the partition and distribution, there can be no registration of the
transfer. And without the registration, we cannot consider the transferee-heir a stockholder who may
invoke the existence of an intra-corporate relationship as premise for an intra-corporate controversy
within the jurisdiction of a special commercial court.

Effect of Renunciation or Waiver by Some Heirs

d

BY OR AMONG HEIRS OF DIFFERENT DEGREE DONORS TAX

If the surviving spouse waives her conjugal share in favor of the children therefore the latter gets
everything, theres a donors tax because the children have no interest at all in the wifes community
property.
BY OR AMONG HEIRS OF SAME DEGREE NO DONORS TAX
BIR Ruling 105-99: The gross estate of the late Antigono A. Rosil which consists merely of bank accounts
in the total amount of P153,478.01 which is even lower than the P200,000.00 tax exempt portion of the
net estate bracket as imposed under Section 84 of the same Code is indeed exempt from estate tax.
However, the executor, administrator or any of the legal heirs of the late Antigono A. Rosil shall be
required to file the corresponding estate tax return within six (6) months from the decedent's death
with the Revenue District Officer (RDO) of the revenue district where the decedent was previously
registered.
On the other hand, the waiver by the three (3) legitimate children of their respective share in the abovementioned estate in favor of their mother is not subject to donor's tax as prescribed under Section 98 of
the Tax Code of 1997 because in legal succession, accretion takes place in case of repudiation among
heirs of the same degree. In other words, when the three (3) legitimate children renounced their share
in the inheritance, they did not donate the property/share to their mother, since the said property/share
has never become their own.

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Donors tax
Meaning of Gift and its Valuation
d

GIFTS (Sec. 104) Real and personal property, whether tangible or intangible, wherever situated
HOW TO DETERMINE WHETHER OR NOT THERE IS A DONATION Look at the circumstances
surrounding the case
o Pirovano v. CIR: What is more, the actual consideration for the cession of the policies, as
previously shown, was the Company's gratitude to Pirovano; so that under section 111 of the
Code there is no consideration the value of which can be deducted from that of the property
transferred as a gift. Like "love and affection," gratitude has no economic value and is not
"consideration" in the sense that the word is used in this section of the Tax Code.
As stated by Chief Justice Griffith of the Supreme Court of Mississippi in his well-known book,
"Outlines of the Law" (p. 204)
Love and affection are not considerations of value they are not estimable in terms
of value. Nor are sentiments of gratitude for gratuitous part favors or kindnesses; nor
are obligations which are merely moral. It has been well said that if a moral obligation
were alone sufficient it would remove the necessity for any consideration at all, since
the fact of making a promise impose, the moral obligation to perform it."
It is of course perfectly possible that a donation or gift should at the same time impose a
burden or condition on the donee involving some economic liability for him. A, for example,
may donate a parcel of land to B on condition that the latter assume a mortgage existing on
the donated land. In this case the donee may rightfully insist that the gift tax be computed only
on the value of the land less the value of the mortgage. This, in fact, is contemplated by Article
619 of the Civil Code of 1889 (Art. 726 of the Tax Code) when it provides that there is also a
donation "when the gift imposes upon the donee a burden which is less than the value of the
thing given." Section 111 of the Tax Code has in view situations of this kind, since it also
prescribes that "the amount by which the value of the property exceeded the value of the
consideration" shall be deemed a gift for the purpose of the tax.
o

Old Colony Trust Co. v. Commissioner: Nor can it be argued that the payment of the tax in No.
130 was a gift. The payment for services, even though entirely voluntary, was nevertheless
compensation within the statute. This is shown by the case of Noel v. Parrott, 15 F.2d 669.
There, it was resolved that a gratuitous appropriation equal in amount to $3 per share on the
outstanding stock of the company be set aside out of the assets for distribution to certain
officers and employees of the company, and that the executive committee be authorized to
make such distribution as they deemed wise and proper. The executive committee gave
$35,000 to be paid to the plaintiff taxpayer.

The tax shall apply whether the transfer is in TRUST or otherwise, whether the gift is DIRECT or INDIRECT,
and whether the property is REAL or PERSONAL, TANGIBLE or INTANGIBLE (Sec. 98B)

TRANSFER FOR LESS THAN ADEQUATE CONSIDERATION (Sec. 100) Amount by which the FMV of the
property, other than real property referred to in Sec. 24D, exceeded the value of the consideration shall
be deemed as a gift and will be included in computing the amount of gifts made during the calendar year
o CIR v. BF Goodrich Phils., Inc: Petitioner insists that private respondent committed "falsity"
when it sold the property for a price lesser than its declared fair market value. This fact alone
did not constitute a false return which contains wrong information due to mistake,
carelessness or ignorance. 13 It is possible that real property may be sold for less than adequate
consideration for a bona fide business purpose; in such event, the sale remains an "arm's
length" transaction. In the present case, the private respondent was compelled to sell the
property even at a price less than its market value, because it would have lost all ownership

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rights over it upon the expiration of the parity amendment. In other words, private respondent
was attempting to minimize its losses. At the same time, it was able to lease the property for
25 years, renewable for another 25. This can be regarded as another consideration on the price.
d

EXEMPT GIFTS (Sec. 101)

MADE BY RESIDENTS
o DOWRIES or GIFTS made on account of marriage and BEFORE its celebration or WITHIN 1YEAR
thereafter by parents to each of their legitimate, recognized natural, or adopted children to
the extent of the FIRST P10,000
o Gifts made to or for the use of the NATIONAL GOVERNMENT or any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision
o Gifts in favor of an EDUCATIONAL and/or CHARITABLE, RELIGIOUS, CULTURAL or SOCIAL
WELFARE corporation, institution, accredited NGO, TRUST or PHILANTHROPIC organization or
RESEARCH institution or organization

BIR Ruling No. 171-98: Lot awarded to National Children's Hospital by virtue of
Proclamation No 439 dated December 23, 1953 is exempt from donor's
and donee's tax pursuant to Section 112(3) of Commonwealth Act No. 466.
NON-RESIDENT ALIENS
o Gifts made to or for the use of the NATIONAL GOVERNMENT of any entity created by any of its
agencies which is not conducted for profit, or to any political subdivision

BIR Ruling No. 56-99: The donation of a vehicle by the US Embassy in favor of the
Central Records Division of the Department of Foreign Affairs is exempt from the
payment of donor's tax pursuant to Section 101(A)(2) of the Tax Code of 1997
considering that the donee is a political subdivisions of the Government. The
aforesaid Deed of Donation is also not subject to the documentary stamp tax of
P15.00 imposed under Section 188 of the same Code.
o Gifts in favor of an EDUCATIONAL and/or CHARITABLE, RELIGIOUS, CULTURAL or SOCIAL
WELFARE corporation, institution, accredited NGO, TRUST or PHILANTHROPIC organization or
RESEARCH institution or organization

VALUATION OF GIFTS (Sec. 102) FMV at the time of the gift

Persons Liable and Tax Rates

PERSONS LIABLE (Sec. 98A) ANY PERSON, resident or nonresident, who transfers property by gift
TAX RATES (Sec. 99)
IN GENERAL Based on the TOTAL NET GIFTS MADE DURING THE CALENDAR YEAR in accordance with
the ff:
Over
But not over
Tax shall be
Plus
Of the excess over
P100,000
Exempt
P100,000
200,000
0
2%
P100,000
200,000
500,000
2,000
4%
200,000
500,000
1,000,000
14,000
6%
500,000
1,000,000
3,000,000
44,000
8%
1,000,000
3,000,000
5,000,000
204,000
10%
3,000,000
5,000,000
10,000,000
404,000
12%
5,000,000
10,000,000
1,004,000
15%
10,000,000

d
d

IF DONEE IS A STRANGER 30% of the NET gifts

o BROTHER, SISTER (whether by whole or half-blood), SPOUSE, ANCESTOR and LINEAL
DESCENDANT
o Relative by consanguinity in the COLLATERAL line within the 4th degree
o Any contribution in cash or in kind to any CANDIDATE, POLITICAL PARTY or COALITION of
parties for CAMPAIGN PURPOSES

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Administrative Provisions
d

DONORS TAX RETURN (Sec. 103A) The return shall set forth:
EACH gift made during the calendar year which is to be included in computing net gifts
DEDUCTIONS claimed
Any PREVIOUS NET GIFTS made during the same calendar year
Name of DONEE
Further info
PAYMENT OF DONORS TAX (Sec. 103B) WITHIN 30DAYS after the date of the gift, the return shall be filed and
the taxes paid

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Value-added tax
Transactions subject to Regular VAT
In general
d Definition: VAT is a consumption tax imposed at EVERY STAGE of the distribution process on the sale, barter,
exchange or lease of goods or properties and rendition of services in the course of trade or business, or the
importation of goods, whether such imported goods are for use in business or not.
Manufacture cost

Selling price

100

200

+ 12

+ 24

100
x .12
P12

P112

P224

INPUT VAT

OUTPUT VAT

How to compute VAT payable: (1) Output Input; OR (2) look at the value added

Nature:
Privilege tax imposed by law directly not on the thing or service but on the ACT of the seller, transferor,
importer or lessor who is exclusively made liable for its timely payment although the burden of the tax is
borne b the ultimate consumer
Ad valorem tax the amount or sale thereof being based on GSP or gross receipts
Indirect tax may be SHIFTED or PASSED on to the buyer, transferee, or lessee of the goods, properties
or services as part of the purchase price in the absence of any showing that the transferee is exempt
from indirect tax (Sec. 105, 2nd par.)
o But the seller may choose to ABSORB the VAT and not pass it on or lower his mark-up to make
his price competitive

Statutory taxpayer: Person who SELLS, BARTERS, EXCHANGES, LEASES goods or services, RENDERS service and
IMPORTS goods
Person any individual or a trust, estate, partnership, corporation, joint venture, cooperative or
association (Sec. 4.105.1 RR 16-05)

IN THE COURSE OF TRADE OR BUSINESS (Sec. 105, 3rd par.)

General Rule: REGULAR CONDUCT or PURSUIT of a COMMERCIAL or an ECONOMIC activity, including
transactions INCIDENTAL thereto, by any person REGARDLESS OF WHETHER OR NOT THE PERSON ENGAGED
THEREIN IS A NON-STOCK, NONPROFIT PRIVATE ORGANIZATION (irrespective of the disposition of its net
income and whether or not it sell exclusively to members or their guests) OR GOVERNMENT ENTITY it
does not matter if taxpayer does not earn profits
o BIR Ruling 98-97: An option to buy, in the hands of a taxpayer who does not deal in options, is a
capital asset and the sale thereof gives rise to a capital gain. Since Read Rite does not deal in
leasehold rights and options in its ordinary course of trade or business, the pre-termination of
the leases and cancellation of the options to purchase will not be made in the ordinary course
of trade or business of Read Rite. Hence, your opinion that the pre-termination of the lease
and the cancellation of the options to purchase is not subject to VAT is hereby confirmed.

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o

VAT Ruling 444-88: Ruling on W/N sales of company consumer store where basic commodities
shall be sold at cost can be subject to VAT YES. The proposed sale transactions cannot qualify
for zero rating since they do not meet the conditions set under the NIRC. Instead, the activity,
in spite of the absence of profit and value-added to the goods, can be classified as one to be
undertaken by persons liable to VAT.

VAT Ruling 26-97: SMCs charges/billings to its subsidiaries for their use of utilities, common
facilities and services purely at cost and without any profit and being merely reimbursements
are not subject to VAT. The amounts charged are mere reimbursement of the expenses
incurred by SMC for and in behalf of the subsidiaries and no profit is made nor is there any
intention on the part of SMC to make profit from the transactions.

Reimbursement-of-cost transactions are VATABLE

F BIR Ruling 10-98: W/N TIPCO-BATAAN GROUP, INCORPORATED, which provides
technical, research, management and personnel assistance to its affiliates on a
reimbursement-of-cost basis is exempt from VAT. NO. Under Section 4.102-1 of the
same Rev. Regs. No. 7-95, the phrase "sale or exchange of services shall likewise
include, among others, the supply of technical service, assistance or services
rendered in connection with technical management or administration of any
scientific, industrial or commercial undertaking, project or scheme. Thus, as an entity
that renders services to its affiliated companies and receives payments for such
assistance, although on a reimbursement-of-cost basis, it is subject to VAT on such
services rendered
F

CIR v. CA and Commonwealth Management and Services Corp: Whether COMASERCO

was engaged in the sale of services, and thus liable to pay VAT thereon YES, liable.
COMASERCO contended that it was not engaged in the business of providing services
to Philamlife and its affiliates. COMASERCO was established to ensure operational
orderliness and administrative efficiency of Philamlife and its affiliates, and not in the
sale of services. Before the SC, COMASERCO contends that the term "in the course of
trade or business" requires that the "business" is carried on with a view to profit or
livelihood. It avers that the activities of the entity must be profit- oriented.
COMASERCO submits that it is not motivated by profit, as defined by its primary
purpose in the articles of incorporation, stating that it is operating "only on
reimbursement-of-cost basis, without any profit." Private respondent argues that
profit motive is material in ascertaining who to tax for purposes of determining
liability for VAT.
Contrary to COMASERCO's contention the above provision clarifies that even a nonstock, non-profit, organization or government entity, is liable to pay VAT on the sale
of goods or services. VAT is a tax on transactions, imposed at every stage of the
distribution process on the sale, barter, exchange of goods or property, and on the
performance of services, even in the absence of profit attributable thereto. The term
"in the course of trade or business" requires the regular conduct or pursuit of a
commercial or an economic activity, regardless of whether or not the entity is profitoriented. Hence, it is immaterial whether the primary purpose of a corporation
indicates that it receives payments for services rendered to its affiliates on a
reimbursement-on-cost basis only, without realizing profit, for purposes of
determining liability for VAT on services rendered. As long as the entity provides
service for a fee, remuneration or consideration, then the service rendered is subject
to VAT.

Lapanday Foods Corp. v. CIR: When a company that is engaged in managing,

promoting, administering or assisting in any business or activities of other
corporations or entities extends loan assistance to its affiliates, it shall be deemed to
have performed services incidental to its business. The loan assistance shall therefore
be considered performed in the course of trade or business.

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Hence, interest income generated from the loan assistance to its affiliates shall be
subject to VAT. This is also consistent with the rule that if the income from the main
business activity is subject to VAT, the incidental income shall also be subject to VAT.
Considering that the companys income from management services is VATable, the
interest income, being incidental income, shall also be subject to VAT.
The VAT applies notwithstanding the fact that the company does not profit from
lending to its affiliates because it only passes on to the affiliates the interest that is
charged by the bank from which the funds are sourced. The Tax Code defines sale of
service as the performance of all kinds of services for others for a fee, remuneration
or consideration. In BIR Ruling No. 10-98, the BIR emphasized that payments received
for services rendered to affiliates on reimbursement-of-cost basis, without intention
of realizing profits, is subject to VAT. As long as the entity provides a service for a fee,
remuneration or consideration, the service rendered is subject to VAT.
o

CIR v. Magsaysay Lines, Inc: Whether the sale by the National Development Company (NDC) of
five (5) of its vessels to the private respondents is subject to value-added tax NO. It was not
made in the course of trade or business.

Exceptions:
o Non-resident alien RENDERS SERVICE in the Philippines deemed made in the course of trade
or business even if the performance is NOT REGULAR
o

ISOLATED TRANSACTIONS even if it is only one transaction, it shall be considered as made in

the course of trade or business if it can be established that it will be the first of a series of
transactions
F VAT Ruling 207-90: Taxpayer contended that sale of technical services is made only to
one person, i.e., sale to Philcom (only one and isolated transaction), the same may
not be constituted as a sale made in the course of business. It contended further that
Section 2(j) of the VAT Revenue Regulations No. 5-87 defines "sale of service" as the
performance of all kinds of services for others for a fee, which means, to be taxable
as a business act, services must be made to more than one person since the word
"others" pertains to several persons/contractees rather than to only one person.
BIR ruled that whether or not a person is engaged in business is determined by his
intent for doing an act or series of acts. An initial or single act may be constituted
done in the course of business if the same is done with the intent of carrying on a
business.
"However, there may be a business without any sequence of acts, for if an
isolated transaction, which if repealed would be a transaction in a business,
is proved to have been undertaken with the intent that it should be the first
of several transactions, that is, with intent of carrying on a business, then it
is a first transaction in an existing business. For example, where a person
makes all necessary preparations to carry on the business of a wholesale
liquor dealer, and holds himself out and solicits trade as such, and makes
one sale without a license, intending to continue the business, he is
engaged in, or carrying on, the business within the meaning of the statute
regulating the business."
The taxpayer in this case has been engaged in communications business at the time it
contracted with PHILCOM. There is no necessity to prove its intent in selling technical
services to PHILCOM. It is more than apparent it sold its services while engaging in
worldwide communications business. That its transaction with PHILCOM was isolated
may not, however, detract from the fact that the same was entered into because it
was, as it is presently, its line of business.

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F

BIR Ruling 113-98: W/N the sale of a microwave backbone transmission network by
Liberty Broadcasting Network, Inc. (Liberty), being an isolated transaction, is not
subject to VAT. NO
The taxpayer claims that it is not engaged in the sale of goods or merchandise, nor
are you deriving any rental income from any of your properties, whether real or
personal. It also contended that because of the pressures on its business occasioned
by the need to remain competitive in the already crowded market require the
company to further expand its existing facilities to create new and more
technologically advanced services to your subscribers. For said purpose, the company
is constrained to raise funds and that to achieve this, it now intends to sell to another
wireless communications carrier (microwave backbone transmission network which
is comprised of various microwave equipment, cables, antennae, etc.).
The intended sale of the microwave backbone transmission network to another
wireless communications carrier is not in the course of your trade or business of
selling telecommunication services. Neither is it incidental thereto since the same
does not necessarily follow the primary function of selling telecommunication
services. Accordingly, since the sale of the microwave backbone transmission
network is just an isolated transaction, said sale is not subject to VAT. Moreover, the
subject sale shall not result in any input tax credit to the buyer.

Who is liable for VAT in GPPs? The GPP itself The distributed earning to the partners will no longer be subject
to VAT

Important features:
All person liable for VAT shall REGISTER with the appropriate Revenue District Officer
Two rates apply: 12% and 0%
A Vat-registered person is entitled to credit input taxes evidenced by a VAT invoice or OR against output
tax payable
All goods, properties and services are subject to VAT at ALL levels of distribution
Although the tax is levied at all stages, the total value of the goods is subject to tax only once
CIR ma, in certain cases, determine the appropriate tax base for purposes of the imposition and
collection of taxes
CIR may suspend the business operations and temporarily close the business establishment of a
taxpayer for violations of VAT laws/regulations
VAT returns shall be filed with and the tax paid to duly authorized agent banks, etc.

Sale of goods or properties

d ACTUAL SALE (Sec. 106A(1))
Goods or properties ALL TANGIBLE and INTANGIBLE objects which are capable of pecuniary
estimation and shall include:
o Real properties held primarily for sale to customers or held for lease in the ordinary course of
trade or business (See Sec. 4.106-3, RR 16-05)
F On INSTALLMENT PLAN sale of real property by a real estate dealer, the initial
payment of which in the year of sale DO NOT EXCEED 25% of the GSP

Subjects the real estate dealer to VAT on the INSTALLMENT PAYMENTS,

including interest and penalties, actually or constructively received by the
seller
F On DEFERRED PAYMENT BASIS sale of real property the initial payment of which
in the year of sale EXCEEDS 25% of the GSP

Treated as a cash sale thus the ENTIRE SELLING PRICE is taxable in the
month of sale
o Right or privilege to use patent, copyright, design or model, plan or secret formula or process,
goodwill, trademark, trade brand or other like property or right
o Right or privilege to use in the Philippines of an industrial, commercial or scientific equipment
o Right or privilege to use motion picture films, films, tapes, and discs

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o

Radio, television, satellite transmission and cable television time

Tax Base GROSS SELLING PRICE or GROSS VALUE in MONEY (Sec. 4.106-4, RR 16-05 as amended)
o DEFINITIONS:
F Gross selling price = total amount of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding the VAT
F Selling price = amount of consideration in a contract of sale between the buyer and
seller or the total price of the sale which may include cash or property and evidence
of indebtedness issued by the buyer, excluding the VAT
o Applicable GSP in case of:
F Real properties that which is stated in the sales document or the fair market value,
whichever is higher
F Real properties sold on installment plan where the zonal value/FMV is higher than the
consideration based on the ratio of actual collection of the consideration, exclusive
of the VAT, against the agreed consideration, exclusive of the VAT, appearing in the
Contract to Sell/Contract of Sale applied to the zonal value/fair market value of the
property at the time of the execution of the Contract to Sell/Contract of Sale at the
inception of the contract
o Sales returns, allowances and sales discounts (Sec. 106D) ALLOWABLE DEDUCTIONS FROM
THE GSP (Sec. 4.106-9, RR 16-05)
F Value of the goods/properties sold and subsequently returned or for which allowances
were granted by a VAT-registered person may be DEDUCTED from the gross sales or
receipts for the QUARTER in which a refund is made or a credit memo or refund is
issued.
F Sales discounts may be EXCLUDED from the gross sales WITHIN THE SAME QUARTER
it was GIVEN if:

They were granted and indicated in the invoice AT THE TIME OF SALE and

The grant does not depend upon the happening of future event

TRANSACTIONS DEEMED SALE (Sec. 106B NIRC and Sec. 4.106-7, RR 16-05 as amended)
The ff. transactions are included:
o Transfer, use or consumption NOT in the course of business of goods/properties ORIGINALLY
INTENDED for sale or for use in the course of business
F When the person withdraws goods for his PERSONAL USE
o Distribution or transfer to:
F SHAREHOLDERS or INVESTORS as share in the profits of the VAT-registered persons;
or

Property dividends and liquidating dividends shall be vatable based on the

zonal value or FMV at the time of distribution, whichever is applicable
F CREDITORS in payment of debt
o CONSIGNMENT of goods if the actual sale is NOT made within 60days following the date such
goods were consigned
F If consigned goods are returned by consignee with the 60-day period, they are not
deemed sold
o RETIREMENT from or CESSATION of business, with respect to INVENTORIES of taxable goods
existing as of such retirement or cessation
F ALL GOODS ON HAND whether capital goods, stock-in-trade, supplies or materials as
of the date of retirement or cessation
F Whether or not the business is CONTINUED by the new owner or successor
F Circumstances that will give rise to transactions deemed sale:

CHANGE OF OWNERSHIP of the business

Single proprietorship incorporates
Proprietor sell his entire business

DISSOLUTION OF PARTNERSHIP and CREATION OF A NEW ONE which takes

over the business

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Tax Base
o TRANSACTIONS DEEMED SALE
F General rule: MARKET VALUE of the goods deemed sold AS OF THE TIME OF
OCCURRENCE of the transaction
F Exception: Retirement or cessation of business = ACQUISITION COST or the
CURRENT MARKET PRICE, whichever is LOWER
o Transactions where the GSP IS UNREASONABLY LOWER THAN THE ACTUAL FMV = ACTUAL
MARKET VALUE
F The GSP is unreasonably lower if it is lower by more than 30% of the actual market
value of the same goods of the same quantity and quality sold in the immediate
locality on or nearest the date of sale

CHANGES IN OR CESSATION OF STATUS OF A VAT-REGISTERED PERSON (Sec. 106C and Sec. 4.106-8 RR 16-05 as
amended)
12% VAT shall apply to goods or properties originally intended for sale or use in business, and capital
goods which are existing as of the occurrence of the ff:
o CHANGE OF BUSINESS ACTIVITY from VAT taxable status to VAT-exempt status
o APPROVAL of a request for CANCELLATION of registration due to REVERSION to exempt
status
o APPROVAL of a request for CANCELLATION due to a desire to revert exempt status after lapse
of 3 CONSECUTIVE YEARS from the time of registration by a person who voluntarily registered
despite being exempt under Sec. 109(2) NIRC
o APPROVAL of a request for CANCELLATION of registration of who commenced business with
the expectation of gross sales or receipts exceeding P1.5M but who failed to exceed this
amount during the first 12mos of operation
12% VAT not applicable to the ff:
o CHANGE OF CONTROL of a corporation by the acquisition of the controlling interest of such
corporation b another stockholder or a group of stockholders. The goods or properties will not
be considered sold, bartered or exchanged despite the change in ownership interest in the
said corporation
o CHANGE in the TRADE or CORPORATE NAME of the business
o MERGER or CONSOLIDATION of corporations the unused tax input of the absorbed
corporation, as of the date of merger/consolidation, shall be absorbed by the surviving or new
corporation

Sale of services
d SALE OR EXCHANGE OF SERVICES (Sec. 108A and Sec. 4.108-2 RR 16-05) performance of ALL KINDS of
services in the Philippines for others for a FEE, REMUNERATION or CONSIDERATION, whether in cash or kind,
including those preformed or rendered by the ff:
Construction and service contractors
Stock, real estate, commercial, customs and immigration brokers
Lessors of property, whether real or personal
Persons engaged in warehousing services
Lessors or distributors of cinematographic films
Persons engaged in milling, processing, manufacturing or repacking goods for others
Proprietors, operators or keepers of hotels, motels, rest houses, pensions houses, inns, resorts,
theaters, and movie houses
Proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers
Dealers in securities
Lending investors
Transportation contractors on their transport of goods or cargoes, including persons who transport
goods or cargoes for hire and other domestic common carriers by land relative to their transport of
goods or cargoes
Common carriers by air and sea relative to their transport of passengers, goods or cargoes from one
place in the Philippines to another rplace in the Philippines
Sales of electricity by generation, transmission and/or distribution companies

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Franchise grantees of electric utilities, telephone and telegraph, radio and/or television broadcasting
and all other franchise grantees, except franchise grantees of radio and/or television broadcasting
whose annual gross receipts of the preceding year do not exceed P10M and franchise grantees of gas
and water utilities
Non-life insurance companies (except their crop insurance), including surety, fidelity, indemnity and
bonding companies
Similar services regardless of whether or not the performance thereof calls for the exercise or use of the
physical or mental faculties
Shall also include:
o The lease or the use of or the right or privilege to use any copyright, patent, design or model,
plan secret formula or process, goodwill, trademark, trade brand or other like property or right
o The lease of the use of, or the right to use of any industrial, commercial or scientific equipment
o The supply of scientific, technical, industrial or commercial knowledge or information
o The supply of any assistance that is ancillary and subsidiary to and is furnished as a means of
enabling the application or enjoyment of any such property, or right as is mentioned in
subparagraph (2) or any such knowledge or information as is mentioned in subparagraph (3)
o The supply of services by a nonresident person or his employee in connection with the use of
property or rights belonging to, or the installation or operation of any brand, machinery or
other apparatus purchased from such nonresident person
o The supply of technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking, venture,
project or scheme
o The lease of motion picture films, films, tapes and discs
o The lease or the use of or the right to use radio, television, satellite transmission and cable
television time

TAX BASE (Sec. 108A NIRC and Sec. 4.108-4 RR as amended) GROSS RECEIPTS derived from the sale or
exchange of services, including the use or lease of properties
Gross receipts = total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty, including the amount charged for materials supplied with
the services and deposits applied as payments for services rendered and advance payments actually or
constructively received during the taxable period for the services performed or to be performed for
another person, excluding VAT
o EXCEPTIONS: (Sec. 4.108-4 RR 16-05 as amended)
F AMOUNTS EARMARKED FOR PAYMENT TO UNRELATED 3RD PARTY those made to
settle an obligation of another person, e.g., customer or client, to the said third party,
which obligation is evidenced by the sales invoice/official receipt issued by said third
party to the obligor/debtor (e.g., customer or client of the payor of the obligation).

Unrelated 3rd party does NOT include taxpayer's

Employees
Partners
Affiliates (parent, subsidiary and other related companies)
Relatives by consanguinity or affinity within the fourth (4th) civil
degree
Trust fund where the taxpayer is the trustor, trustee or
beneficiary, even if covered by an agreement to the contrary

CIR v. Tours Specialists, Inc: Whether amounts received by a local tourist and
travel agency included in a package fee from tourists or foreign tour
agencies, intended or earmarked for hotel accommodations form part of
gross receipts subject to 3% contractor's tax.
evidence presented by the private respondent shows that the amounts
entrusted to it by the foreign tourist agencies to pay the room charges of
foreign tourists in local hotels were not diverted to its funds; this
arrangement was only an act of accommodation on the part of the private
respondent. This evidence was not refuted.

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In essence, the petitioner's assertion that the hotel room charges entrusted
to the private respondent were part of the package fee paid by foreign
tourists to the respondent is not correct. The evidence is clear to the effect
that the amounts entrusted to the private respondent were exclusively for
payment of hotel room charges of foreign tourists entrusted to it by foreign
travel agencies.
As demonstrated in the above-mentioned case, gross receipts subject to tax
under the Tax Code do not include monies or receipts entrusted to the
taxpayer which do not belong to them and do not redound to the
taxpayer's benefit; and it is not necessary that there must be a law or
regulation which would exempt such monies and receipts within the
meaning of gross receipts under the Tax Code.
Parenthetically, the room charges entrusted by the foreign travel agencies
to the private respondent do not form part of its gross receipts within the
definition of the Tax Code. The said receipts never belonged to the private
respondent. The private respondent never benefited from their payment to
the local hotels. As stated earlier, this arrangement was only to
accommodate the foreign travel agencies.
F

RECEIVED AS REIMBURSEMENT FOR ADVANCE PAYMENT on behalf of another which

DO NOT REDOUND TO THE BENEFIT of the payor those paid to a third (3rd) party
for a present or future obligation of said another party which obligation is evidenced
by a sales invoice/official receipt issued by the obligee/creditor to the obligor/debtor
(i.e., the aforementioned "another party") for the sale of goods or services by the
former to the latter.

Constructive receipts = the money consideration or its equivalent is placed at the control of the person
who rendered the service without restrictions by the payor. EXAMPLES:
o Deposit in banks which are made available to the seller of services without restrictions
o Issuance by the debtor of a notice to offset any debt or obligation and acceptance thereof by
the seller as payment for services rendered
o Transfer of the amounts retained by the payor to the account of the contractor

Importation of Goods
d TAX BASE (Sec. 107A)
TOTAL VALUE used by Bureau of Customs in determining tariff and customs duties + customs duties,
excise taxes, if any and other charges, such tax to be paid by the importer prior to the release of goods
from customs custody
If customs duties are determined on the basis of the QUANTITY or VOLUME of the goods LANDED
COST + excise taxes, if any
d

TRANSFER OF GOODS BY TAX-EXEMPT PERSONS (Sec. 107B)

Purchasers, transferees or recipients shall be considered as importers and shall be liable for any internal
revenue tax on such importation
Tax due shall be a lien on the goods superior to all charges or liens on the goods, irrespective of the
possessor thereof

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Transactions subject to Zero-Rated VAT

Zero-rated v. exempt transactions
d INPUT TAX CREDIT
A zero-rated transaction is a taxable transaction for VAT purposes but it shall not result in output tax.
Input tax related to such transaction shall be available as a TAX CREDIT or REFUND (Sec. 4.106-5, RR 1605)
A VAT-exempt transaction is a not subject to output tax and the seller is NOT allowed any input tax
credit on purchasers (Sec. 4.109-1, RR 16-05)
CIR v. Cebu Toyo Corp: Taxable transactions are those transactions which are subject to value-added tax
either at the rate of ten percent (10%) or zero percent (0%). In taxable transactions, the seller shall be
entitled to tax credit for the value-added tax paid on purchases and leases of goods, properties or
services.
An exemption means that the sale of goods, properties or services and the use or lease of properties is
not subject to VAT (output tax) and the seller is not allowed any tax credit on VAT (input tax) previously
paid. The person making the exempt sale of goods, properties or services shall not bill any output tax to
his customers because the said transaction is not subject to VAT. Thus, a VAT-registered purchaser of
goods, properties or services that are VAT-exempt, is not entitled to any input tax on such purchases
despite the issuance of a VAT invoice or receipt.
Now, having determined that respondent is engaged in taxable transactions subject to VAT, let us then
proceed to determine whether it is subject to 10% or zero (0%) rate of VAT. To begin with, it must be
recalled that generally, sale of goods and supply of services performed in the Philippines are taxable at
the rate of 10%. However, export sales, or sales outside the Philippines, shall be subject to value-added
tax at 0% if made by a VAT-registered person. Under the value-added tax system, a zero-rated sale by a
VAT-registered person, which is a taxable transaction for VAT purposes, shall not result in any output
tax. However, the input tax on his purchase of goods, properties or services related to such zero-rated
sale shall be available as tax credit or refund.
In principle, the purpose of applying a zero percent (0%) rate on a taxable transaction is to exempt the
transaction completely from VAT previously collected on inputs. It is thus the only true way to ensure
that goods are provided free of VAT. While the zero rating and the exemption are computationally the
same, they actually differ in several aspects, to wit:
(a) A zero-rated sale is a taxable transaction but does not result in an output tax while an
exempted transaction is not subject to the output tax;
(b) The input VAT on the purchases of a VAT-registered person with zero-rated sales may be
allowed as tax credits or refunded while the seller in an exempt transaction is not entitled to
any input tax on his purchases despite the issuance of a VAT invoice or receipt.
(c) Persons engaged in transactions which are zero-rated, being subject to VAT, are required to
register while registration is optional for VAT-exempt persons.
d

CASES:

PEZA-registered enterprises have 2 options: (1) income tax holiday under EO226 + not VAT-exempt +
entitled to input tax credit; or (2) 5% of gross income in lieu of all other taxes + no more VAT
o CIR v. Cebu Toyo Corp: CIR argued that Cebu Toyo being a PEZA-registered enterprise is VAT
exempt thus not entitled to credit or refund. Cebu Toyo argued that it availed of the income
tax holiday under EO 226 making it exempt from income tax but not from other taxes such as
VAT. Hence, its export sales are subject to 0%.
Petitioners contention that respondent is not entitled to refund for being exempt from VAT is
untenable. This argument turns a blind eye to the fiscal incentives granted to PEZA-registered
enterprises under Section 23 of Rep. Act No. 7916. Note that under said statute, the
respondent had two options with respect to its tax burden. It could avail of an income tax
holiday pursuant to provisions of E.O. No. 226, thus exempt it from income taxes for a number
of years but not from other internal revenue taxes such as VAT; or it could avail of the tax

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exemptions on all taxes, including VAT under P.D. No. 66 and pay only the preferential tax rate
of 5% under Rep. Act No. 7916. Both the Court of Appeals and the Court of Tax Appeals found
that respondent availed of the income tax holiday for four (4) years starting from August 7,
1995, as clearly reflected in its 1996 and 1997 Annual Corporate Income Tax Returns, where
respondent specified that it was availing of the tax relief under E.O. No. 226. Hence,
respondent is not exempt from VAT and it correctly registered itself as a VAT taxpayer. In fine,
it is engaged in taxable rather than exempt transactions.
o

CIR v. Seagate Technology (Phils): If it avails itself of PD 66, notwithstanding the provisions of
other laws to the contrary, respondent shall not be subject to internal revenue laws and
regulations for raw materials, supplies, articles, equipment, machineries, spare parts and
wares, except those prohibited by law, brought into the zone to be stored, broken up,
repacked, assembled, installed, sorted, cleaned, graded or otherwise processed, manipulated,
manufactured, mixed or used directly or indirectly in such activities. Even so, respondent
would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and
financial assistance; and exemption from export taxes, local taxes and licenses.
Comparatively, the same exemption from internal revenue laws and regulations applies if EO
226 is chosen. Under this law, respondent shall further be entitled to an income tax holiday;
additional deduction for labor expense; simplification of customs procedure; unrestricted use
of consigned equipment; access to a bonded manufacturing warehouse system; privileges for
foreign nationals employed; tax credits on domestic capital equipment, as well as for taxes and
duties on raw materials; and exemption from contractors taxes, wharfage dues, taxes and
duties on imported capital equipment and spare parts, export taxes, duties, imposts and fees,
local taxes and licenses, and real property taxes.
A privilege available to respondent under the provision in RA 7227 on tax and duty-free
importation of raw materials, capital and equipment1 -- is, ipso facto, also accorded to the
zone under RA 7916. Furthermore, the latter law -- notwithstanding other existing laws, rules
and regulations to the contrary -- extends to that zone the provision stating that no local or
national taxes shall be imposed therein. No exchange control policy shall be applied; and free
markets for foreign exchange, gold, securities and future shall be allowed and maintained.
Banking and finance shall also be liberalized under minimum Bangko Sentral regulation with
the establishment of foreign currency depository units of local commercial banks and offshore
banking units of foreign banks.
In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locallyproduced materials used as inputs. Aside from the other incentives possibly already granted to
it by the Board of Investments, it also enjoys preferential credit facilities and exemption from
PD 1853.
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax
treatment. It is not subject to internal revenue laws and regulations and is even entitled to tax
credits. The VAT on capital goods is an internal revenue tax from which petitioner as an entity
is exempt. Although the transactions involving such tax are not exempt, petitioner as a VATregistered person, however, is entitled to their credits.
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. 4 The
tax rate is set at zero. When applied to the tax base, such rate obviously results in no tax
chargeable against the purchaser. The seller of such transactions charges no output tax, but
can claim a refund of or a tax credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to
persons or entities whose exemption under special laws or international agreements to which

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the Philippines is a signatory effectively subjects such transactions to a zero rate. Again, as
applied to the tax base, such rate does not yield any tax chargeable against the purchaser. The
seller who charges zero output tax on such transactions can also claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of
relief that results from either one of them is not.
Applying the destination principle to the exportation of goods, automatic zero rating is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales. Effective zero rating, on the contrary, is intended to
benefit the purchaser who, not being directly and legally liable for the payment of the VAT, will
ultimately bear the burden of the tax shifted by the suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the
tax. But in an exemption there is only partial relief, because the purchaser is not allowed any
tax refund of or credit for input taxes paid.
Exempt Transaction >and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties
to the transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard
to the tax status -- VAT-exempt or not -- of the party to the transaction. Indeed, such
transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit
for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the
Tax Code, a special law or an international agreement to which the Philippines is a signatory,
and by virtue of which its taxable transactions become exempt from the VAT. Such party is also
not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer.
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or
passed on by the seller to the purchaser of the goods, properties or services. While
the liability is imposed on one person, theburden may be passed on to another. Therefore, if a
special law merely exempts a party as a seller from its direct liability for payment of the VAT,
but does not relieve the same party as a purchaser from its indirect burden of the VAT shifted
to it by its VAT-registered suppliers, the purchase transaction is not exempt. Applying this
principle to the case at bar, the purchase transactions entered into by respondent are not VATexempt.
Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides
that those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law
under which respondent was registered. The purchase transactions it entered into are,
therefore, not VAT-exempt. These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10
percent, depending again on the application of the destination principle.
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country
-- for use or consumption outside the Philippines, these shall be subject to 0 percent. If entered
into with a purchaser for use or consumption in the Philippines, then these shall be subject to
10 percent, unless the purchaser is exempt from the indirect burden of the VAT, in which case
it shall also be zero-rated.

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Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero.
Its exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero
rate, because the ecozone within which it is registered is managed and operated by the PEZA
as a separate customs territory. This means that in such zone is created the legal fiction of
foreign territory. Under the cross-border principle of the VAT system being enforced by the
Bureau of Internal Revenue (BIR), no VAT shall be imposed to form part of the cost of goods
destined for consumption outside of the territorial border of the taxing authority. If exports of
goods and services from the Philippines to a foreign country are free of the VAT, then the same
rule holds for such exports from the national territory -- except specifically declared areas -- to
an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VATregistered person in the customs territory are deemed imports from a foreign country. An
ecozone -- indubitably a geographical territory of the Philippines -- is, however, regarded in law
as foreign soil. This legal fiction is necessary to give meaningful effect to the policies of the
special law creating the zone. If respondent is located in an export processing zone within that
ecozone, sales to the export processing zone, even without being actually exported, shall in
fact be viewed as constructively exported under EO 226. Considered as export sales, such
purchase transactions by respondent would indeed be subject to a zero rate.

The SC created a fiction. It likened the ecozone to a foreign territory

o This Court agrees, however, that PEZA-registered enterprises, which would necessarily be
located within ECOZONES, are VAT-exempt entities, not because of Section 24 of Rep. Act No.
7916, as amended, which imposes the five percent (5%) preferential tax rate on gross income of
PEZA-registered enterprises, in lieu of all taxes; but, rather, because of Section 8 of the same
statute which establishes the fiction that ECOZONES are foreign territory.
It is important to note herein that respondent Toshiba is located within an ECOZONE. An
ECOZONE or a Special Economic Zone has been described as
. . . [S]elected areas with highly developed or which have the potential to be
developed into agro-industrial, industrial, tourist, recreational, commercial, banking,
investment and financial centers whose metes and bounds are fixed or delimited by
Presidential Proclamations. An ECOZONE may contain any or all of the following:
industrial estates (IEs), export processing zones (EPZs), free trade zones and
tourist/recreational centers.
The national territory of the Philippines outside of the proclaimed borders of the ECOZONE
shall be referred to as the Customs Territory.
Section 8 of Rep. Act No. 7916, as amended, mandates that the PEZA shall manage and
operate the ECOZONES as a separate customs territory; thus, creating the fiction that the
ECOZONE is a foreign territory. As a result, sales made by a supplier in the Customs Territory to
a purchaser in the ECOZONE shall be treated as an exportation from the Customs Territory.
Conversely, sales made by a supplier from the ECOZONE to a purchaser in the Customs
Territory shall be considered as an importation into the Customs Territory.
Given the preceding discussion, what would be the VAT implication of sales made by a supplier
from the Customs Territory to an ECOZONE enterprise?
The Philippine VAT system adheres to the Cross Border Doctrine, according to which, no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free of VAT; while, those destined for use or
consumption within the Philippines shall be imposed with ten percent (10%) VAT.

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Applying said doctrine to the sale of goods, properties, and services to and from the
ECOZONES, the BIR issued Revenue Memorandum Circular (RMC) No. 74-99, on 15 October
1999. Of particular interest to the present Petition is Section 3 thereof, which reads
SECTION 3. Tax Treatment Of Sales Made By a VAT Registered Supplier from The
Customs Territory, To a PEZA Registered Enterprise.
(1) If the Buyer is a PEZA registered enterprise which is subject to the 5% special tax
regime, in lieu of all taxes, except real property tax, pursuant to R.A. No. 7916, as
amended:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC
and Sec. 23 of R.A. No. 7916, in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of service. This shall be treated subject to zero percent (0%) VAT under
the "cross border doctrine"of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(2) If Buyer is a PEZA registered enterprise which is not embraced by the 5% special
tax regime, hence, subject to taxes under the NIRC, e.g., Service Establishments
which are subject to taxes under the NIRC rather than the 5% special tax regime:
(a) Sale of goods (i.e., merchandise). This shall be treated as indirect export hence,
considered subject to zero percent (0%) VAT, pursuant to Sec. 106(A)(2)(a)(5), NIRC
and Sec. 23 of R.A. No. 7916 in relation to ART. 77(2) of the Omnibus Investments
Code.
(b) Sale of Service. This shall be treated subject to zero percent (0%) VAT under
the "cross border doctrine" of the VAT System, pursuant to VAT Ruling No. 032-98
dated Nov. 5, 1998.
(3) In the final analysis, any sale of goods, property or services made by a VAT
registered supplier from the Customs Territory to any registered enterprise operating
in the ecozone, regardless of the class or type of the latters PEZA registration, is
actually qualified and thus legally entitled to the zero percent (0%) VAT. Accordingly,
all sales of goods or property to such enterprise made by a VAT registered supplier
from the Customs Territory shall be treated subject to 0% VAT, pursuant to Sec.
106(A)(2)(a)(5), NIRC, in relation to ART. 77(2) of the Omnibus Investments Code,
while all sales of services to the said enterprises, made by VAT registered suppliers
from the Customs Territory, shall be treated effectively subject to the 0% VAT,
pursuant to Section 108(B)(3), NIRC, in relation to the provisions of R.A. No. 7916 and
the "Cross Border Doctrine" of the VAT system.
This Circular shall serve as a sufficient basis to entitle such supplier of goods, property or
services to the benefit of the zero percent (0%) VAT for sales made to the aforementioned
ECOZONE enterprises and shall serve as sufficient compliance to the requirement for prior
approval of zero-rating imposed by Revenue Regulations No. 7-95 effective as of the date of
the issuance of this Circular.
Indubitably, no output VAT may be passed on to an ECOZONE enterprise since it is a VATexempt entity. The VAT treatment of sales to it, however, varies depending on whether the
supplier from the Customs Territory is VAT-registered or not.
Sales of goods, properties and services by a VAT-registered supplier from the Customs
Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made by a
VAT-registered supplier, they shall be subject to VAT at zero percent (0%). In zero-rated
transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,
making it internationally competitive by allowing it to credit/refund the input VAT attributable
to its export sales.

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Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or unregistered supplier
would only be exempt from VAT and the supplier shall not be able to claim credit/refund of its
input VAT.
Even conceding, however, that respondent Toshiba, as a PEZA-registered enterprise, is a VATexempt entity that could not have engaged in a VAT-taxable business, this Court still believes,
given the particular circumstances of the present case, that it is entitled to a credit/refund of
its input VAT.
o

CIR v. Sekusui Jushi Phils: An entity registered with the PEZA as an ecozone may be covered by
the VAT system. Section 23 of Republic Act 7916, as amended, gives a PEZA-registered
enterprise the option to choose between two fiscal incentives: a) a five percent preferential
tax rate on its gross income under the said law; or b) an income tax holiday provided under
Executive Order No. 226 or the Omnibus Investment Code of 1987, as amended. If the entity
avails itself of the five percent preferential tax rate under the first scheme, it is exempt from all
taxes, including the VAT; under the second, it is exempt from income taxes for a number of
years, but not from other national internal revenue taxes like the VAT.
The CA and CTA found that respondent had availed itself of the fiscal incentive of an income
tax holiday under Executive Order No. 226. This Court respects that factual finding. Absent a
sufficient showing of error, findings of the CTA as affirmed by the CA are deemed
conclusive. Moreover, a perusal of the pleadings and supporting documents before us
indicates that when it registered as a VAT-entity -- a fact admitted by the parties -- respondent
intended to avail itself of the income tax holiday. Verily, being a question of fact, the type of
fiscal incentive chosen cannot be a subject of this Petition, which should raise only questions of
law.
By availing itself of the income tax holiday, respondent became subject to the VAT. It correctly
registered as a VAT taxpayer, because its transactions were not VAT-exempt.
Notably, while an ecozone is geographically within the Philippines, it is deemed a separate
customs territory and is regarded in law as foreign soil. Sales by suppliers from outside the
borders of the ecozone to this separate customs territory are deemed as exports and treated
as export sales. These sales are zero-rated or subject to a tax rate of zero percent.
Notwithstanding the fact that its purchases should have been zero-rated, respondent was able
to prove that it had paid input taxes in the amount of P4,377,102.26. The CTA found, and the CA
affirmed, that this amount was substantially supported by invoices and Official Receipts; and
petitioner has not challenged the computation. Accordingly, this Court upholds the findings of
the CTA and the CA.
On the other hand, since 100 percent of the products of respondent are exported, all its
transactions are deemed export sales and are thus VAT zero-rated. It has been shown that
respondent has no output tax with which it could offset its paid input tax. Since the subject
input tax it paid for its domestic purchases of capital goods and services remained unutilized, it
can claim a refund for the input VAT previously charged by its suppliers. The amount
of P4,377,102.26 is excess input taxes that justify a refund.

Contex Corp. v. CIR: Exemptions from VAT are granted by express provision of the Tax Code or
special laws. Under VAT, the transaction can have preferential treatment in the following
ways:
(a) VAT Exemption. An exemption means that the sale of goods or properties
and/or services and the use or lease of properties is not subject to VAT (output tax)
and the seller is not allowed any tax credit on VAT (input tax) previously paid. This is a
case wherein the VAT is removed at the exempt stage (i.e., at the point of the sale,
barter or exchange of the goods or properties).
The person making the exempt sale of goods, properties or services shall not bill any
output tax to his customers because the said transaction is not subject to VAT. On

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the other hand, a VAT-registered purchaser of VAT-exempt goods/properties or
services which are exempt from VAT is not entitled to any input tax on such purchase
despite the issuance of a VAT invoice or receipt.
(b) Zero-rated Sales. These are sales by VAT-registered persons which are subject
to 0% rate, meaning the tax burden is not passed on to the purchaser. A zero-rated
sale by a VAT-registered person, which is a taxable transaction for VAT purposes,
shall not result in any output tax. However, the input tax on his purchases of goods,
properties or services related to such zero-rated sale shall be available as tax credit or
refund in accordance with these regulations.
Under Zero-rating, all VAT is removed from the zero-rated goods, activity or firm. In contrast,
exemption only removes the VAT at the exempt stage, and it will actually increase, rather than
reduce the total taxes paid by the exempt firms business or non-retail customers. It is for this
reason that a sharp distinction must be made between zero-rating and exemption in
designating a value-added tax.
Apropos, the petitioners claim to VAT exemption in the instant case for its purchases of
supplies and raw materials is founded mainly on Section 12 (b) and (c) of Rep. Act No. 7227,
which basically exempts them from all national and local internal revenue taxes, including VAT
and Section 4 (A)(a) of BIR Revenue Regulations No. 1-95.
On this point, petitioner rightly claims that it is indeed VAT-Exempt and this fact is not
controverted by the respondent. In fact, petitioner is registered as a NON-VAT taxpayer per
Certificate of Registration issued by the BIR. As such, it is exempt from VAT on all its sales and
importations of goods and services.
Petitioners claim, however, for exemption from VAT for its purchases of supplies and raw
materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered entities
can claim Input VAT Credit/Refund.
The point of contention here is whether or not the petitioner may claim a refund on the Input
VAT erroneously passed on to it by its suppliers.
While it is true that the petitioner should not have been liable for the VAT inadvertently passed
on to it by its supplier since such is a zero-rated sale on the part of the supplier, the petitioner
is not the proper party to claim such VAT refund.
Since the transaction is deemed a zero-rated sale, petitioners supplier may claim an Input VAT
credit with no corresponding Output VAT liability. Congruently, no Output VAT may be passed
on to the petitioner.
AUTOMATICALLY ZERO-RATED TRANSACTIONS
d SALE OF GOODS AND PROPERTIES (Sec. 106A(2)(1), (2), (4) and (b))
EXPORT SALES
o Sale and actual shipment of goods FROM THE Philippines TO A FOREIGN COUNTRY,
irrespective of any shipping arrangement that may be agreed upon which may influence or
determine the transfer of ownership of the goods so exported
F Paid for in acceptable foreign currency or its equivalent in goods or services
F Accounted for in accordance with the rules and regulations of the BSP
o Sale of RAW MATERIALS or PACKAGING MATERIALS to a NONRESIDENT BUYER for delivery to
a RESIDENT LOCAL EXPORT-ORIENTED ENTERPRISE to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyers goods
F Paid for in acceptable foreign currency
F Accounted for in accordance with the rules and regulations of the BSP
o Sale of GOLD to the BSP

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FOREIGN CURRENCY DENOMINATED SALE sale to a NONRESIDENT of goods, except those mentioned
in Secs. 149 and 150, assembled or manufactured IN THE PHILIPPINES for DELIVERY to a RESIDENT in the
Philippines
o Paid for in acceptable foreign currency or its equivalent in goods or services
o Accounted for in accordance with the rules and regulations of the BSP

SALE OF SERVICES
TRANSACTIONS COVERED (Sec. 108B(1), (2), (6) and (7)) those services PERFORMED IN THE PHILS.
o Processing, manufacturing or repacking goods FOR OTHER PERSONS DOING BUSINESS
OUTSIDE THE Philippines which goods are subsequently exported
F Paid for in acceptable foreign currency or its equivalent in goods or services
F Accounted for in accordance with the rules and regulations of the BSP
o Services, other than processing, manufacturing or repacking, rendered to a (1) PERSON
ENGAGED IN BUSINESS CONDUCTED OUTSIDE THE PHILS. or to a (2) NONRESIDENT PERSON
NOT ENGAGED IN BUSINESS WHO IS OUTSIDE THE PHILS. when the services are performed
F Paid for in acceptable foreign currency or its equivalent in goods or services
F Accounted for in accordance with the rules and regulations of the BSP
o TRANSPORT of PASSENGERS or CARGO by AIR or SEA from the PHILS. to a FOREIGN COUNTRY
o Sale of POWER or FUEL generated through RENEWABLE SOURCES OF ENERGY, such as, but
not limited to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other
emerging energy sources using technologies such as fuel cells and hydrogen fuels
CASES:
o CIR v. Placer Dome Technical Services (Phils.), Inc citing CIR v. American Express Intl Inc: Yet
even as services may be subject to VAT, our tax laws extend the benefit of zero-rating the VAT
due on certain services. The aforementioned Section 102(b) of the 1986 NIRC activates such
zero-rating on two categories of transactions: (1) Processing, manufacturing or repacking
goods for other persons doing business outside the Philippines which goods are subsequently
exported, where the services are paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP; and (2) services other than those
mentioned in the preceding subparagraph, the consideration for which is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of
the BSP.
Obviously, it is the second category that begs for further explication, owing to its apparently
broad scope, covering as it does "services other than those mentioned in the preceding
subparagraph." Yet, as found by the Court in American Express, such broad scope did not
mean that Section 102(b) is vague, thus:
The law is very clear. Under the last paragraph [of Section 102(b)], services
performed by VAT-registered persons in the Philippines (other than the processing,
manufacturing or repacking of goods for persons doing business outside the
Philippines), when paid in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP, are zero-rated.
Since Section 102(b) is, in fact, "very clear," the Court declared that any resort to statutory
construction or interpretation was unnecessary.
As mentioned at the outset, Section 102(b)(2) of the Tax Code is very clear.
Therefore, no statutory construction or interpretation is needed. Neither can
conditions or limitations be introduced where none is provided for. Rewriting the law
is a forbidden ground that only Congress may tread upon.
The Court may not construe a statute that is free from doubt. "[W]here the law
speaks in clear and categorical language, there is no room for interpretation. There is
only room for application." The Court has no choice but to "see to it that its mandate
is obeyed."
It was from the awareness that Section 102(b) is free from ambiguity in providing so broad an
extension of the zero-rated benefit on VAT-registered persons performing services that the
Court in American Express proceeded to consider the same Section 4.102-2(b)(2) of Revenue

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Regulation No. 5-96 now cited by petitioner. The Court in American Express explained that
Revenue Regulation No. 5-96 had amended Revenue Regulation No. 7-95, Section 4.102-2 of
which had retained the broad language of Section 102(b) in defining "transactions subject to
zero-rate," adding only, by way of specific example, the phrase "those [services] rendered by
hotels and other service establishments." However, the amendatory Revenue Regulation No.
5-96 opted for a more specific approach, providing, by way of example, an enumeration of
those services contemplated as zero-rated.31 In the present case, it is because of such
enumeration that petitioner now argues that "respondents services likewise do not fall under
the second category mentioned in Section 4.102-2(b)(2) [as amended by Revenue Regulation
No. 5-96], because they are not similar to project studies, information services, engineering
and architectural designs which are destined to be consumed abroad by non-resident foreign
clients.
However, the Court in American Express clearly rebuffed a similar contention.
Aside from the already scopious coverage of services in Section 4.102-2(b)(2) of RR 795, the amendment introduced by RR 5-96 further enumerates specific services
entitled to zero rating. Although superfluous, these sample services are meant to be
merely illustrative. In this provision, the use of the term "as well as" is not restrictive.
As a prepositional phrase with an adverbial relation to some other word, it simply
means "in addition to, besides, also or too."
Neither the law nor any of the implementing revenue regulations aforequoted
categorically defines or limits the services that may be sold or exchanged for a fee,
remuneration or consideration. Rather, both merely enumerate the items of service
that fall under the term "sale or exchange of services."
xxxx
The canon of statutory construction known as ejusdem generis or "of the same kind
or specie" does not apply to Section 4.102-2(b)(2) of RR 7-95 as amended by RR 5-96.
First, although the regulatory provision contains an enumeration of particular or
specific words, followed by the general phrase "and other similar services," such
words do not constitute a readily discernible class and are patently not of the same
kind. Project studies involve investments or marketing; information services focus on
data technology; engineering and architectural designs require creativity. Aside from
calling for the exercise or use of mental faculties or perhaps producing written
technical outputs, no common denominator to the exclusion of all others
characterizes these three services. Nothing sets them apart from other and similar
general services that may involve advertising, computers, consultancy, health care,
management, messengerial work to name only a few.
Second, there is the regulatory intent to give the general phrase "and other similar
services" a broader meaning. Clearly, the preceding phrase "as well as" is not meant
to limit the effect of "and other similar services."
Third, and most important, the statutory provision upon which this regulation is
based is by itself not restrictive. The scope of the word "services" in Section 102(b)(2)
of the [1986 NIRC] is broad; it is not susceptible of narrow interpretation. (Emphasis
supplied)
The Court in American Express recognized the existence of the contrary holding in VAT Ruling
No. 040-98, now relied upon by petitioner especially as he states that the zero-rating applied
only when the services are destined for consumption abroad. American Express minced no
words in criticizing said ruling.
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level, rendered by the BIR commissioner upon request of a taxpayer
to clarify certain provisions of the VAT law. As correctly held by the CA, when this

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ruling states that the service must be "destined for consumption outside of the
Philippines" in order to qualify for zero rating, it contravenes both the law and the
regulations issued pursuant to it. This portion of VAT Ruling No. 040-98 is clearly ultra
vires and invalid.
Although "[i]t is widely accepted that the interpretation placed upon a statute by the
executive officers, whose duty is to enforce it, is entitled to great respect by the
courts," this interpretation is not conclusive and will have to be "ignored if judicially
found to be erroneous" and "clearly absurd x x x or improper." An administrative
issuance that overrides the law it merely seeks to interpret, instead of remaining
consistent and in harmony with it, will not be countenanced by this Court.(Emphasis
supplied)
Petitioner presently invokes the "destination principle," citing that [r]espondents services,
while rendered to a non-resident foreign corporation, are not destined to be consumed
abroad. Hence, the onus of taxation of the revenue arising therefrom, for VAT purposes, is also
within the Philippines. Yet the Court in American Express debunked this argument when it
rebutted the theoretical underpinnings of VAT Ruling No. 040-98, particularly its reliance on
the "destination principle" in taxation:
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country
where they are consumed. Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a
particular type of service with the consumption of its output abroad. In the present
case, the facilitation of the collection of receivables is different from the utilization or
consumption of the outcome of such service. While the facilitation is done in the
Philippines, the consumption is not. Respondent renders assistance to its foreign
clients the ROCs outside the country by receiving the bills of service
establishments located here in the country and forwarding them to the ROCs
abroad. The consumption contemplated by law, contrary to petitioner's
administrative interpretation, does not imply that the service be done abroad in
order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to
services, the term means the performance or "successful completion of a contractual
duty, usually resulting in the performer's release from any past or future liability x x
x" The services rendered by respondent are performed or successfully completed
upon its sending to its foreign client the drafts and bills it has gathered from service
establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when
their destination is determined. Instead, there can only be a "predetermined end of a
course" when determining the service "location or position x x x for legal
purposes." Respondent's facilitation service has no physical existence, yet takes
place upon rendition, and therefore upon consumption, in the Philippines. Under the
destination principle, as petitioner asserts, such service is subject to VAT at the rate
of 10 percent.
xxxx
However, the law clearly provides for an exception to the destination principle; that
is, for a zero percent VAT rate for services that are performed in the Philippines, "paid
for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the [BSP]." Thus, for the supply of service to be zero-rated as an
exception, the law merely requires that first, the service be performed in the
Philippines; second, the service fall under any of the categories in Section 102(b) of
the Tax Code; and, third, it be paid in acceptable foreign currency accounted for in
accordance with BSP rules and regulations. (Emphasis supplied)

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xxxx
Again, contrary to petitioner's stand, for the cost of respondent's service to be zerorated, it need not be tacked in as part of the cost of goods exported. The law neither
imposes such requirement nor associates services with exported goods. It simply
states that the services performed by VAT-registered persons in the Philippines
services other than the processing, manufacturing or repacking of goods for persons
doing business outside this country if paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zerorated. The service rendered by respondent is clearly different from the product that
arises from the rendition of such service. The activity that creates the income must
not be confused with the main business in the course of which that income is
realized. (Emphasis supplied)
xxxx
The law neither makes a qualification nor adds a condition in determining the tax
situs of a zero-rated service. Under this criterion, the place where the service is
rendered determines the jurisdiction to impose the VAT. Performed in the
Philippines, such service is necessarily subject to its jurisdiction, for the State
necessarily has to have "a substantial connection" to it, in order to enforce a zero
rate. The place of payment is immaterial; much less is the place where the output of
the service will be further or ultimately used.
o

CIR v. Burmeister & Wain Scandinavian Contractor Mindanao, Inc: In insisting that its services
should be zero-rated, respondent claims that it complied with the requirements of the Tax
Code for zero rating under the second paragraph of Section 102(b). Respondent asserts that
(1) the payment of its service fees was in acceptable foreign currency, (2) there was inward
remittance of the foreign currency into the Philippines, and (3) accounting of such remittance
was in accordance with BSP rules. Moreover, respondent contends that its services which
"constitute the actual operation and management of two (2) power barges in Mindanao" are
not "even remotely similar to project studies, information services and engineering and
architectural designs under Section 4.102-2(b)(2) of Revenue Regulations No. 5-96." As such,
respondents services need not be "destined to be consumed abroad in order to be VAT zerorated."
Respondent is mistaken.
The Tax Code not only requires that the services be other than "processing, manufacturing or
repacking of goods" and that payment for such services be in acceptable foreign currency
accounted for in accordance with BSP rules. Another essential condition for qualification to
zero-rating under Section 102(b)(2) is that the recipient of such services is doing business
outside the Philippines. While this requirement is not expressly stated in the second paragraph
of Section 102(b), this is clearly provided in the first paragraph of Section 102(b) where the
listed services must be "for other persons doing business outside the Philippines." The phrase
"for other persons doing business outside the Philippines" not only refers to the services
enumerated in the first paragraph of Section 102(b), but also pertains to the general term
"services" appearing in the second paragraph of Section 102(b). In short, services other than
processing, manufacturing, or repacking of goods must likewise be performed for persons
doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of
the "other services" are both doing business in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can
avoid paying the VAT by simply stipulating payment in foreign currency inwardly remitted by
the recipient of services. To interpret Section 102(b)(2) to apply to a payer-recipient of services
doing business in the Philippines is to make the payment of the regular VAT under Section
102(a) dependent on the generosity of the taxpayer. The provider of services can choose to
pay the regular VAT or avoid it by stipulating payment in foreign currency inwardly remitted by
the payer-recipient. Such interpretation removes Section 102(a) as a tax measure in the Tax

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Code, an interpretation this Court cannot sanction. A tax is a mandatory exaction, not a
voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules,
the law clearly envisions the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines can be required under BSP rules to
pay in acceptable foreign currency for their purchase of goods or services from the Philippines.
In a domestic transaction, where the provider and recipient of services are both doing business
in the Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the payerrecipient of services is doing business outside the Philippines. Under BSP rules, the proceeds of
export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to
require the provider of services under Section 102(b) (1) and (2) to account for the foreign
currency proceeds to the BSP. The same rationale does not apply if the provider and recipient
of the services are both doing business in the Philippines since their transaction is not in the
nature of an export sale even if payment is denominated in foreign currency.
Further, when the provider and recipient of services are both doing business in the Philippines,
their transaction falls squarely under Section 102(a) governing domestic sale or exchange of
services. Indeed, this is a purely local sale or exchange of services subject to the regular VAT,
unless of course the transaction falls under the other provisions of Section 102(b).
Thus, when Section 102(b)(2) speaks of "[s]ervices other than those mentioned in the
preceding subparagraph," the legislative intent is that only the services are different between
subparagraphs 1 and 2. The requirements for zero-rating, including the essential condition that
the recipient of services is doing business outside the Philippines, remain the same under both
subparagraphs.
Significantly, the amended Section 108(b) [previously Section 102(b)] of the present Tax Code
clarifies this legislative intent. Expressly included among the transactions subject to 0% VAT are
"[s]ervices other than those mentioned in the [first] paragraph [of Section 108(b)] rendered to
a person engaged in business conducted outside the Philippines or to a nonresident person
not engaged in business who is outside the Philippines when the services are performed, the
consideration for which is paid for in acceptable foreign currency and accounted for in
accordance with the rules and regulations of the BSP."
In this case, the payer-recipient of respondents services is the Consortium which is a jointventure doing business in the Philippines. While the Consortiums principal members are nonresident foreign corporations, the Consortium itself is doing business in the Philippines. This is
shown clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium
and NAPOCOR is for a 15-year term, thus:
This refers to your letter dated January 14, 1994 requesting for a clarification of the tax
implications of a contract between a consortium composed of Burmeister & Wain
Scandinavian Contractor A/S ("BWSC"), Mitsui Engineering & Shipbuilding, Ltd. (MES), and
Mitsui & Co., Ltd. ("MITSUI"), all referred to hereinafter as the "Consortium", and the National
Power Corporation ("NAPOCOR") for the operation and maintenance of two 100-Megawatt
power barges ("Power Barges") acquired by NAPOCOR for a 15-year term.
Considering this length of time, the Consortiums operation and maintenance of NAPOCORs
power barges cannot be classified as a single or isolated transaction. The Consortium does not
fall under Section 102(b)(2) which requires that the recipient of the services must be a person
doing business outside the Philippines. Therefore, respondents services to the Consortium,
not being supplied to a person doing business outside the Philippines, cannot legally qualify for
0% VAT.

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Respondent, as subcontractor of the Consortium, operates and maintains NAPOCORs power
barges in the Philippines. NAPOCOR pays the Consortium, through its non-resident partners,
partly in foreign currency outwardly remitted. In turn, the Consortium pays respondent also in
foreign currency inwardly remitted and accounted for in accordance with BSP rules. This
payment scheme does not entitle respondent to 0% VAT. As the Court held in Commissioner of
Internal Revenue v. American Express International, Inc. (Philippine Branch), the place of
payment is immaterial, much less is the place where the output of the service is ultimately
used. An essential condition for entitlement to 0% VAT under Section 102(b)(1) and (2) is that
the recipient of the services is a person doing business outside the Philippines. In this case, the
recipient of the services is the Consortium, which is doing business not outside, but within the
Philippines because it has a 15-year contract to operate and maintain NAPOCORs two 100megawatt power barges in Mindanao.
The Court recognizes the rule that the VAT system generally follows the "destination principle"
(exports are zero-rated whereas imports are taxed). However, as the Court stated in American
Express, there is an exception to this rule. This exception refers to the 0% VAT on services
enumerated in Section 102 and performed in the Philippines. For services covered by Section
102(b)(1) and (2), the recipient of the services must be a person doing business outside the
Philippines. Thus, to be exempt from the destination principle under Section 102(b)(1) and (2),
the services must be (a) performed in the Philippines; (b) for a person doing business outside
the Philippines; and (c) paid in acceptable foreign currency accounted for in accordance with
BSP rules.
Respondents reliance on the ruling in American Express is misplaced. That case involved a
recipient of services, specifically American Express International, Inc. (Hongkong Branch),
doing business outside the Philippines. There, the Court stated:
Respondent [American Express International, Inc. (Philippine Branch)] is a VATregistered person that facilitates the collection and payment of receivables
belonging to its non-resident foreign client [American Express International, Inc.
(Hongkong Branch)], for which it gets paid in acceptable foreign currency inwardly
remitted and accounted for in accordance with BSP rules and regulations.
In contrast, this case involves a recipient of services the Consortium which is doing business
in the Philippines. Hence, American Express services were subject to 0% VAT, while
respondents services should be subject to 10% VAT.
d

Meaning of Accounted for in accordance with the rules and regulations of the BSP The term "and accounted
for in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP) is implemented by BSP
Circular No. 1389 dated April 13, 1993 the pertinent portion of which provides:
"Sec. 20. Disposition of Export Proceeds. Foreign exchange receipts, acquisitions or earnings of
residents from exports may, at the option of said exporter, be sold for pesos to AABs or outside the
banking system, retained, or deposited in foreign currency accounts, whether in the Philippines or
abroad and may be used freely for any purpose. (BIR Ruling No. 176-94 and VAT Ruling No. 47-00)

EFFECTIVELY ZERO-RATED TRANSACTIONS

d SALE OF GOODS AND PROPERTIES (Sec. 106A(2)(3), (5), (6) and (c))
EXPORT SALES
o Sale or RAW MATERIALS or PACKAGING MATERIALS to EXPORT-ORIENTED enterprise whose
export sales EXCEED 70% of total annual production
o Those considered export sales under EO 226 and other special laws
o Sale of goods, supplies, equipment and fuel to persons engaged in INTERNATIONAL SHIPPING
or INTERNATIONAL AIR TRANSPORT OPERATIONS

Sales to persons/entities whose exemption under special laws or international agreements to which the
Philippines Is a signatory EFFECTIVELY SUBJECTS SUCH SALES TO ZERO RATE
o Atlas Consolidated Mining and Devt. Corp: The afore-cited provision of the Omnibus
Investments Code of 1987 recognizes as export sales the sales of export products to another

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producer or to an export trader, provided that the export products are actually exported. For
purposes of VAT zero-rating, such producer or export trader must be registered with the BOI
and is required to actually export more than 70% of its annual production.
Without actual exportation, Article 23 of the Omnibus Investments Code of 1987 also considers
constructive exportation as export sales. Among other types of constructive exportation
specifically identified by the said provision are sales to export processing zones. Sales to
export processing zones are subjected to special tax treatment. Article 77 of the same Code
establishes the tax treatment of goods or merchandise brought into the export processing
zones. Of particular relevance herein is paragraph 2, which provides that "Merchandise
purchased by a registered zone enterprise from the customs territory and subsequently
brought into the zone, shall be considered as export sales and the exporter thereof shall be
entitled to the benefits allowed by law for such transaction."
Such tax treatment of goods brought into the export processing zones are only consistent
with the Destination Principle and Cross Border Doctrine to which the Philippine VAT system
adheres. According to the Destination Principle, goods and services are taxed only in the
country where these are consumed. In connection with the said principle, the Cross Border
Doctrine23 mandates that no VAT shall be imposed to form part of the cost of the goods
destined for consumption outside the territorial border of the taxing authority. Hence, actual
export of goods and services from the Philippines to a foreign country must be free of VAT,
while those destined for use or consumption within the Philippines shall be imposed with 10%
VAT. Export processing zones are to be managed as a separate customs territory from the rest
of the Philippines and, thus, for tax purposes, are effectively considered as foreign territory.
For this reason, sales by persons from the Philippine customs territory to those inside the
export processing zones are already taxed as exports.

Effectively zero-rated sales of goods and properties (Sec. 4.106-6, RR 16-05) local sale of goods and
properties by a VAT-registered person to a person/entity who was granted indirect tax exemption under
special laws or international agreement
o Although the transactions do not involve actual export, they are considered as CONSTRUCTIVE
EXPORT which shall be entitled to zero-rating
o Prior approval from the BIR is required so that the transaction qualifies as zero-rating. Without
such approval, the transaction shall be considered exempt DELETED by RR 4-07 when it
amended RR 16-05

SALE OF SERVICES (Sec. 108B(3), (4) and (5))

Services rendered to persons/entities whose exemption under SPECIAL LAWS or INTERNATIONAL
AGREEMENTS to which the Philippines is a signatory effectively subjects the supply of such services to
0% rate
Services rendered to persons engaged in INTERNATIONAL SHIPPING or INTERNATIONAL AIRTRANSPORT operations, including leases of property for use thereof
Services performed by subcontractors and/or contractors in processing, converting, or manufacturing
goods for an enterprise whose export sales EXCEED 70% OF TOTAL ANNUAL PRODUCTION

Effectively zero-rated sales of services (Sec. 4.108-6, RR 16-05) local sale of services by a VATregistered person to a person/entity who was granted indirect tax exemption under special laws or
international agreement
o Prior approval from the BIR is required so that the transaction qualifies as zero-rating. Without
such approval, the transaction shall be considered exempt DELETED by RR 4-07 when it
amended RR 16-05
CIR v. Acesite (Phils.) Hotel Corp citing CIR v. John Gotamco & Sons, Inc.: Thus, while it was proper for
PAGCOR not to pay the 10% VAT charged by Acesite, the latter is not liable for the payment of it as it is
exempt in this particular transaction by operation of law to pay the indirect tax. Such exemption falls
within the former Section 102 (b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A.
8424).

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The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the extension of such
exemption to entities or individuals dealing with PAGCOR in casino operations are best elucidated from
the 1987 case of Commissioner of Internal Revenue v. John Gotamco & Sons, Inc., where the absolute tax
exemption of the World Health Organization (WHO) upon an international agreement was upheld. We
held in said case that the exemption of contractee WHO should be implemented to mean that the entity
or person exempt is the contractor itself who constructed the building owned by contractee WHO, and
such does not violate the rule that tax exemptions are personal because the manifest intention of the
agreement is to exempt the contractor so that no contractors tax may be shifted to the contractee
WHO. Thus, the proviso in P.D. 1869, extending the exemption to entities or individuals dealing with
PAGCOR in casino operations, is clearly to proscribe any indirect tax, like VAT, that may be shifted to
PAGCOR.
PRINTING OF WORDS ZERO-RATED ON INVOICES/RECEIPTS
d Microsoft Philippines, Inc. v. CIR: The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC
and revenue regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or services attributable to
zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section 4.108-1 of RR 7-95. Contrary
to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases covered by invoices other than a VAT invoice
shall not give rise to any input tax." Microsoft's invoice, lacking the word "zero-rated," is not a "VAT invoice," and
thus cannot give rise to any input tax.
d Panasonic Communications Imaging Corp. v. CIR: Section 4.108-1 of RR 7-95 proceeds from the rule-making
authority granted to the Secretary of Finance under Section 245 of the 1977 NIRC (Presidential Decree 1158) for
the efficient enforcement of the tax code and of course its amendments. The requirement is reasonable and is in
accord with the efficient collection of VAT from the covered sales of goods and services. As aptly explained by the
CTAs First Division, the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid. If, absent
such word, a successful claim for input VAT is made, the government would be refunding money it did not collect.
Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to 10% (now
12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices, petitioner Panasonic has
been unable to substantiate its claim for refund.
d Silicon Philippines, Inc. v. CIR: Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are
zero-rated or effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales
must be presented. However, since the ATP is not indicated in the invoices or receipts, the only way to verify
whether the invoices or receipts are duly registered is by requiring the claimant to present its ATP from the BIR.
Without this proof, the invoices or receipts would have no probative value for the purpose of refund. In the case
of Intel, we emphasized that:
It bears reiterating that while the pertinent provisions of the Tax Code and the rules and regulations
implementing them require entities engaged in business to secure a BIR authority to print invoices or
receipts and to issue duly registered invoices or receipts, it is not specifically required that the BIR
authority to print be reflected or indicated therein. Indeed, what is important with respect to the BIR
authority to print is that it has been secured or obtained by the taxpayer, and that invoices or receipts
are duly registered.
Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of input VAT. Similarly,
failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for credit/refund of input
VAT on zero-rated sales.
d Kepco Philippines Corp. v. CIR: Indeed, it is the duty of Kepco to comply with the requirements, including the
imprinting of the words "zero-rated" in its VAT official receipts and invoices in order for its sales of electricity to
NPC to qualify for zero-rating. It must be emphasized that the requirement of imprinting the word "zero-rated"
on the invoices or receipts under Section 4.108-1 of R.R. No. 7-95 is mandatory as ruled by the CTA En Banc,
citing Tropitek International, Inc. v. Commissioner of Internal Revenue. [13] In Kepco Philippines Corporation v.
Commissioner of Internal Revenue, the CTA En Banc explained the rationale behind such requirement in this wise:
The imprinting of "zero-rated" is necessary to distinguish sales subject to 10% VAT, those that are subject
to 0% VAT (zero-rated) and exempt sales, to enable the Bureau of Internal Revenue to properly
implement and enforce the other provisions of the 1997 NIRC on VAT, namely:
(1) Zero-rated sales [Sec. 106(A)(2) and Sec. 108(B)];
(2) Exempt transactions [Sec. 109] in relation to Sec. 112(A);
(3) Tax Credits [Sec. 110]; and

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(4) Refunds or tax credits of input tax [Sec. 112]
Records disclose, as correctly found by the CTA that Kepco failed to substantiate the claimed zero-rated sales of
P10,514,023.92. The wordings "zero-rated sales" were not imprinted on the VAT official receipts presented by
Kepco (marked as Exhibits S to S-11) for taxable year 1999, in clear violation of Section 4.108-1 of R.R. No. 7-95 and
the condition imposed under its approved Application/Certificate for Zero-rate as well.

Transactions Exempt from VAT

Coverage (sec. 109 and rr 16-05 as amended)
d Sale or importation of AGRRICULTURAL and MARINE FOOD PRODUCTS in their ORIGINAL STATE, LIVESTOCK and
POULTRY of a kind generally used as, or yielding or producing foods for human consumption and breeding stock
and genetic materials
Original state: those that have undergone simple processes of preparation or preservation for the
market
d
Sale or importation of FERTILIZERS, SEEDS and FINGERLLINGS, FISH, PRAWN, LIVESTOCK and POULTRY FEEDS,
including ingredients used in the manufacture of finished feeds
Except: specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and other animals
generally considered as pets
d Importation of PERSONAL and HOUSEHOLD EFFECTS belonging to RESIDENTS returning from abroad and
NONRESIDENT CITIZENS coming to resettle in the Philippines
d Importation of PROFESSIONAL INSTRUMENTS and IMPLEMENTS, WEARING APPAREL, DOMESTIC ANIMALS, and
PERSONAL HOUSEHOLD EFFECTS
Except: any vehicle, vessel, aircraft, machinery, other goods for use in the manufacture and merchandise
of any kind in commercial quantity belonging to persons coming to SETTLE in the Philippines, for their
OWN USE and NOT FOR SALE, BARTER or EXCHANGE, accompanying such persons or arriving within
90days before or after their arrival. Resettlement must be bona fide
d Services subject to PERCENTAGE TAX
d Services by AGRICULTURAL CONTRACT GROWERS and MILLING for others of palay into rice, corn into grits and
sugar can to raw sugar
d MEDICAL, DENTAL, HOSPITAL and VETERINARY services
Except: those rendered by PROFESSIONALS and LABORATORY SERVICES
d EDUCATIONAL services rendered b PRIVATE educational institutions duly accredited
Except: SEMINARS, IN-SERVICE TRAINING, REVIEW CLASSES, and other similar services rendered by
persons not accredited
d Services rendered by individuals pursuant to an EMPLOYER-EMPLOYEE RELATIONSHIP
d Services rendered b REGIONAL or AREA HQs established in the Philippines by multinational corporations
d Transactions which are exempt under INTERNATIONAL AGREEMENTS to which the Philippines is a signatory or
under SPECIAL LAWS
PAGCOR v. BIR: The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:
PAGCOR is exempt from payment of indirect taxes. It is undisputed that P.D. 1869, the charter creating
PAGCOR, grants the latter an exemption from the payment of taxes.
Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability and not to
indirect taxes, like the VAT. We disagree.
A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes with no
distinction on whether the taxes are direct or indirect. We are one with the CA ruling that PAGCOR is
also exempt from indirect taxes, like VAT, as follows:
Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or operator refers to
PAGCOR. Although the law does not specifically mention PAGCOR's exemption from indirect
taxes, PAGCOR is undoubtedly exempt from such taxes because the law exempts from taxes persons or
entities contracting with PAGCOR in casino operations. Although, differently worded, the provision
clearly exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt
status to persons dealing with PAGCOR in casino operations. The unmistakable conclusion is that

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PAGCOR is not liable for the P30, 152,892.02 VAT and neither is Acesite as the latter is effectively subject
to zero percent rate under Sec. 108 B (3), R.A. 8424.

d
d
d
d
d

d
d
d

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the legislature
clearly granted exemption also from indirect taxes. It must be noted that the indirect tax of VAT, as in
the instant case, can be shifted or passed to the buyer, transferee, or lessee of the goods, properties, or
services subject to VAT. Thus, by extending the tax exemption to entities or individuals dealing with
PAGCOR in casino operations, it is exempting PAGCOR from being liable to indirect taxes.
Sales by AGRICULTURAL COOPERATIVES
Gross receipts from LENDING ACTIVITIES by credit or multi-purpose cooperatives
Sales by NON-AGRICULTURAL, NON-ELECTRIC and NON-CREDIT cooperatives
Export sales by persons who are NOT VAT-registered
Sale of the ff:
REAL PROPERTIES NOT PRIMARILY HELD FOR SALE to customers or HELD FOR LEASE in the ordinary
course of trade or business or
REAL PROPERTY UTILIZED FOR LOW-COST and SOCIALIZED HOUSING or
RESIDENTIAL LOT valued at P1,919,500 and below
HOUSE AND LOT and other RESIDENTIAL DWELLINGS valued at P3,199,200 and below
Lease of a RESIDENTIAL UNIT with a monthly rental not exceeding P12,800
Monthly rental exceeds P12,800 but the aggregate of the rentals of the lessor does not exceed
P1,919,500 VAT-exempt but subject to 3% percentage tax
Some units leased for monthly rental not exceeding P12,800 while others are leased out for more than
P12,800
o Gross receipts from rentals not exceeding P12,800 per month per unit shall be EXEMPT
regardless of the aggregate annual gross receipts
o Gross receipts from rentals exceeding P12,800 per month per unit
F VATable if the aggregate annual gross receipts from said units only exceeds
P1,919,500
F Subject to 3% percentage tax if the aggregate annual gross receipts does not exceed
P1,919,500
Sale, importation, printing or publication of BOOKS and any NEWSPAPER, MAGAZINE, REVIEW, or BULLETIN
which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally
to the publication of paid advertisements
Sale, importation or lease of PASSENGER or CARGO VESSELS and AIRCRAFT, including engine, equipment and
spare parts for domestic or international transport operations
Importation of FUEL, GOODS and SUPPLIES by persons engaged in INTERNATIONAL SHIPPING or AIR
TRANSPORT OPERATIONS
Services of BANKS, NON-BANK FINANCIAL INTERMEDIARIES performing quasi-banking functions and other nonbank financial intermediaries
PAWNSHOPS are exempt as non-bank financial intermediaries: First Planters Pawnshop, Inc. v. CIR: On
July 15, 2003, the Court rendered Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc. in
which it was categorically ruled that while pawnshops are engaged in the business of lending money,
they are not considered "lending investors" for the purpose of imposing percentage taxes. The Court
gave the following reasons: first, under the 1997 Tax Code, pawnshops and lending investors were
subjected to different tax treatments; second, Congress never intended pawnshops to be treated in the
same way as lending investors; third, Section 116 of the NIRC of 1977 subjects to percentage tax dealers
in securities and lending investors only; and lastly, the BIR had ruled several times prior to the issuance
of RMO No. 15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage tax on lending
investors imposed by Section 116 of the NIRC of 1977, as amended by Executive Order No. 273.
The tax treatment of pawnshops as non-bank financial intermediaries is not without basis. R.A. No. 337,
as amended, or the General Banking Act characterizes the terms banking institution and bank as
synonymous and interchangeable and specifically include commercial banks, savings bank, mortgage
banks, development banks, rural banks, stock savings and loan associations, and branches and agencies
in the Philippines of foreign banks.[30] R.A. No. 8791 or the General Banking Law of 2000, meanwhile,
provided that banks shall refer to entities engaged in the lending of funds obtained in the form of
deposits.[31] R.A. No. 8791 also included cooperative banks, Islamic banks and other banks as determined
by the Monetary Board of the BangkoSentral ng Pilipinas in the classification of banks. Financial

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intermediaries, on the other hand, are defined as "persons or entities whose principal functions include
the lending, investing or placement of funds or evidences of indebtedness or equity deposited with
them, acquired by them, or otherwise coursed through them, either for their own account or for the
account of others."
It need not be elaborated that pawnshops are non-banks/banking institutions. Moreover, the nature of
their business activities partakes that of a financial intermediary in that its principal function is lending.
A pawnshop's business and operations are governed by Presidential Decree (P.D.) No. 114 or the
Pawnshop Regulation Act and Central Bank Circular No. 374 (Rules and Regulations for Pawnshops).
Section 3 of P.D. No. 114 defines pawnshop as "a person or entity engaged in the business of lending
money on personal property delivered as security for loans and shall be synonymous, and may be used
interchangeably, with pawnbroker or pawn brokerage."

That pawnshops are to be treated as non-bank financial intermediaries is further bolstered by the fact
that pawnshops are under the regulatory supervision of the Bangko Sentral ng Pilipinas and covered by
its Manual of Regulations for Non-Bank Financial Institutions.
Sale or lease of GOODS or PROPERTIES or the performance of SERVICES other than the transactions mentioned,
the gross annual sales and/or receipts DO NOT EXCEED P1,919,500

Waiver of vat exemption/election to be subject to vat

d Waiver of VAT-exemption is irrevocable for 3YEARS from time of election

Input Tax Credits and Refunds

d

INPUT TAX CREDIT (Sec. 110)

WHO CAN AVAIL (Sec. 4.110-2)
o Importer upon payment of VAT prior to the release of goods from customs custody
o Purchaser of the domestic goods or properties upon consummation of the sale
o Purchaser of the services or the lessee or licensee upon payment of the compensation, rental,
royalty or fee
SPECIAL RULES
o AMORTIZATION of input tax on DEPRECIABLE GOODS (Sec. 4.110-3) Capital goods which are
depreciable goods for income tax purposes the aggregate acquisition cost in a calendar month
EXCEEDS P1M REGARDLESS of the acquisition cost of each good, shall be claimed in the ff.
manner:
F Estimated useful life is 5YEARS or MORE input tax spread evenly over a period of
60months and the claim will be commenced in the calendar month when good is
acquired
F Estimated useful life is LESS than 5YEARS input tax spread evenly on a monthly basis
by dividing the input tax by the actual number of months comprising the estimated
useful life of the good
o APPORTIONMENT of input tax on MIIXED TRANSACTIONS (Sec. 4.110-4)
F All input taxes that can be directly attributable to VATable transactions may be
recognized for input tax credit

Input taxes that can be directly attributable to VAT taxable sales of goods
and services to the Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall NOT be credited against
output taxes arising from sales to non-Government entities
F Those which cannot be directly attributed to either a VATable or VAT-exempt
transaction, the input tax shall be pro-rated and only the ratable portion pertaining to
transactions subject to VAT may be recognized for input tax credit
EXCESS OUTPUT OR INPUT TAX
o General Rule: Excess input tax shall be CARRIED OVER to the SUCCEEDING QUARTER/S

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o

Exception: Any input tax attributable to ZERO-RATED SALES b a VAT-registered person may at
his OPTION be REFUNDED or CREDITED against other internal revenue taxes
SUBSTANTIATION (Sec, 4.110-8)
o Input taxes for the IMPORTATION of GOODS or the DOMESTIC PURCHASE of GOODS,
PROPERTIES or SERVICES
F Importation of goods import entry or other equivalent document showing actual
payment of VAT on the imported goods
F Domestic purchase of goods and properties invoice showing info required under
Sec. 113 and 237 NIRC
F Purchase of real property public instrument + VAT invoice issued by the seller
F Purchase of services official receipt showing the info required under Sec. 113 and
237 NIRC
o TRANSITIONAL INPUT TAX shall be supported b an inventory of goods as shown in a detailed
list to be submitted to the BIR
o Input tax on DEEMED SALE transactions shall be substantiated with invoice required under
Sec. 4.113-2
o Input tax from PAYMENTS made to NON-RESIDENTS shall be supported by a copy of the
Monthly Remittance Return of VAT Withheld filed by the resident payor in behalf of the nonresident evidencing remittance of VAT due which was withheld b the payor
o Advance VAT on SUGAR shall be supported by the Payment Order showing payment of the
advance VAT
o

Atlas Consolidated Mining and Devt. Corp. v. CIR (518 Scra 425): Both courts correctly observed
that petitioner never submitted any of the invoices or receipts required by the foregoing rules
and held this omission to be fatal to its cause. Petitioner insists, however, that its failure to
submit these documents should not have been held to bar the successful prosecution of its
claims. Petitioner offers two propositions: (1) the documentary requirements imposed by
Revenue Regulations 3-88 applied only to administrative claims for refund or tax credit and
should have had no bearing in a judicial claim for refund in the CTA which was "entirely
independent of and distinct from the administrative claim,"11 and (2) the summary and
certification of an independent certified public accountant required by CTA Circular 1-95(1)
"constitute(d) the principal evidence" and rendered superfluous the submission of VAT
invoices and receipts.
Petitioners contention that non-compliance with Revenue Regulations 3-88 could not have
adversely affected its case in the CTA indicates a failure on its part to appreciate the nature of
the proceedings in that court. First, a judicial claim for refund or tax credit in the CTA is by no
means an original action but rather an appeal by way of petition for review of a previous,
unsuccessful administrative claim.14 Therefore, as in every appeal or petition for review, a
petitioner has to convince the appellate court that the quasi-judicial agency a quo did not have
any reason to deny its claims. In this case, it was necessary for petitioner to show the CTA not
only that it was entitled under substantive law to the grant of its claims but also that it satisfied
all the documentary and evidentiary requirements for an administrative claim for refund or tax
credit. Second, cases filed in the CTA are litigated de novo. Thus, a petitioner should prove
every minute aspect of its case by presenting, formally offering and submitting its evidence to
the CTA. Since it is crucial for a petitioner in a judicial claim for refund or tax credit to show that
its administrative claim should have been granted in the first place, part of the evidence to be
submitted to the CTA must necessarily include whatever is required for the successful
prosecution of an administrative claim.

Atlas Consolidated Mining and Devt. Corp. v. CIR (546 Scra 150): The summary presented
by Atlas does not replace the pertinent invoices, receipts, and export sales documents as
competent evidence to prove the fact of refundable or creditable input VAT. Indeed, the
summary presented with the certification by an independent Certified Public Accountant (CPA)
and the testimony of Atlas Accounting and Finance Manager are merely corroborative of the
actual input VAT it paid and the actual export sales. Otherwise, the pertinent invoices,
receipts, and export sales documents are the best and competent pieces of evidence required
to substantiate Atlas claim for tax credit or refund which is merely corroborated by the

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summary duly certified by a CPA and the testimony of Atlas employee on the export sales. And
when these pertinent documents are not presented, these could not be corroborated as is
true in the instant case.
Fourth, Atlas mere allegations of the figures in its amended VAT return for the first quarter of
1993 as well as in its petition before the CTA are not sufficient proof of the amount of its
refund entitlement. They do not even constitute evidence adverse to CIR against whom they
are being presented. While Atlas indeed submitted several documents, still, the CTA could not
ascertain from them the veracity of the figures as the documents presented by Atlas were not
sufficient to prove its action for tax credit or refund. Atlas has failed to meet the burden of
proof required in order to establish the factual basis of its claim for a tax credit or
refund. Neither can we ascertain the veracity of Atlas alleged input VAT taxes which are
refundable nor the alleged actual export sales indicated in the amended VAT return.
d

TRANSITIONAL INPUT TAX (Sec. 111(A) and Sec. 4.111-1(a))

Rate: 2% Input tax on BEGINNING INVENTORY of goods, materials and supplies
Basis: INVENTORY or ACTUAL VAT PAID whichever is higher
Goods covered:
o Goods purchased for resale in their present condition
o Materials purchased for further processing but which have not yet undergone processing
o Goods which have been manufactured by the taxpayer
o Goods in process for sale
o Goods and supplies for use in the course of the taxpayers trade or business as a VATregistered person
Fort Bonifacio Devt. Corp. v. CIR: It is apparent that the transitional input tax credit operates to benefit
newly VAT-registered persons, whether or not they previously paid taxes in the acquisition of their
beginning inventory of goods, materials and supplies. During that period of transition from non-VAT to
VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the taxpayer. At
the very beginning, the VAT-registered taxpayer is obliged to remit a significant portion of the income it
derived from its sales as output VAT. The transitional input tax credit mitigates this initial diminution of
the taxpayers income by affording the opportunity to offset the losses incurred through the remittance
of the output VAT at a stage when the person is yet unable to credit input VAT payments.

PRESUMPTIVE INPUT TAX (Sec. 110(B) and Sec. 4-111-1(b))

Who are entitled:
o Persons or firms engaged in the processing of sardines, mackerel and milk
o Those engaged in manufacturing refined sugar and cooking oil and packed noodle-based
instant meals
Rate and Base: 4% of the GROSS VALUE in money of their purchases of primary agricultural products
which are used as inputs to their production

FINAL WITHHOLDING VAT (Sec. 114(C) and Sec. 4.114-2(a))

The Government or any of its political subdivision, instrumentalities or agencies, including GOCCs shall
DEDUCT and WITHHOLD the VAT due before making payment on account of each purchase of goods
and services which are subject to the VAT
Rate: 5% of gross payment and 12% for lease or use of properties or property rights to non-resident
owners
The tax shall be remitted within 10days from the end of the month the withholding was made

CLAIMS FOR REFUND OR ISSUANCE OF TAX CREDIT CERTIFICATES (Sec. 112)

ZERO-RATED OR EFFECTIVELY ZERO-RATED TRANSACTIONS application should be made WITHIN
2YEARS after the close of the taxable quarter when the sales were made
CANCELLATION OF VAT REGISTRATION WITHIN 2YEARS from the date of cancellation
PERIOD WITHIN WHICH REFUND OR TAX CREDIT SHALL BE MADE The refund or credit shall be granted
within 120DAYS from the date of submission of complete documents
o FULL or PARTIAL DENIAL of the claim for refund or credit or the FAILURE on the PART of the
CIR to act on the application within the period prescribed taxpayer may WITHIN 30DAYS

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from the RECEIPT of the decision denying the refund or claim or AFTER the EXPIRATION of the
120day-period APPEAL the decision or the unacted claim with the CTA
o

CIR v. Mirant Pagbilao Corp: Claim for refund or tax credit filed out of time
The claim for refund or tax credit for the creditable input VAT payment made by MPC
embodied in OR No. 0189 was filed beyond the period provided by law for such claim.
The above proviso clearly provides in no uncertain terms that unutilized input VAT payments
not otherwise used for any internal revenue tax due the taxpayer must be claimed within two
years reckoned from the close of the taxable quarter when the relevant sales were made
pertaining to the input VAT regardless of whether said tax was paid or not. As the CA aptly
puts it, albeit it erroneously applied the aforequoted Sec. 112(A), [P]rescriptive period
commences from the close of the taxable quarter when the sales were made and not from the
time the input VAT was paid nor from the time the official receipt was issued. Thus, when a
zero-rated VAT taxpayer pays its input VAT a year after the pertinent transaction, said taxpayer
only has a year to file a claim for refund or tax credit of the unutilized creditable input
VAT. The reckoning frame would always be the end of the quarter when the pertinent sales or
transaction was made, regardless when the input VAT was paid. Be that as it may, and given
that the last creditable input VAT due for the period covering the progress billing of September
6, 1996 is the third quarter of 1996 ending on September 30, 1996, any claim for unutilized
creditable input VAT refund or tax credit for said quarter prescribed two years after September
30, 1996 or, to be precise, on September 30, 1998. Consequently, MPCs claim for refund or tax
credit filed onDecember 10, 1999 had already prescribed.
Reckoning for prescriptive period under Secs. 204(C) and 229 of the NIRC inapplicable
To be sure, MPC cannot avail itself of the provisions of either Sec. 204(C) or 229 of the NIRC
which, for the purpose of refund, prescribes a different starting point for the two-year
prescriptive limit for the filing of a claim therefor.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from
the date of payment of the tax or penalty regardless of any supervening cause that may arise
after payment: Provided, however, That the Commissioner may, even without a written claim
therefor, refund or credit any tax, where on the face of the return upon which payment was
made, such payment appears clearly to have been erroneously paid.
Notably, the above provisions also set a two-year prescriptive period, reckoned from date of
payment of the tax or penalty, for the filing of a claim of refund or tax credit. Notably too, both
provisions apply only to instances of erroneous payment or illegal collection of internal
revenue taxes.

CIR v. Aichi forging Company of Asia, Inc: A taxpayer is entitled to a refund either by authority
of a statute expressly granting such right, privilege, or incentive in his favor, or under the
principle of solutio indebiti requiring the return of taxes erroneously or illegally collected. In
both cases, a taxpayer must prove not only his entitlement to a refund but also his compliance
with the procedural due process as non-observance of the prescriptive periods within which to
file the administrative and the judicial claims would result in the denial of his claim.
In this case, the administrative and the judicial claims were simultaneously filed on September
30, 2004. Obviously, respondent did not wait for the decision of the CIR or the lapse of the 120day period. For this reason, we find the filing of the judicial claim with the CTA premature.
Respondents assertion that the non-observance of the 120-day period is not fatal to the filing
of a judicial claim as long as both the administrative and the judicial claims are filed within the
two-year prescriptive period has no legal basis.
There is nothing in Section 112 of the NIRC to support respondents view. Subsection (A) of the
said provision states that "any VAT-registered person, whose sales are zero-rated or effectively
zero-rated may, within two years after the close of the taxable quarter when the sales were
made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or

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paid attributable to such sales." The phrase "within two (2) years x x x apply for the issuance of
a tax credit certificate or refund" refers to applications for refund/credit filed with the CIR and
not to appeals made to the CTA. This is apparent in the first paragraph of subsection (D) of the
same provision, which states that the CIR has "120 days from the submission of complete
documents in support of the application filed in accordance with Subsections (A) and (B)"
within which to decide on the claim.
In fact, applying the two-year period to judicial claims would render nugatory Section 112(D) of
the NIRC, which already provides for a specific period within which a taxpayer should appeal
the decision or inaction of the CIR. The second paragraph of Section 112(D) of the NIRC
envisions two scenarios: (1) when a decision is issued by the CIR before the lapse of the 120-day
period; and (2) when no decision is made after the 120-day period. In both instances, the
taxpayer has 30 days within which to file an appeal with the CTA. As we see it then, the 120-day
period is crucial in filing an appeal with the CTA.

Administrative Requirements
d

REGISTRATION OF VAT TAXPAYERS (Sec. 9.236-1, RR 16-05)

MANDATORY
o Gross sales or receipts for the past 12months have exceeded P1.5M
o There are reasonable grounds to believe that his gross sales or receipts for the next 12months
will exceed P1.5M
OPTIONAL
o VAT-exempt person
o VAT-registered person who enters into transactions which ar exempt may opt that the VAT
apply to his transactions which would have been exempt under Sec 109(1)
o Franchise grantees of radio and/or television broadcasting whose annual gross receipts of the
previous year do not exceed P10M derived from business covered b the law granting the
franchise may opt for VAT registration

INVOICING AND BOOKKEEPING REQUIREMENTS (Sec. 4.113-1)

A VAT-registered person shall issue
o VAT invoice and
o VAT official receipt
Info contained
o Amount of tax as a separate item
o VAT-exempt sale or Zero-rated sale
o Breakdown of items

FLING OF VAT RETURNS AND PAYMENT OF VAT (Sec. 4.114-1)

Quarterly return within 25days from the close of taxable quarter
Monthly VAT declaration filed and taxes paid not later than the 20th day from the end of each month

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Rights and remedies of

the government under
the tax code
Examination and Audit of Returns
d
d

d
d

PURPOSE of examination and audit: To ascertain the correctness of the return or to make one if there is none
WHAT CAN THE CIR DO:
Prepare and file a tax return in the name of the taxpayer who did not file such return
Examine the tax return, if any, books of accounts and accounting records of the taxpayer for the
purpose of:
o Ascertaining the correctness of the tax return filed
o Determining the tax liability of any person
o Verifying the taxpayers compliance with existing laws and rules and regulations
Suspend the examination of all tax returns for a limited period or not to authorize the examination of
certain returns
LETTER OF AUTHORITY (LA) official document that empowers a revenue officer to examine and scrutinize a
taxpayers books of accounts and other accounting records
SELECTION and AUDIT POLICIES
Limited basis but thorough and extensive
Ensure that some minimum level of audit coverage applies to all types of taxpayers
Selection of returns done equitably
LA will be issued only for tax returns which correspond with the existing Audit Program
All tax audits shall be covered by LAs, except:
o Capital gains tax returns for transactions involving sale or transfer of real property and/or
shares of stocks
o Protested cases
o Tax credit or refund cases of individuals of purely compensation income where the amount of
the credit or refund does not exceed P10k
One LA issued for each taxable year, except in fraud cases and policy cases approved by the CIR or
Deputy CIR
Taxpayers may not be examined by the same revenue officer or group supervisor for 2 consecutive
taxable years, except in fraud cases
Taxpayers who have availed of the privileges under an amnesty or last priority in audit program and who
have not been selected under an order or other directive of the CIR may be selected for audit
The books of accounts may be examined in the place of business or outside thereof
Taxpayer has a right to refuse examination of books of accounts where the revenue officer is not
provided with the required LA or where the officer fails or refuses to such LA, or where the examination
is conducted in the presence of unauthorized persons

BIRs Investigative/Enforcement Authority

Powers included
d ISSUANCE OF SUMMONS
ADMINISTRATIVE SUMMONS TO TAXPAYERS

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o

Sec. 5(C): The person liable for tax or required to file return may be summoned to appear
before the CIR or his duly authorized representative at a time and place specified and to
produce such books, papers, records, or other data, and to give testimony
o Sec. 5(D): Taking of testimony under oath
THIRD PARTY SUMMONS
o Sec. 5(B): To obtain any information such as 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, ROHs, joint accounts,
associations, joint ventures or consortia and registered partnerships, and their members, from
the ff:
F Any other person aside from taxpayer
F Any office/officer of the national and local governments, government agencies and
instrumentalities (BSP, GOCCs)
o Sec. 5(C): Aside from the taxpayer, the ff. may also be summoned:
F Any officer/EE of taxpayer 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 taxpayer
F Any other person

CONDUCT INVENTORY-TAKING AND SURVEILLANCE

Sec 6(C): Any time during the taxable year, the CIR may:
o Order inventory-taking of goods of any taxpayer to determine his tax liabilities
o Place the business operations of any person under observation or surveillance if there is reason
to believe that the person is not declaring his correct income, sales or receipts for tax
purposes.
F 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
F Failure to issue receipts and invoices or when theres 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 CIR may prescribe a minimum amount of such gross
receipts, sales and taxable base which shall be prima facie correct for purposes of
determining the tax liabilities of taxpayer

PRESCRIBE ZONAL VALUES FOR REAL PROPERTIES (TAXMAPPING)

Sec 6(E): CIR is authorized to divide the Philippines into different zones or areas and determine the FMV
of the real properties located in each zone/area (after consulting with competent appraisers from both
public and private sectors). The value of the property shall be, whichever is HIGHER of:
o FMV as determined by the CIR or
o FMV as shown in the scheduled values of the Provincial and City Assessors (assessed value)
Whats the significance of zonal values? They are the minimum/floor values which serve as basis for
assessment
o But the zonal value does not preclude the BIR from assessing higher taxes if theres proof of
higher consideration paid
o The CIR cannot unilaterally change the zonal values
CIR v. Aquafresh Seafoods, Inc: This Court agrees with the observation of the CTA that "zonal valuation
was established with the objective of having an efficient tax administration by minimizing the use of
discretion in the determination of the tax based on the part of the administrator on one hand and the
taxpayer on the other hand." Zonal value is determined for the purpose of establishing a more realistic
basis for real property valuation. Since internal revenue taxes, such as CGT and DST, are assessed on the
basis of valuation, the zonal valuation existing at the time of the sale should be taken into account.

INQUIRE INTO BANK DEPOSITS OF DECEDENT OR PERSON APPLYING FOR COMPROMISE DUE TO FINANCIAL
INCAPACITY
Sec 6(F): Notwithstanding the contrary provisions of RA 1405 and other general or special laws, CIR is
authorized to inquire into the bank deposit of:
o Decedent to determine gross estate; and

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o

Any taxpayer who filed an application for compromise of his tax liability under Sec. 204(A)(2)
by reason of financial incapacity to pay taxpayer should waive in writing his privilege under
RA 1405 or other laws

ACCREDITATION OF TAX AGENTS/PRACTITIONERS

Sec. 6(G): CIR shall accredit and register, based on their professional competence, integrity and moral
fitness, individuals and GPPs and their representatives who prepare and file tax returns, statements,
reports, protests and other papers with, or appear before, the BIR.
o Accreditation Boards shall take charge of this process
o Those denied accreditation may appeal to the Finance Secretary, who shall decide within
60days from the receipt of such appeal. Failure to act within 60days would be deemed as
approval of the application.
Sec. 8, RR 04-10: Only those accredited can appear and transact with the BIR.
o The BIR can refuse to transact official business with practitioners who are not accredited
before it
o Lawyers need not be accredited before they can transact with the BIR

MAKE RULES
Statutory Bases:
o POWER TO INTERPRET TAX LAWS AND DECIDE TAX CASES (Sec. 4)
F Power to interpret tax laws CIR has exclusive and original jurisdiction to interpret
provisions of the NIRC, subject to review by the Finance Secretary
F Power to decide tax cases CIR has the power to decide disputed assessments,
refunds of taxes, fees or other charges, penalties imposed in relation thereto, or
other matters arising under the NIRC or other laws administered by the BIR. The
decision is subject to the exclusive appellate jurisdiction of the CTA.
o CIR MAY DELEGATE POWERS (Sec. 7)
F General Rule: The CIR may delegate powers vested in him under the NIRC to any or
such subordinate officials with the rank equivalent to a division chief or higher,
subject to limitations and restrictions as may be imposed by the Finance Secretary,
upon recommendation by the CIR.
F Exception: The ff. powers shall NOT be delegated:

Power to recommend the promulgation of rules and regulations by the

Finance Secretary

Power to issue rulings of first impression or to reverse, revoke, or modify any

existing ruling of the BIR

Power to compromise or abate any tax liability

EXCEPT: Assessments issued by the regional offices involving basic
deficiency taxes of P500k or less, and minor criminal violations
discovered any regional and district officials, MAY be
compromised by a regional evaluation board

Power to assign or reassign internal revenue officers to establishments

where articles subject to excise tax are produced or kept
Requirements:
o MUST BE CONSISTENT WITH STATUTE
F Fort Bonifacio Development Corp. v. CIR: It is of course axiomatic that a rule or
regulation must bear upon, and be consistent with, the provisions of the enabling
statute if such rule or regulation is to be valid. In case of conflict between a statute
and an administrative order, the former must prevail. Indeed, the CIR has no power
to limit the meaning and coverage of the term "goods" in Section 105 of the Old NIRC
absent statutory authority or basis to make and justify such limitation. A contrary
conclusion would mean the CIR could very well moot the law or arrogate legislative
authority unto himself by retaining sole discretion to provide the definition and scope
of the term "goods."
F CIR v. Bicolandia Drug Corp: Revenue Regulations No. 2-94 is still subordinate to R.A.
No. 7432, and in cases of conflict, the implementing rule will not prevail over the law
it seeks to implement. While seemingly conflicting laws must be harmonized as far as
practicable, in this particular case, the conflict cannot be resolved in the manner the

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petitioner wishes. There is a great divide separating the idea of "tax credit" and "tax
deduction," as seen in the definition in Black's Law Dictionary.

The claimed absurdity of Section 4(a) of R.A. No. 7432 impliedly repealing Section
204(c) of the National Internal Revenue Code could only come about if it is accepted
that a tax credit is akin to a tax refund wherein payment of taxes must be made in
order for it to be claimed. But as shown in Section 112(a) of the National Internal
Revenue Code, it is not always necessary for payment to be made for a tax credit to
be available.
PUBLICATION
F CIR v. Trustworthy Pawnshop, Inc: Since Section 116 of the NIRC of 1977, which
breathed life on the questioned administrative issuances, had already been repealed,
RMO 15-91 and RMC 43-91, which depended upon it, are deemed automatically
repealed. Hence, even granting that pawnshops are included within the term lending
investors, the assessment from May 27, 1994 onward would have no leg to stand on.
Adding to the invalidity of RMC No. 43-91 and RMO No. 15-91 is the absence of
publication. While the rule-making authority of the CIR is not doubted, like any other
government agency, the CIR may not disregard legal requirements or applicable
principles in the exercise of quasi-legislative powers.

RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules or
corrective measures revoking in the process the previous rulings of past
Commissioners. Specifically, they would have been amendatory provisions applicable
to pawnshops. x x x. The due observance of the requirements of notice, hearing, and
publication should not have been ignored.
Effect of Absence of IRRs
o CIR v. Reyes: A tax regulation is promulgated by the finance secretary to implement the
provisions of the Tax Code.15 While it is desirable for the government authority or
administrative agency to have one immediately issued after a law is passed, the absence of the
regulation does not automatically mean that the law itself would become inoperative.
At the time the pre-assessment notice was issued to Reyes, RA 8424 already stated that the
taxpayer must be informed of both the law and facts on which the assessment was based.
Thus, the CIR should have required the assessment officers of the Bureau of Internal Revenue
(BIR) to follow the clear mandate of the new law. The old regulation governing the issuance of
estate tax assessment notices ran afoul of the rule that tax regulations -- old as they were -should be in harmony with, and not supplant or modify, the law.
It may be argued that the Tax Code provisions are not self-executory. It would be too wide a
stretch of the imagination, though, to still issue a regulation that would simply require tax
officials to inform the taxpayer, in any manner, of the law and the facts on which an
assessment was based. That requirement is neither difficult to make nor its desired results
hard to achieve.
Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights
and corresponding obligations, is given retroactive effect as of the date of the effectivity of
the statute. RR 12-99 is one such rule. Being interpretive of the provisions of the Tax Code,
even if it was issued only on September 6, 1999, this regulation was to retroact to January 1,
1998 -- a date prior to the issuance of the preliminary assessment notice and demand letter.

Informers reward (Sec, 282)

d FOR VIOLATIONS OF THE NIRC
Who is entitled to reward Any person EXCEPT:
o Internal revenue official or EE or
o Other public official or EE or
o Relatives within 6th degree of consanguinity of the revenue or public officer or EE

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How to be entitled
o The person must VOLUNTARILY give definite and sworn information that is NOT yet in the
possession of the BIR, leading to the DISCOVERY of frauds upon the internal revenue laws or
violations of any of the provisions thereof and such information given leads to the RECOVERY
of revenues, surcharges and fees and/or the CONVICTION of the guilty party and/r the
IMPOSITION of any fine or penalty; OR
F The information should NOT refer to a case already pending or previously
investigated or examined by the CIR or the Finance Secretary
o If the offender has OFFERED to COMPROMISE the violation of law he committed and his offer
has been ACCEPTED by the CIR and collected from him.
What is the reward whichever is LOWER between:
o SUM equivalent to 10% of the revenues, surcharges or fees recovered and/or fine or penalty
imposed and collected or
o P1M per case

FOR DISCOVERY AND SEIZURE OF SMUGGLED GOODS

Reason To encourage people to extend full cooperation in eradicating smuggling
Who is entitled to the reward Person instrumental in the discovery and seizure of smuggled goods
EXCEPT public officials, incumbent or retired, who acquired the information in the course of the
performance of their duties during their incumbency
Reward whichever is lower between:
o CASH equivalent to 10% of the FMV of the smuggled and confiscated goods or
o P1M per case

CASES:

CIR v. COA: One of the reasons for respondent COA's disallowance of the informer's reward under
consideration is that there was actually no revenue realized or recovered as two (2) government
agencies were involved. This view is simplistic and merits no concurrence. It overlooks the fact that the
two (2) government agencies involved, NCA and PNOC, possess legal personalities separate and distinct
from the Philippine government. Although both are government-owned and controlled corporations,
NCA and PNOC perform proprietary functions. Their revenues do not automatically devolve to the
general coffers of the government. Unless transferred to the Philippine government through the vehicle
of taxation, no part of their revenues is available for appropriation by the Legislature for expenditure in
government projects; such revenues remain said agencies' in their entirety, to be applied to and
expended for their own exclusive purpose. Clearly, then, when said revenues are subjected to tax, the
portion thereof corresponding to such tax becomes, in its own, revenue for the government accruing to
the General Fund.
That the informer's reward was sought and given in relation to tax delinquencies of government
agencies provides no reason for disallowance. The law on the matter makes no distinction whatsoever
between delinquent taxpayers in this regard, whether private persons or corporations, or public or
quasi-public agencies, it being sufficient for its operation that the person or entity concerned is subject
to, and violated, revenue laws, and the informer's report thereof resulted in the recovery of revenues. It
is elementary that where the law does not distinguish, none must be made. Ubi lex non distinguit nec nos
distinguere debemos.

Fitness by Design, Inc. v. CIR: The law thus allows the BIR access to all relevant or material records and
data in the person of the taxpayer,32and the BIR can accept documents which cannot be admitted in a
judicial proceeding where the Rules of Court are strictly observed.33 To require the consent of the
taxpayer would defeat the intent of the law to help the BIR assess and collect the correct amount of
taxes.
Petitioners invocation of the rights of an accused in a criminal prosecution to cross examine the witness
against him and to have compulsory process issued to secure the attendance of witnesses and the
production of other evidence in his behalf does not lie. CTA Case No. 7160 is not a criminal prosecution,
and even granting that it is related to I.S. No. 2005-203, the respondents in the latter proceeding are the
officers and accountant of petitioner-corporation, not petitioner. From the complaint and supporting

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affidavits in I.S. No. 2005-203, Sablan does not even appear to be a witness against the respondents
therein.

BIRs Power to Make Assessments

When to assess
d UPON EXAMINATION OF RETURNS FILED (Sec. 6A)
CIR or duly authorized representative may authorize the examination of any taxpayer and the
assessment of the correct amount of tax after a return has been filed
Failure to file a return shall NOT prevent the CIR from authorizing the examination of any taxpayer
Tax or any deficiency tax assessed shall be paid upon notice and demand from the CIR or duly
authorized representative
Once a return, statement or declaration has already been filed in any office authorized to receive it, it
can no longer be withdrawn
o But it may be modified, changed or amended within 3yrs provided that no notice for audit or
investigation of such return, statement or declaration has, in the meantime, been actually
served upon the taxpayer.
d

IN CASE OF FAILURE TO SUBMIT REQUIRED REPORTS (Sec. 6B)

When a report required by law as a basis for the assessment of any tax has not been filed within the time
fixed by laws or rules and regulations OR when there is reason to believe that the report is false,
incomplete or erroneous, the CIR shall assess the proper tax on the best evidence obtainable
The CIR shall make or amend the return based 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

AFTER INVENTORY TAKING OR SURVEILLANCE (Sec. 6C)

WHERE CIR TERMINATES TAXPAYERS TAXABLE PERIOD (Sec. 6D)

The CIR shall declare the tax period terminated at any time when he learns that:
o The taxpayer is retiring from business subject to tax
o The taxpayer is intending to leave the Philippines or to remove his property therefrom or to
hide or conceal his property
o The taxpayer 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 it totally or partially ineffective
unless the proceedings are begun immediately
The CIR shall send a notice of its 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.
o Taxes shall be due and payable immediately and shall be subject to all the penalties prescribed,
unless paid within the time fixed in the demand made by the CIR

Kinds of issuances
d PRE-ASSESSMENT NOTICE (Sec. 228)
Issued upon finding that there exists sufficient basis to assess the taxpayer for any DEFICIENCY taxes
o General Rule: The PAN shall be given to the taxpayer when the CIR or duly authorized
representative finds that proper taxes should be assessed
F The PAN shall be in WRITING and shall contain the LAW and FACTS on which the
assessment is made, otherwise it shall be VOID
F The taxpayer is REQUIRED to RESPOND within 15DAYS

If the taxpayer RESPONDS, he or his representative shall be allowed to

examine the records of the case so that he can validly object against the
proposed assessment and present documentary evidence and arguments in
support of his position.

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FAILURE TO RESPOND CIR shall issue a FAN based on his own findings
Exception: PAN shall not be required in the ff cases:
F When the finding for any deficiency tax is the result of MATHEMATICAL ERROR in the
computation of the tax as appearing on the face of the return; or
F When a DISCREPANCY has been determined between the tax withheld and the
amount actually remitted by the withholding agent; or
F When a taxpayer who opted to claim a refund or a 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 quarters of the succeeding taxable year; or
F When the EXCISE TAX due has NOT been paid; or
F When an article locally purchased or imported by an exempt person, such as, but not
limited to vehicles, capital equipment, machineries and spare parts, has been SOLD,
TRADED or TRANSFERRED to a NON-EXEMPT person

Is the issuance of PAN MANDATORY? compare the 2 cases

o Pilipinas Shell Petroleum Corp. v. CIR: The facts show that PSPC was not accorded due process
before the assessment was levied on it.
What is applicable is RR 12-99, which superseded RR 12-85, pursuant to Sec. 244 in relation to
Sec. 245 of the NIRC implementing Secs. 6, 7, 204, 228, 247, 248, and 249 on the assessment of
national internal revenue taxes, fees, and charges. The procedures delineated in the said
statutory provisos and RR 12-99 were not followed by respondent, depriving PSPC of due
process in contesting the formal assessment levied against it. Respondent ignored RR 12-99
and did not issue PSPC a notice for informal conference and a preliminary assessment notice,
as required.
PSPC was merely informed that it is liable for the amount of excise taxes it declared in its
excise tax returns for 1992 and 1994 to 1997 covered by the subject TCCs via the formal letter
of demand and assessment notice. For being formally defective, the November 15, 1999
formal letter of demand and assessment notice is void.
In short, respondent merely relied on the findings of the Center which did not give PSPC ample
opportunity to air its side. While PSPC indeed protested the formal assessment, such does not
denigrate the fact that it was deprived of statutory and procedural due process to contest the
assessment before it was issued.
o

CIR v. Menguito: However, while the lack of a post-reporting notice and pre-assessment notice
is a deviation from the requirements under Section 1 and Section 2 of Revenue Regulation No.
12-85, the same cannot detract from the fact that formal assessments were issued to and
actually received by respondents in accordance with Section 228 of the National Internal
Revenue Code which was in effect at the time of assessment.
It should be emphasized that the stringent requirement that an assessment notice be
satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said
assessment notice have been served on the taxpayer, applies only to formal assessments
prescribed under Section 228 of the National Internal Revenue Code, but not to post-reporting
notices or pre-assessment notices. The issuance of a valid formal assessment is a substantive
prerequisite to tax collection, for it contains not only a computation of tax liabilities but also a
demand for payment within a prescribed period, thereby signaling the time when penalties
and interests begin to accrue against the taxpayer and enabling the latter to determine his
remedies therefor. Due process requires that it must be served on and received by the
taxpayer.
A post-reporting notice and pre-assessment notice do not bear the gravity of a formal
assessment notice. The post-reporting notice and pre-assessment notice merely hint at the
initial findings of the BIR against a taxpayer and invites the latter to an "informal" conference
or clarificatory meeting. Neither notice contains a declaration of the tax liability of the

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taxpayer or a demand for payment thereof. Hence, the lack of such notices inflicts no prejudice
on the taxpayer for as long as the latter is properly served a formal assessment notice. In the
case of respondent, a formal assessment notice was received by him as acknowledged in his
Petition for Review and Joint Stipulation; and, on the basis thereof, he filed a protest with the
BIR, Baguio City and eventually a petition with the CTA.

REPLY v. PROTEST
REPLY
15days from receipt of PAN to reply

Taxpayer generally does not respond in an

adequate manner to the specific findings of the
revenue officer

Filing is DIRECTORY
Failure to reply to PA makes the taxpayer in
default and authorizes the revenue officer to
issue a FAN; no liability for additional or
deficiency tax arises from failure to reply

PROTEST
30days from receipt of FAN to file protest
Usually sufficient and comprehensive to explain
the legal and factual bases why the assessment is
incorrect, and certain documentary evidence not
presented during the preliminary assessment
phase and legal authorities and jurisprudence
relevant to the findings of the officer are allowed
to be submitted within the next 60days
Filing is MANDATORY
Failure to file protest to FAN makes the formal
assessment notice final and executor and the
taxpayer loses his right to contest the
assessment at the administrative and judicial
levels

FINAL ASSESSMENT NOTICE (Sec. 228)

WHAT CONSTITUTES AN ASSESSMENT
o CIR v. Pascor Realty and Development Corp: An assessment contains not only a computation of
tax liabilities, but also a demand for payment within a prescribed period. It also signals the
time when penalties and interests begin to accrue against the taxpayer. To enable the
taxpayer to determine his remedies thereon, due process requires that it must be served on
and received by the taxpayer. Accordingly, an affidavit, which was executed by revenue
officers stating the tax liabilities of a taxpayer and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can be questioned before the Court of Tax
Appeals.
To start with, an assessment must be sent to and received by a taxpayer, and must demand
payment of the taxes described therein within a specific period. Thus, the NIRC imposes a 25
percent penalty, in addition to the tax due, in case the taxpayer fails to pay the deficiency tax
within the time prescribed for its payment in the notice of assessment. Likewise, an interest of
20 percent per annum, or such higher rate as may be prescribed by rules and regulations, is to
be collected from the date prescribed for its payment until the full payment.
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 the 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 to make an assessment or to protest the same, or whether interest and penalty may
accrue thereon.
It should also be stressed that the said document is a notice duly sent to the taxpayer. Indeed,
an assessment is deemed made only when the collector of internal revenue releases, mails or
sends such notice to the taxpayer.
o

Adamson v. CA: Whether the Commissioners recommendation letter can be considered as a

formal assessment of private respondents tax liability.

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In the context in which it is used in the NIRC, an assessment is a written notice and demand
made by the BIR on the taxpayer for the settlement of a due tax liability that is there definitely
set and fixed. A written communication containing a computation by a revenue officer of the
tax liability of a taxpayer and giving him an opportunity to contest or disprove the BIR
examiners findings is not an assessment since it is yet indefinite.
We rule that the recommendation letter of the Commissioner cannot be considered a formal
assessment. Even a cursory perusal of the said letter would reveal three key points:
1. It was not addressed to the taxpayers.
2. There was no demand made on the taxpayers to pay the tax liability, nor a period
for payment set therein.
3. The letter was never mailed or sent to the taxpayers by the Commissioner.
In fine, the said recommendation letter served merely as the prima facie basis for filing criminal
informations that the taxpayers had violated Section 45 (a) and (d), and 110, in relation to
Section 100, as penalized under Section 255, and for violation of Section 253, in relation to
Section 252 9(b) and (d) of the Tax Code
o

The BIR enjoys presumption of regularity in the discharge of its functions. The burden is on
the taxpayer to show that assessment was not made. Once the taxpayer questions the
receipt of the assessment, the burden shifts to the CIR to show that the notice of assessment
was indeed sent to the taxpayer.
F Republic v. CA: As correctly observed by the respondent court in its appealed
decision, while the contention of petitioner is correct that a mailed letter is deemed
received by the addressee in the ordinary course of mail, stilt this is merely a
disputable presumption, subject to controversion, and a direct denial of the receipt
thereof shifts the burden upon the party favored by the presumption to prove that
the mailed letter was indeed received by the addressee.
Since petitioner has not adduced proof that private respondent had in fact received
the demand letter of 16 July 1955, it cannot be assumed that private respondent
received said letter. Records, however, show that petitioner wrote private
respondent a follow-up letter dated 19 September 1956, reiterating its demand for the
payment of taxes as originally demanded in petitioner's letter dated 16 July 1955. This
follow-up letter is considered a notice of assessment in itself which was duly received
by private respondent in accordance with its own admission.
F

Barcelon, Roxas Securities, Inc. v. CIR: In the present case, petitioner denies receiving
the assessment notice, and the respondent was unable to present substantial
evidence that such notice was, indeed, mailed or sent by the respondent before
the BIRs right to assess had prescribed and that said notice was received by the
petitioner. The respondent presented the BIR record book where the name of the
taxpayer, the kind of tax assessed, the registry receipt number and the date of
mailing were noted.
In the present case, the evidence offered by the respondent fails to convince this
Court that Formal Assessment Notice No. FAN-1-87-91-000649 was released, mailed,
or sent before 15 April 1991, or before the lapse of the period of limitation upon
assessment and collection prescribed by Section 203 of the NIRC. Such evidence,
therefore, is insufficient to give rise to the presumption that the assessment notice
was received in the regular course of mail. Consequently, the right of the
government to assess and collect the alleged deficiency tax is barred by prescription.

Is it important that the notice is received within the 3-yr prescriptive period? NO
F Basilan Estates, Inc. v. CIR and CIR v. Bautista: Although the evidence is not clear on
this point, We cannot accept this interpretation of the petitioner, considering the
presence of circumstances that lead Us to presume regularity in the performance of

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official functions. The notice of assessment shows the assessment to have been
made on February 26, 1959, well within the five-year period. On the right side of the
notice is also stamped "Feb. 26, 1959" denoting the date of release, according to
Bureau of Internal Revenue practice. The Commissioner himself in his letter (Exh. H,
p. 84 of BIR records) answering petitioner's request to lift, the warrant of distraint
and levy, asserts that notice had been sent to petitioner. In the letter of the Regional
Director forwarding the case to the Chief of the Investigation Division which the
latter received on March 10, 1959 (p. 71 of the BIR records), notice of assessment was
said to have been sent to petitioner. Subsequently, the Chief of the Investigation
Division indorsed on March 18, 1959 (p. 24 of the BIR records) the case to the Chief of
the Law Division. There it was alleged that notice was already sent to petitioner on
February 26, 1959. These circumstances pointing to official performance of duty must
necessarily prevail over petitioner's contrary interpretation. Besides, even granting
that notice had been received by the petitioner late, as alleged, under Section 331 of
the Tax Code requiring five years within which to assess deficiency taxes, the
assessment is deemed made when notice to this effect is released, mailed or sent by
the Collector to the taxpayer and it is not required that the notice be received by the
taxpayer within the aforementioned five-year period.

PRESUMPTION OF CORRECTNESS OF ASSESSMENT

o Sy Po v. CTA: 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 Bureau of Internal Revenue
examiner and approved by his superior officers will not be disturbed. 8 All presumptions are in
favor of the correctness of tax assessments.

ASSESSMENT MUST BE BASED ON ACTUAL FACTS

o CIR v. Benipayo: Fraud is a serious charge and, to be sustained, it must be supported by clear
and convincing proof which, in the present case, is lacking.
o CIR v. Hantex Trading Co, Inc: However, the best evidence obtainable under Section 16 of the
1977 NIRC, as amended, does not include mere photocopies of records/documents. The
petitioner, in making a preliminary and final tax deficiency assessment against a taxpayer,
cannot anchor the said assessment on mere machine copies of records/documents. Mere
photocopies of the Consumption Entries have no probative weight if offered as proof of the
contents thereof. The reason for this is that such copies are mere scraps of paper and are of
no probative value as basis for any deficiency income or business taxes against a taxpayer.
In Collector of Internal Revenue v. Benipayo, the Court ruled that the assessment must be based
on actual facts. The rule assumes more importance in this case since the xerox copies of the
Consumption Entries furnished by the informer of the EIIB were furnished by yet another
informer. While the EIIB tried to secure certified copies of the said entries from the Bureau of
Customs, it was unable to do so because the said entries were allegedly eaten by termites. The
Court can only surmise why the EIIB or the BIR, for that matter, failed to secure certified copies
of the said entries from the Tariff and Customs Commission or from the National Statistics
Office which also had copies thereof. It bears stressing that under Section 1306 of the Tariff
and Customs Code, the Consumption Entries shall be the required number of copies as
prescribed by regulations. The Consumption Entry is accomplished in sextuplicate copies and
quadruplicate copies in other places. In Manila, the six copies are distributed to the Bureau of
Customs, the Tariff and Customs Commission, the Declarant (Importer), the Terminal
Operator, and the Bureau of Internal Revenue. Inexplicably, the Commissioner and the BIR
personnel ignored the copy of the Consumption Entries filed with the BIR and relied on the
photocopies supplied by the informer of the EIIB who secured the same from another
informer. The BIR, in preparing and issuing its preliminary and final assessments against the
respondent, even ignored the records on the investigation made by the District Revenue
officers on the respondents importations for 1987.

Issued when:
o FAILURE by the taxpayer to REPLY within 15DAYS from receipt of the PAN; OR

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o

Explanation of taxpayer is NOT accepted

Formal requisites: (RR 12-99)

o The FAN shall state the facts, the law, rules and regulations, or jurisprudence on which the
assessment is based, otherwise, the FAN shall be void
o It shall be sent to the taxpayer by registered mail or by personal delivery

Remedy against FAN:

o The taxpayer may file an ADMINISTRATIVE PROTEST within 30DAYS from receipt of the
assessment
o All relevant supporting documents shall be submitted within 60DAYS from filing the protest

TAX VERIFICATION NOTICES AND LETTER NOTICES (based on information provided by 3rd parties) see pp. 355360 of Mamalateo
RMO no. 46-04: When no response is given to Letter Notices (LNs)
o No response LNs with discrepancies
F Less than 30% Revenue Officer (RO) shall endorse the case to the Assessment
Division of the Region for the issuance of PAN or FAN in accordance with the
provisions of RR 12-99
F 30% or more RO shall institute closure proceedings in accordance with policies in
RMO No. 31-02
o When the taxpayer issued an LN protests the accuracy of the information provided by 3rd
parties (TPI) RO shall evaluate the protest and shall require the taxpayer to provide a Sworn
Statement attesting to the alleged inaccuracies or errors in the TPI. The TPI shall also execute a
Sworn Statement
o Enforcement action shall be undertaken when theres reason to believe that there is tax
evasion based on the TPI and the information given by the taxpayer and the evaluation by the
RO
F If the enforcement action if to conduct AUDIT/INVESTIGATION the audit should
be, whenever possible, an issue-based audit focusing on the TPI and the explanation
given by the taxpayer.

Collection of Unpaid Taxes

Sec. 205: Remedies for collection of internal revenue taxes, fees or charges any increment thereto resulting from
delinquency shall be
d By DISTRAINT of goods, chattels or effects and other personal property of whatever character, including stocks
and other securities, debts, credits, bank accounts and interest in and rights to personal property and by LEVY
upon real property and interest in or rights to real property
These remedies shall NOT be availed of where the amount of tax involved is NOT more than P100
GARNISHMENT in case of stocks and other securities
d CRIMINAL or CIVIL action
EITHER or BOTH simultaneously may be pursued in the discretion of the authorities charged with the collection of taxes
Administrative remedies
d DISTRAINT on PERSONAL PROPERTIES and GARNISHMENT of STOCKS and other SECURITIES
TWO KINDS OF DISTRAINT
o ACTUAL DISTRAINT (Sec. 207A) Resorted to when at the time required for payment, a person
FAILS to pay his delinquent tax obligation. It consists in the ACTUAL SEIZURE and TAKING
POSSESSION of personal property of the taxpayer.
F WHO shall seize the property?

CIR or duly authorized representative If the amount involved is more than

P1M

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RDO if the amount involved is P1M or less

Within 10days from receipt of the warrant, the distraining officer shall submit a report
on the distraint to the RDO and to the Revenue Regional Director
F CIR or his representative has the power to LIFT the order of distraint
F PROCEDURE (Sec. 208):

The officer serving the WARRANT of distraint shall make an ACCOUNT of

the goods, chattels, effects or other personal property distrained.
A COPY of the account shall be left

Either to the OWNER or person from whose

POSSESSION such goods, etc. were taken OR

At the DWELLING or PLACE of BUSINESS of such person

and with someone of suitable age and discretion
A STATEMENT of the SUM distrained and NOTE of the time and
place of SALE shall also be given

STOCKS and SECURITIES serve a COPY of the WARRANT to the taxpayer

and to the president, manager, treasurer or other responsible officer of the
corporation, company or association, which issued the stocks or securities

DEBTS and SECURITIES serve a COPY of the WARRANT to the PERSON

owing the debts or having in his possession or under his control such credits
OR with his AGENT
The warrant shall be sufficient authority to the person to pay the
CIR the amount of such debts or credits

BANK ACCOUNTS garnished b serving a WARRANT of GARNISHMENT

upon the taxpayer and upon the president, manager, treasure, or other
responsible officer of the bank
Upon receipt of the warrant, the bank shall turn over to the CIR
so much of the bank accounts as may be sufficient to satisfy the
claim of the Government
o CONSTRUCTIVE DISTRAINT (Sec. 206) Issued where no actual tax delinquency of the taxpayer
is necessary before the same is resorted to by the government
F May be availed of in the ff. instances:

Taxpayer is retiring from an business subject to tax; or

Taxpayer is intending to leave the Philippines; or

Taxpayer intends to remove his property from the Philippines; or

Taxpayer intends to hide or conceal his property; or

Taxpayer intends to perform any act tending to obstruct the proceedings

for collecting the tax due or which may be due from him
F PROCEDURE (HOW effected?)

The taxpayer or any person having possession or control of the property

shall SIGN a RECEIPT covering the property distrained and
If taxpayer or person having control or possession of property
REFUSES or FAILS to sign the receipt the revenue officer shall
prepare a list of such property and, in the presence of 2 witnesses,
leave a copy in the premises where the property distrained is
located

He shall obligate himself to preserve the same intact and unaltered and

He shall not dispose of such in any manner whatever without the express
authority of the CIR
SALE OF PROPERTY DISTRAINED (Sec. 209)
o Upon recommendation of the CIR, the RDO or his duly authorized representative shall cause a
NOTIFICATION to be exhibited in NOT less than 2 public places in the municipality or city where
the distraint is made. The notice shall specify the time and place of the sale and the articles
distrained.
F Time of sale shall NOT be less than 20days after notice to the owner or possessor of
property and the publication or posting of the notice
F One place for the posting is the Office of the Mayor
F

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o

At the time and place set, the revenue officer hall SELL the properties at PUBLIC AUCTION to
the highest bidder for CASH or through DULY LICENSED COMMODITY or STOCK EXCHANGE
(with CIR approval)
o In case of STOCKS and other SECURITIES, the revenue officer shall execute a BILL of SALE
which will be delivered to the buyer.
F Copy of the bill shall be given to the corporation, company or association which
issued the stocks or securities

Upon receipt of the copy, the corporation shall make the corresponding
entry in its books, transfer the stocks or securities sold in the name of the
buyer, and issue, if require to do so, the corresponding certificates of stocks
or securities
o Any RESIDUE over and above what is required to be paid shall be RETURNED to the OWNER of
the property sold
o Expenses shall cover only the ACTUAL EXPENSES of seizure and preservation of the property
pending the sale and no charge shall be imposed for the services of the local revenue officer or
his deputy
RELEASE OF DISTRAINED PROPERTY UPON PAYMENT PRIOR TO SALE (Sec. 210) If at any time prior to
the consummation of the sale, the proper charges are paid to the officer conducting the sale, the
properties shall be restored to the owner.
REPORT OF SALE TO BIR (Sec. 211) WITHIN 2DAYS after the sale, the officer shall make a REORT of the
proceedings in writing to the CIR and shall preserve a copy as an official record
PURCHASE BY GOVERNMENT AT SALE UPON DISTRAINT (Sec. 212)
o WHEN done?
F When the amount bid for the property is NOT equal to the amount of the tax OR is
VERY MUCH LESS than the actual market value of the property
o The purchased property may then be RESOLD by the CIR, subject to rules and regulations
prescribed by the Finance Secretary. The net proceeds shall be remitted to the National
Treasury and accounted for as internal revenue.
SEC. 11, RA 1125: Effect of Appeal to CTA
o General Rule: Appeal from the decision of the CIR shall NOT SUSPEND the payment, levy,
distraint, and/or sale of any property of the taxpayer for the satisfaction of his tax liability
o Exception: When, in the opinion of the CTA, the collection may JEOPARDIZE the INTEREST of
the GOVERNMENT and/or the TAXPAYER, the CTA, at any stage of the proceedings, may
SUSPEND the said collection and REQUIRE the taxpayer to DEPOSIT the amount claimed or to
FILE a SURETY BOND for not more than double the amount

LEVY on REAL PROPERTIES remedy whereby the collection of delinquent taxes is enforced on the real property
belonging to the delinquent taxpayer
Sec. 207B:
o When may levy be done?
F AFTER the expiration of the time required to pay the delinquent tax/revenue as
prescribed
F May be done before, simultaneously or after the distraint of personal property

If NOT issued BEFORE or SIMULTANEOUSLY with the warrant of distraint

and the personal property if NOT sufficient to satisfy the delinquency, the
CIR or his duly authorized representative shall proceed with the levy
WITHIN 30 DAYS AFTER THE EXECUTION OF THE DISTRAINT
o HOW effected?
F Effected by WRITING upon the duly authenticated certificate (shows the name of the
taxpayer and the amounts of tax and penalty due from him) a description of the
property upon which levy is made
F WRITTEN NOTICE of the levy shall be MAILED to or SERVED upon the

Register of Deeds of the province/city where the property is located and

Delinquent taxpayer or if he is absent from the Phils., to his agent or the

manager of the business in respect to which the liability arose or if there be
none, to the occupant of the property in question

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o

Within 10 days after receipt of the warrant REPORT on any levy shall be submitted by the
levying officer to the CIR or his representative
o CIR or his representative has the power to LIFT the warrants of levy issued
ADVERTISEMENT AND SALE OF REAL PROPERTIES (Sec. 213)
o Advertisement
F WITHIN 20DAYS after levy, the officer shall advertise the property or a usable portion
of it as may be necessary to satisfy the claim and cost of sale
F The advertisement will last for AT LEAST 30DAYS
F How done?

By posting a NOTICE at the main entrance of the municipal building or city

hall and in a public and conspicuous place in the barrio or district in which
the real estate lies; and

By PUBLICATION ONCE A WEEK for 3WEEKS in a newspaper of general

circulation in the municipality or city where the property is located
F The advertisement will contain a statement of the AMOUNT of taxes and penalties
due and the TIME and PLACE of sale and a SHORT DESCRIPTION of the property to be
sold
o Sale
F At ANY TIME BEFORE the day fixed for the sale, the taxpayer ma DISCONTINUE all
proceedings by PAYING the taxes, penalties and interest

If the taxpayer does not ay, the sale will proceed and will be held either at
the main entrance of the municipal building or city hall or on the premises
to be sold
F WITHIN 5DAYS AFTER THE SALE, a RETURN made by the officer shall be entered
upon the records of the Revenue Collection Officer, the RDO and the Revenue
Regional Director
F Excess of the proceeds shall be given to the owner
REDEMPTION OF PROPERTY SOLD (Sec. 214)
o WITHIN 1YEAR FROM THE DATE OF SALE, the delinquent taxpayer, or anyone for him, shall
have the right of paying the RDO the amount of the public taxes, penalties and interest from
the DATE OF DELINQUENCY to the DATE OF SALE and interest on said purchase price at 15%p.a.
from the DATE OF PURCHASE to the DATE OF REDEMPTION
F Owner shall NOT be deprived of the possession of the property and he shall be
entitled to the rents and other income therefrom until the expiration of the time
allowed for redemption
o Upon payment, the certificate issued to the purchaser shall be delivered to the taxpayer and
the RDO shall pa over the purchaser the amount by which such property has been redeemed
F Thereafter, the property shall be free from the lien of the taxes and penalties
FORFEITURE TO GOVERNMENT IN CASE THERE IS NO BIDDER (Sec. 215)
o When will forfeiture happen?
F If there is no bidder OR
F If the highest bid is insufficient to pay the taxes, penalties and costs
o Within 2days upon declaration of forfeiture, the officer shall make a return
o The Register of Deeds, upon registration with his office, will transfer title of the property to
the Government without necessity of an order from a competent court
o The taxpayer may REDEEM the property WITHIN 1YEAR from forefeiture
RESALE OF REAL ESTATE (Sec. 216)
o Upon giving of NOT less than 20days notice, the CIR may sell and dispose of the property at
PUBLIC AUCTION or PRIVATE SALE (upon prior approval of Finance Secretary)
o Proceeds shall be deposited with National Treasury and an accounting shall be rendered to the
COA Chairman

SEIZURE or FORFEITURE
ENFORCEMENT OF FORFEITURES (Sec. 224)
o PERSONAL PROPERTY The forfeiture of chattels and removable fixtures of any sort shall be
enforced by the SEIZURE and SALE, or DESTRUCTION, of specific forfeited property
o REAL PROPERTY The forfeiture of real property shall be enforced by a JUDGMENT of
CONDEMNATION and SALE in a legal action or proceeding, civil or criminal, as the case may be

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WHEN TO BE SOLD OR DESTROYED (Sec. 225)

o The sale shall be effected in the same manner and under the same conditions as are prescribed
for sales of personal property distrained for non-payment of taxes (Sec. 225)
o Distilled spirits, liquors, cigars, cigarettes, other manufactured products of tbacco, and all
apparatus used in or about the illicit product may be DESTROYED upon CIRs order when the
sale of such for consumption or use would be injurious to public health or prejudicial to the
enforcement of the law
o ALL OTHER ARTICLES subject to EXCISE TAX, which have been manufactured or removed in
violation of the NIRC, as well as dies for the printing or making of internal revenue stamps and
labels which are imitation or purport to be lawful stamps, or labels may be SOLD or
DESTROYED in the discretion of the CIR
o Forfeited property shall not be destroyed until AT LEAST 20DAYS AFTER SEIZURE

COMPROMISE AND ABATEMENT (Sec. 204 and RR30-02)

COMPROMISE
o BASIS:
F A REASONABLE DOUBT as to the VALIDITY of the claim against the taxpayer exists;
or

JEOPARDY ASSESSMENT a tax assessment which was assessed without

the benefit of complete or partial audit by an authorized revenue officer,
who has reason to believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because of the taxpayer's failure
to comply with the audit and investigation requirements to present his
books of accounts and/or pertinent records, or to substantiate all or any of
the deductions, exemptions, or credits claimed in his return; or

The assessment seems to be ARBITRARY in nature, appearing to be based

on presumptions and there is reason to believe that it is lacking in legal
and/or factual basis; or

Taxpayer failed to file an administrative protest on account of the alleged

failure to receive notice of assessment and there is reason to believe that
the assessment is lacking in legal and/or factual basis; or

Taxpayer failed to file a request for reinvestigation/reconsideration within

30 days from receipt of final assessment notice and there is reason to
believe that the assessment is lacking in legal and/or factual basis; or

Taxpayer failed to elevate to the CTA an adverse decision of the CIR within
30days from receipt thereof and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or

The assessments were issued on or after January 1, 1998, where the

demand notice allegedly failed to comply with the formalities prescribed
under Sec. 228 of the National Internal Revenue Code of 1997; or

Assessments made based on the "Best Evidence Obtainable Rule" and

there is reason to believe that the same can be disputed by sufficient and
competent evidence; or

Assessment was issued within the prescriptive period for assessment as

extended by the taxpayer's execution of Waiver of the Statute of
Limitations the validity or authenticity of which is being questioned or at
issue and there is strong reason to believe and evidence to prove that it is
not authentic.
F The FINANCIAL POSITION of the taxpayer demonstrates a clear INABILITY TO PAY
the assessed tax

Corporation ceased operation or is already dissolved

The tax liabilities corresponding to the Subscription Receivable or
Assets distributed/distributable to the stockholders representing
return of capital at the time of cessation of operation or
dissolution of business shall not be considered for compromise

Taxpayer is suffering from surplus or earnings deficit resulting to the

impairment in the original capital by at least 50%

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o
o

The amounts payable or due to stockholders other than businessrelated transactions which are properly includible in the regular
"accounts payable" are by fiction of law considered as part of
capital and not liability
The taxpayer has no sufficient liquid asset to satisfy the tax
liability

Taxpayer is suffering from a networth deficit computing by deducting total

liabilities from total assets, taken from latest audited financial statements

Taxpayer is a compensation income earner with no other source of income

and the familys gross monthly compensation income does not exceed the
levels of compensation income provided for in the RR and it appears that
the taxpayer possesses no other leviable or distrainable assets, other than
his family home

Taxpayer has been declared by any competent tribunal/authority as

bankrupt or insolvent
Only the CIR has the power and the authority to compromise tax liabilities
F BIR may run after a taxpayer who compromised with an agent because the
agreement is ultra vires
Compromise settlement subject to the ff. MINIMUM AMOUNTS:
F For case of financial incapacity 10% of basic assessed tax
F For other cases 40% of the basic assessed tax
Approval of the Evaluation Board is necessary when the basic tax involved exceeds P1M or
where the settlement offered is less than the prescribed minimum rates
What cases MAY be compromised?
F Delinquent accounts
F Cases under administrative protest after issuance of the FAN to the taxpayer which
are still pending in the Regional Offices, RDOs, Legal Service, Large Taxpayer Service,
Collection Services, Enforcement Service and other offices in the National Office
F Civil tax cases being disputed before the courts
F Collection cases filed in courts
F Criminal violations, other than those already filed in court or those involving criminal
tax fraud

BEFORE final judgment: doubtful validity or incapacity to pay

Cases which CANNOT be compromised:
F Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that
cast doubt on the taxpayers obligation to withhold
F Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue
or his duly authorized representative;
F Criminal violations already filed in court;
F Delinquent accounts with duly approved schedule of installment payments;
F Cases where final reports of reinvestigation or reconsideration have been issued
resulting to reduction in the original assessment and the taxpayer is agreeable to
such decision by signing the required agreement form for the purpose. On the other
hand, other protested cases shall be handled by the Regional Evaluation Board (REB)
or the National Evaluation Board (NEB) on a case to case basis;
F Cases which become final and executory after final judgment of a court, where
compromise is requested on the ground of doubtful validity of the assessment; and

AFTER final judgment: doubtful validity only

F Estate tax cases where compromise is requested on the ground of financial
incapacity of the taxpayer.

The CIR may ABATE or CANCEL a tax liability, when:

o The tax or any portion of it appears to be unjustly or excessively assessed; or
o The administration and collection costs involved do not justify the collection of the amount
due

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d

TAX LIEN
DEFINITION: Tax lien is a legal claim or charge on property, either real or personal, as security for the
payment of some debt or obligation.
o A lien in its modern-acceptation is understood to denote a legal claim or charge on property,
either real or personal, as security for the payment of some debt or obligation. Its meaning is
more extensive than the jus retentionis (derecho de retencion) of the civil law. Unless the
statute is otherwise, the rule is that a valid lien created on real or personal estate is
enforceable against property in the hands of any person, other than a bona fide purchaser for
value without notice, who subsequently acquires the estate. In order that the lien may follow
the property into the hands of a third party, it is further essential that the latter should have
notice, either actual or constructive. (HSBC v. Rafferty)
NATURE AND EXTENT (Sec. 219)
o If any person, corporation, partnership, joint-account, association or insurance company liable
to pay an internal revenue tax NEGLECTS or REFUSES to pay AFTER DEMAND such amount
shall be a LIEN in favor of the Government
F The internal revenue tax constitutes a paramount lien either on the property upon
which the tax is imposed or on any other property used in any business or occupation
upon which the tax is imposed. The government has here chosen to levy on the
property itself in the hands of a purchaser for value. (HSBC v. Rafferty)
F The claim of the government predicted on a tax lien is superior to the claim of a
private litigant predicated on a 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. Also, the distraint on the subject properties as well as the
notice of their seizure was made by petitioner before the writ of execution was
issued. There is no question therefore that at the time the writ was issued, the 2
barges were no longer properties of the Maritime Company. The power of the court
in execution of judgments extends only to properties unquestionably belonging to
the judgment debtor. (Republic v. Enriquez)
F The Collectors claim, being for amusement taxes on the theater insured, constitutes
a lien superior to all other charges or liens not only on the theater itself but also upon
all property rights therein, including the insurance proceeds. (Rizal Srety v. Dela Paz)
o WHEN? From the time when ASSESSMENT WAS MADE by the CIR until PAID, with interests,
penalties and costs that may accrue
o ON WHAT? All property and rights to property belonging to the taxpayer
o PROVISO: The lien shall NOT be valid against any mortgagee, purchaser or judgment creditor
UNTIL notice of such lien shall be filed by the CIR in the office of the Register of Deeds of the
province/city where the property is located

Judicial remedies
Sec. 220: Form and Mode of Proceeding in Actions (Civil and Criminal)
d Instituted in behalf of the Government and conducted by the legal officers of the BIR
d CIR approval is required before any action is filed in court
d

CIVIL ACTIONS
2 ways of enforcing tax liability through civil actions:
o Filing a civil case for collection of sum of money
o Filing an answer to the petition for review filed by the taxpayer with the CTA
F The answer filed by the government in the CTA was tantamount to the filing of a civil
action for collection in regular courts
Instances when tax delinquency becomes collectible through a civil action:
o Self-assessed tax shown in the return was not paid within the date prescribed by law
o FAN is not protested administratively within 30days from date of receipt
o Non-compliance with the condition laid in the approval of protest
o Failure to file a timely appeal to the CTA on the final decision of the CIR on the disputed
assessment
MAY THE GOVERNMENT FILE A CIVIL CASE FOR COLLECTION WITHOUT FIRST ISSUING AN ASSESSMENT
NOTICE?

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o

General rule: YES, the BIR can file a civil action for collection of a tax that has become
delinquent or collectible within 5years from the date of assessment.
F Republic v. Lim Tian Teng Sons & Co: The Collector of Internal Revenue is authorized
to collect delinquent internal revenue taxes either by distraint and levy or by judicial
action or both simultaneously. The only requisite before he can collect the tax is that
he must first assess the same within the time fixed by law. And in the case of a false
or fraudulent return with intent to evade the tax or of a failure to file a return, a
proceeding in court for the collection of such tax may be begun without assessment.
Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on
a taxpayer's request for reinvestigation before he can go to court for the purpose of
collecting the tax assessed. On the contrary, Section 305 of the same Code withholds
from all courts, except the Court of Tax Appeals under Section 11 of Republic Act 1125,
the authority to restrain the collection of any national internal-revenue tax, fee or
charge, thereby indicating the legislative policy to allow the Collector of Internal
Revenue much latitude in the speedy and prompt collection of taxes.
Exception: There are some cases where a civil action may not be filed until the pending protest
is decided by the CIR.
F San Juan v. Vasquez: The Collector may not overlook the fact that the assessment
had been disputed as the objections to the assessment had been made at the
opportune time. He may not ignore the positive dispute against the assessment by
immediately bringing an action to collect, thus depriving the taxpayer of his right to
appeal the disputed assessment. As the legality and correctness of the assessment is
in dispute, the following provisions of Section 7 of Republic Act No. 1125 apply to the
case:
SEC. 7. The Court of Tax Appeals shall exercise exclusive appellate
jurisdiction to review by appeal, as herein provided .
(1) Decisions of the Collector of Internal Revenue in cases involving
disputed assessments, refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto, or other matters arising
under the National Internal Revenue Code or other law or part of law
administered by the Bureau of Internal Revenue
F Yabes v. Flojo: The respondent Court of First Instance of Cagayan can only acquire
jurisdiction over this case filed against the heirs of the taxpayer if the assessment
made by the Commissioner of Internal Revenue had become final and incontestable.
If the contrary is established, as this Court holds it to be, considering the
aforementioned conclusion of the Court of Tax Appeals on the finality and
incontestability of the assessment made by the Commissioner is correct, then the
Court of Tax Appeals has exclusive jurisdiction over this case. Petitioners received the
summons in Civil Case No. II-7 of the respondent Court of First Instance of Cagayan
on January 20, 1971, and petitioners filed their appeal with the Court of Tax Appeals in
CTA Case No. 2216, on February 12, 1971, well within the thirty-day prescriptive period
under Section 11 of Republic Act No. 1125. The Court of Tax Appeals has exclusive
appellate jurisdiction to review on appeal any decision of the Collector of Internal
Revenue in cases involving disputed assessments and other matters arising under the
National Internal Revenue Code.
F Sec. 205 provides that when the tax becomes due and payable and the taxpayer fails
to pay it, the tax shall become delinquent. This is the only time when the tax
becomes delinquent therefore the BIR has no business issuing a warrant of D/L while
the protest is still pending

CRIMINAL ACTIONS
THE GOVERNMENT MAY FILE A CRIMINAL CASE WITHOUT FIRST SECURING AN ASSESSMENT NOTICE
o CIR v. Pascor Realty and Development Corp: Private respondents maintain that the filing of a
criminal complaint must be preceded by an assessment. This is incorrect, because Section 222
of the NIRC specifically states that in cases where a false or fraudulent return is submitted or in
cases of failure to file a return such as this case, proceedings in court may be
commenced without an assessment. Furthermore, Section 205 of the same Code clearly

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mandates that the civil and criminal aspects of the case may be pursued
simultaneously. In Ungab v. Cusi, petitioner therein sought the dismissal of the criminal
Complaints for being premature, since his protest to the CTA had not yet been resolved. The
Court held that such protests could not stop or suspend the criminal action which was
independent of the resolution of the protest in the CTA. This was because the commissioner of
internal revenue had, in such tax evasion cases, discretion on whether to issue an assessment
or to file a criminal case against the taxpayer or to do both.
Private respondents insist that Section 222 should be read in relation to Section 255 of the
NIRC, which penalizes failure to file a return. They add that a tax assessment should precede a
criminal indictment. We disagree. To reiterate, said Section 222 states that an assessment is
not necessary before a criminal charge can be filed. This is the general rule. Private
respondents failed to show that they are entitled to an exception. Moreover, the criminal
charge need only be supported by a prima facie showing of failure to file a required
return. This fact need not be proven by an assessment.
The issuance of an assessment must be distinguished from the filing of a complaint. Before an
assessment is issued, there is, by practice, a pre-assessment notice sent to the taxpayer. The
taxpayer 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 or
her is then sent to the taxpayer informing the latter specifically and clearly that an assessment
has been made against him or her. In contrast, the criminal charge need not go through all
these. The criminal charge is filed directly with the DOJ. Thereafter, the taxpayer is notified
that a criminal case had been filed against him, not that the commissioner has issued an
assessment. It must be stressed that a criminal complaint is instituted not to demand
payment, but to penalize the taxpayer for violation of the Tax Code.
o

Ungab v. Cusi: The petitioner also claims that the filing of the informations was precipitate and
premature since the Commissioner of Internal Revenue has not yet resolved his protests
against the assessment of the Revenue District Officer; and that he was denied recourse to the
Court of Tax Appeals.
The contention is without merit. What is involved here is not the 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 National Internal Revenue Code which
is within the cognizance of courts of first instance. 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.
The contention is made, and is here rejected, that an assessment of the deficiency tax due is
necessary before the taxpayer can be prosecuted criminally for the charges preferred. The
crime is complete when the violator has, as in this case, knowingly and willfully filed fraudulent
returns with intent to evade and defeat a part or all of the tax.
An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to
defeat and evade the income tax. A crime is complete when the violator has knowingly and
willfuly filed a fraudulent return with intent to evade and defeat the tax. The perpetration of
the crime is grounded upon knowledge on the part of the taxpayer that he has made an
inaccurate return, and the government's failure to discover the error and promptly to assess
has no connections with the commission of the crime.
Besides, it has been ruled that a petition for reconsideration of an assessment may affect the
suspension of the prescriptive period for the collection of taxes, but not the prescriptive
period of a criminal action for violation of law. Obviously, the protest of the petitioner against
the assessment of the District Revenue Officer cannot stop his prosecution for violation of the
National Internal Revenue Code. Accordingly, the respondent Judge did not abuse his
discretion in denying the motion to quash filed by the petitioner.

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Important principles involving criminal actions

o No criminal action for the recovery of taxes or the enforcement of any fine, penalty or
forfeiture shall be filed in court without the approval of the CIR
o Criminal actions instituted on behalf of the Government under the authority of the NIRC or
other laws enforced by the BIR shall be brought in the name of the Government and shall be
conducted by the legal officers of the BIR
o The acquittal of the taxpayer in a criminal action under the NIRC does not necessarily result in
exoneration of taxpayer from his civil liability to pay taxes
F Republic v. Patanao: In applying the principle underlying the civil liability of an
offender under the Penal Code to a case involving the collection of taxes, the court a
quo fell into error. The two cases are circumscribed by factual premises which are
diametrically opposed to each either, and are founded on entirely different
philosophies. Under the Penal Code the civil liability is incurred by reason of the
offender's criminal act. Stated differently, the criminal liability gives birth to the civil
obligation such that generally, if one is not criminally liable under the Penal Code, he
cannot become civilly liable thereunder. The situation under the income tax law is the
exact opposite. Civil liability to pay taxes arises from the fact, for instance, that one
has engaged himself in business, and not because of any criminal act committed by
him. The criminal liability arises upon failure of the debtor to satisfy his civil
obligation. The incongruity of the factual premises and foundation principles of the
two cases is one of the reasons for not imposing civil indemnity on the criminal
infractor of the income tax law. Another reason, of course, is found in the fact that
while section 73 of the National Internal Revenue Code has provided the imposition
of the penalty of imprisonment or fine, or both, for refusal or neglect to pay income
tax or to make a return thereof, it failed to provide the collection of said tax in
criminal proceedings. The only civil remedies provided, for the collection of income
tax, in Chapters I and II, Title IX of the Code and section 316 thereof, are distraint of
goods, chattels, etc. or by judicial action, which remedies are generally exclusive in
the absence of a contrary intent from the legislator. Considering that the
Government cannot seek satisfaction of the taxpayer's civil liability in a criminal
proceeding under the tax law or, otherwise stated, since the said civil liability is not
deemed included in the criminal action, acquittal of the taxpayer in the criminal
proceeding does not necessarily entail exoneration from his liability to pay the taxes.
It is error to hold, as the lower court has held, that the judgment in the criminal cases
Nos. 2089 and 2090 bars the action in the present case. The acquittal in the said
criminal cases cannot operate to discharge defendant appellee from the duty of
paying the taxes which the law requires to be paid, since that duty is imposed by
statute prior to and independently of any attempts by the taxpayer to evade
payment. Said obligation is not a consequence of the felonious acts charged in the
criminal proceeding, nor is it a mere civil liability arising from crime that could be
wiped out by the judicial declaration of non-existence of the criminal acts charged.
o The subsequent satisfaction of the tax liability by payment or prescription will not operate to
extinguish the taxpayers criminal liability

Anti-injunction rule
d GENERAL RULE (Sec. 218) NO court shall have the authority to grant an injunction to restrain the collection of
any NIRC tax, fee, or charge
CIR v. Cebu Portland Cement Co: It goes without saying that this injunction is available not only when the
assessment is already being questioned in a court of justice but more so if, as in the instant case, the
challenge to the assessment is still-and only-on the administrative level. There is all the more reason to
apply the rule here because it appears that even after crediting of the refund against the tax deficiency,
a balance of more than P 4 million is still due from the private respondent.
To require the petitioner to actually refund to the private respondent the amount of the judgment debt,
which he will later have the right to distrain for payment of its sales tax liability is in our view an Idle
ritual.

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Churchill v. Rafferty: Preventive remedies of the courts are extraordinary and are not the usual
remedies. The origin and history of the writ of injunction show that it has always been regarded as an
extraordinary, preventive remedy, as distinguished from the common course of the law to redress evils
after they have been consummated. No injunction issues as of course, but is granted only upon the oath
of a party and when there is no adequate remedy at law. The Government does, by section 139 and 140,
take away the preventive remedy of injunction, if it ever existed, and leaves the taxpayer, in a contest
with it, the same ordinary remedial actions which prevail between citizen and citizen. The AttorneyGeneral, on behalf of the defendant, contends that there is no provisions of the paramount law which
prohibits such a course. While, on the other hand, counsel for plaintiffs urge that the two sections are
unconstitutional because (a) they attempt to deprive aggrieved taxpayers of all substantial remedy for
the protection of their property, thereby, in effect, depriving them of their property without due
process of law, and (b) they attempt to diminish the jurisdiction of the courts, as conferred upon them
by Acts Nos. 136 and 190, which jurisdiction was ratified and confirmed by the Act of Congress of July 1,
1902.
In the first place, it has been suggested that section 139 does not apply to the tax in question because
the section, in speaking of a "tax," means only legal taxes; and that an illegal tax (the one complained
of) is not a tax, and, therefore, does not fall within the inhibition of the section, and may be restrained
by injunction. There is no force in this suggestion. The inhibition applies to all internal revenue taxes
imposes, or authorized to be imposed, by Act No. 2339. And, furthermore, the mere fact that a tax is
illegal, or that the law, by virtue of which it is imposed, is unconstitutional, does not authorize a court of
equity to restrain its collection by injunction. There must be a further showing that there are special
circumstances which bring the case under some well recognized head of equity jurisprudence, such as
that irreparable injury, multiplicity of suits, or a cloud upon title to real estate will result, and also that
there is, as we have indicated, no adequate remedy at law. This is the settled law in the United States,
even in the absence of statutory enactments such as sections 139 and 140. Therefore, this branch of the
case must be controlled by sections 139 and 140, unless the same be held unconstitutional, and
consequently, null and void.

EXCEPTION (Sec. 11, RA 1125) When, in the opinion of the CTA, the collection may JEOPARDIZE the INTEREST of
the GOVERNMENT and/or the TAXPAYER, the CTA, at any stage of the proceedings, may SUSPEND the said
collection and REQUIRE the taxpayer to DEPOSIT the amount claimed or to FILE a SURETY BOND for not more
than double the amount
Collector v. Reyes and Collector v. Avelino: It can be inferred from the aforequoted provision that there
may be instances like the one at bar, when the Collector of Internal Revenue could be restrained from
proceeding with the collection, levy, distraint and/or sale of any property of the taxpayer. In this respect,
this Court said in the case of Collector of Internal Revenue vs. Avelino et al., supra:
This section (Sec. 11 of Rep. Act No. 1125) must be deemed to have modified section 305 of the
National Internal Revenue Code in view of the repeating clause contained in said Act to the
effect that "any law or part of law, or any executive order, rule or regulation or part thereof,
inconsistent with the provisions of this Act is hereby repealed" (Section 21).
But petitioner asserts that even assuming that under Section 11 of Republic Act No. 1125 respondent
court is empowered to order him to desist from the collection of said taxes by extra-judicial methods,
yet the Court erred in issuing the injunction without requiring the taxpayer either to deposit the amount
claimed or file a surety bond for an amount not more than double the tax sought to be collected. We
disagree with this contention. At first blush it might be as contended by the Solicitor General, but a
careful analysis of the second paragraph of said Section 11 will lead us to the conclusion that the
requirement of the bond as a condition precedent to the issuance of the writ of injunction applies only in
cases where the processes by which the collection sought to be made by means thereof are carried out
in consonance with the law for such cases provided and not when said processes are obviously in
violation of the law to the extreme that they have to be SUSPENDED for jeopardizing the interests of
the taxpayer.

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Liability of corporate officers and stockholders
d Proton Pilipinas Corp. v. Republic: Accordingly, as can be gleaned from the Complaint for Collection of Money with
Damages filed by the Government against petitioner, what the former seeks is the payment of customs duties and
taxes due from petitioner, which remain unpaid by reason of the cancellation of the subject TCCs for being fake
and spurious. Said Complaint has nothing to do with the criminal liability of the accused, which the Government
wants to enforce in the criminal cases filed before the Sandiganbayan. This can be clearly inferred from the fact
that only petitioner was impleaded in the said Complaint.
While it is true that according to the aforesaid Section 4, of Republic Act No. 8249, the institution of the criminal
action automatically carries with it the institution of the civil action for the recovery of civil liability, however, in
the case at bar, the civil case for the collection of unpaid customs duties and taxes cannot be simultaneously
instituted and determined in the same proceedings as the criminal cases before the Sandiganbayan, as it cannot
be made the civil aspect of the criminal cases filed before it. It should be borne in mind that the tax and the
obligation to pay the same are all created by statute; so are its collection and payment governed by statute. The
payment of taxes is a duty which the law requires to be paid. Said obligation is not a consequence of the
felonious acts charged in the criminal proceeding nor is it a mere civil liability arising from crime that could be
wiped out by the judicial declaration of non-existence of the criminal acts charged. Hence, the payment and
collection of customs duties and taxes in itself creates civil liability on the part of the taxpayer. Such civil liability
to pay taxes arises from the fact, for instance, that one has engaged himself in business, and not because of any
criminal act committed by him.

Imposition of Surcharge, Interest and Compromise Penalty

Civil penalties/surcharges
d Sec. 248(A): In addition to the tax required to be paid, a penalty equivalent to 25% OF THE AMOUNT DUE shall be
imposed in the ff. instances:
FAILURE to FILE a RETURN and PAY the tax due thereon as required by the NIRC or rules and regulations
on the date prescribed
Unless otherwise authorized by the CIR, filing a return with an internal revenue officer OTHER THAN
those to whom the return is required to be filed
FAILURE to PAY the DEFICIENCY TAX within the prescribed time for its payment in the notice of
assessment
o Before: The surcharge was imposed automatically
o Now: Imposed only if the tax due is not paid on or before the prescribed time for payment
FAILURE to PAY in FULL or PART of the amount of tax shown on any return required to be filed under
the provisions of the NIRC or rules and regulations, or the FULL amount of tax due for which NO
RETURN is required to be file, on or before the date prescribed for its payment
d Sec. 248(B): The surcharge shall be 50% OF THE TAX OR THE DEFICIENCY TAX, in case any payment has been made
in the ff. cases:
WILLFUL NEGLECT to file the return
FALSE or FRAUDULENT RETURN
o Substantial underdeclaration of taxable sales, receipts or income, or a substantial
overstatement of deductions shall be prima facie evidence of a false or fraudulent return
o Failure to report sales, receipts or income in an amount exceeding 30% of that declared per
return, and a claim of deductions in an amount exceeding 30% of actual deductions shall render
the taxpayer liable for substantial underdeclaration of sales, receipts or income or for
overstatement of deductions
d Sec. 250: Failure to file certain information returns P1k per failure but the aggregate amount during the
calendar year shall not exceed P25k
d Sec. 251: Failure of withholding agent to collect and remit tax penalty equal to the amount of tax he did not
withhold or not accounted for and remitted
d Sec. 252: Failure of a withholding agent to refund excess withholding tax penalty equal to the total amount of
refunds which was not refunded to the EE resulting from any excess of the amount withheld over the tax actually
due on their return

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d

CASES:

Good faith in paying tax at lower rates

o Tambunting Pawnshop, Inc. v. CIR: It is settled that good faith and honest belief that one is not
subject to tax on the basis of previous interpretations of government agencies tasked to
implement the tax law are sufficient justification to delete the imposition of surcharges and
interest.
o M. Lhuillier Pawnshop, Inc. v. CIR: The settled rule is that good faith and honest belief that one
is not subject to tax on the basis of previous interpretation of government agencies tasked to
implement the tax law, are sufficient justification to delete the imposition of surcharges and
interest.
o Connell Bros. Co. (Phils.) v. CIR: We are convinced that appellant, in preparing its sales invoices
as it did, was not guilty of an intentional violation of the law. It did not delay filing the returns
for the sales taxes corresponding to the period in question, let alone did so purposely. The
delay was in the payment of the deficiency, which arose from a mistaken understanding of the
regulations laid down by appellee. The ensuing controversy was, in our opinion, generated in
good faith and should furnish no justification for the imposition of a penalty.
o Tuason v. Lingad: In our opinion this additional requirement should be eliminated because the
petitioner relied in good faith upon opinions rendered by no less than the highest officials of
the Bureau of Internal Revenue, including the Commissioner himself.
o CIR v. Republic Cement Corp: In the case at bar the assessments are not undisputed or
indisputable. The dispute as to the tax liability of private respondents for sales tax on the sale
of cement arose not simply because of ordinary divergence of views in good faith vis-a-vis the
interpretation of the law; the position of private respondents was founded upon the original
stand of the Bureau of Internal Revenue itself that cement is a mineral product rather than a
manufactured product and is therefore subject to ad valorem tax, not sales tax. As pointed out
above, this stand was apparently given implied support in CEPOC vs. Collector, G.R. No. L20563 (1968), 25 SCRA 789, penned by Justice Angeles. That the posture of private
respondents is plausible despite the subsequent BIR position that cement is a manufactured
product subject to sales tax is supported by the fact that the Court of Tax Appeals, the
specialized body handling tax cases, sustained the private respondents in the decisions under
review.
o Antam Pawnshop v. CIR: Good faith and honest belief that one is not subject to tax on the
previous interpretation of the government instrumentality tasked to implement the tax law
are sufficient justification for petitioner to be spared of interest and surcharges.[29]
The dispute as to the tax liability of petitioner for DST on pawn tickets arose not simply
because of ordinary divergence of views in the interpretation of the law. Petitioner's position
was founded on the previous interpretation of the BIR that a pawn ticket is not a printed
evidence of indebtedness, hence, not subject to DST. That the posture of petitioner is plausible
is supported by the fact that even the CTA, the specialized body handling tax cases, sustained
its position. It was only recently, in Lhuillier, that the Court made a categorical pronouncement
that pawn tickets are subject to DST.

Fraud must be sufficiently established

o CIR v. Javier, Jr: We are persuaded considerably by the private respondent's contention that
there is no fraud in the filing of the return and agree fully with the Court of Tax Appeals'
interpretation of Javier's notation on his income tax return filed on March 15, 1978 thus:
"Taxpayer was the recipient of some money from abroad which he presumed to be a gift but
turned out to be an error and is now subject of litigation that it was an "error or mistake of fact
or law" not constituting fraud, that such notation was practically an invitation for investigation
and that Javier had literally "laid his cards on the table."
In Aznar v. Court of Tax Appeals, 14 fraud in relation to the filing of income tax return was
discussed in this manner:
. . . The fraud contemplated by law is actual and not constructive. It must be
intentional fraud, consisting of deception willfully and deliberately done or resorted
to in order to induce another to give up some legal right. Negligence, whether slight
or gross, is not equivalent to the fraud with intent to evade the tax contemplated by

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law. It must amount to intentional wrong-doing with the sole object of avoiding the
tax. It necessarily follows that a mere mistake cannot be considered as fraudulent
intent, and if both petitioner and respondent Commissioner of Internal Revenue
committed mistakes in making entries in the returns and in the assessment,
respectively, under the inventory method of determining tax liability, it would be
unfair to treat the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith.
Fraud is never imputed and the courts never sustain findings of fraud upon circumstances
which, at most, create only suspicion and the mere understatement of a tax is not itself proof
of fraud for the purpose of tax evasion.
A "fraudulent return" is always an attempt to evade a tax, but a merely "false return"
may not be.
In the case at bar, there was no actual and intentional fraud through willful and deliberate
misleading of the government agency concerned, the Bureau of Internal Revenue, headed by
the herein petitioner. The government was not induced to give up some legal right and place
itself at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities because Javier did not conceal anything. Error or mistake of law is not fraud. The
petitioner's zealousness to collect taxes from the unearned windfall to Javier is highly
commendable. Unfortunately, the imposition of the fraud penalty in this case is not justified by
the extant facts. Javier may be guilty of swindling charges, perhaps even for greed by spending
most of the money he received, but the records lack a clear showing of fraud committed
because he did not conceal the fact that he had received an amount of money although it was
a "subject of litigation." As ruled by respondent Court of Tax Appeals, the 50% surcharge
imposed as fraud penalty by the petitioner against the private respondent in the deficiency
assessment should be deleted.
o

CIR v. Japan Airlines: Nowhere in the records of the case can be found that JAL deliberately
failed to file its income tax returns for the years covered by the assessment. There was not
even an attempt by petitioner to prove the same or justify the imposition of the 50% surcharge.
All that petitioner did was to cite the provision of law upon which the surcharge was based
without explaining why it was applicable to respondent's case. Such cannot be countenanced
for mere allegations are definitely not acceptable. The willful neglect to file the required tax
return or the fraudulent intent to evade the payment of taxes, considering that the same is
accompanied by legal consequences, cannot be presumed (CIR vs. Air India, supra). The fraud
contemplated by law is actual and constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with intent
to evade the tax contemplated by the law. It must amount to intentional wrongdoing with the
sole object of evading the tax (Aznar v. Court of Tax Appeals, G.R. No. L-20569, August 23,
1974, 58 SCRA 519). This was not proven to be so in the case of JAL as it believed in good faith
that it need not file the tax return for it had no taxable income then. The element of fraud is
lacking. At most, only negligence may be imputed to JAL for not ascertaining the dispensability
of filing the tax returns. As such, JAL may be subjected only to the 25% surcharge prescribed by
the aforequoted law.

Interest (Sec. 249)

d IN GENERAL 20% p.a or such higher rate as may be prescribed by rules and regulations shall be assessed and
collected on any unpaid amount of tax from the date prescribed for payment until the amount is fully paid
d DEFICIENCY INTEREST 20% p.a
d DELINQUENCY INTEREST 20% p.a. in case of failure to pay:
Amount tax due on any return required to be filed
Amount of tax due for which no return is required
Deficiency tax or any surcharge or interest thereon on the due date appearing in the notice and demand
of the CRI
d INTEREST ON EXTENDED PAYMENT 20% p.a. in the ff cases:

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If any person required to pay the tax is qualified and elects to pay on installment but fails to pay the tax
or any installment or any part of the amount or installment, on or before the date prescribed
Where the CIR has authorized an extension of time within which to pay a tax or a deficiency tax
WAIVER OF INTEREST
Cagayan Electric v. CIR: However, it cannot be denied that the said 1969 assessment appears to be highly
controversial. The Commissioner at the outset was not certain as to petitioner's income tax liability. It
had reason not to pay income tax because of the tax exemption in its franchise. For this reason, it
should be liable only for tax proper and should not be held liable for the surcharge and interest.

Compromise penalty
d A compromise penalty is a certain amount of money which the taxpayer pays to compromise a tax violation that
may be subject to criminal prosecution
Philippine International Fair, Inc. v. Collector: The present is not a criminal action instituted against the
PIF or its officers for having violated the provisions of Section 260, in relation to Section 352 of the Tax
Code, but a tax assessment or demand made by the Collector of Internal Revenue upon the PIF, from
which the latter appealed to the Court of Tax Appeals and ultimately to this Court. It is clear, therefore,
that the PIF resisted the assessment. Consequently, the result of the proceedings cannot be considered
as a "compromise", because the decision of the Court of Tax Appeals as well as the present decision
constitute an adjudication upon the issue arising from the assessment made by the Collector of Internal
Revenue, on the one hand, and the PIF's refusal to pay the same, on the other.

Furthermore, the brief submitted by the Solicitor General in behalf of the Collector (p. 34) also admits
the alleged "compromise" is really a "penalty for violation of the provisions of the Tax Code". The
present not being a criminal case charging the PIF with having violated the provisions of the Tax Code,
we agree with Court of Tax Appeals that the payment of the alleged compromise cannot be imposed
upon the taxpayer in the present proceedings. The cases relied upon by the Collector of Internal
Revenue are not applicable to the present because the taxpayer involved in the Macondray case
voluntarily paid the "multas" demanded or imposed on him to avoid further imposition of "multas". In
the Sanchez case the taxpayer paid the tax demanded of her plus the sum of P50.00 as compromise,
under protest, but does not appear to have specifically raised any objection against the said compromise
either in the lower court or in this Court. Our decision affirming those rendered by the lower court in
said cases cannot, therefore, be cited to support the proposition that in proceedings like the present the
Court of Tax Appeals or this Court may render judgment in favor of the government and against the
taxpayer for the payment of the alleged "compromise" which, as the Solicitor General admits, is really a
"penalty" to avoid prosecution for violation of the provisions of the Tax Code unless of course, the
taxpayer gives his consent thereto.
It implies a MUTUAL AGREEMENT hence it cannot be imposed in the absence of showing that the taxpayer
consented to it
The BIR has no power to impose and collect the penalty in the absence of a compromise agreement
validly entered into between the taxpayer and the CIR
CIR v. Lianga Bay Logging: As to the "compromise penalty" of P300.00 also sought to be imposed, there
is no basis therefor, and, as the Court of Tax Appeals finally declares, "the imposition of the same
without the conformity of the taxpayer is illegal and unauthorized
May be entered into extra-judicially

Statute of Limitations
Period to assess
d WHEN MUST AN ASSESSMENT BE MADE (PRESCRIPTIVE PERIODS)
ORDINARY PRESCRIPTION Internal revenue taxes shall be assessed WITHIN 3 YEARS AFTER THE LAST
DAY PRESCRIBED BY LAW FOR FILING OF THE RETURN and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period. (Sec. 203)
o RECKONING PERIOD:

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F

General rule: LAST DAY of filing prescribed by law. A return filed BEFORE the last day
prescribed by law shall be considered as filed on such last day
F Exception: If the return is filed BEYOND the period prescribed by law 3 yr period
shall be counted from the DAY THE RETURN WAS FILED
COUNTING OF THE 3-YR PERIOD (RMC 48-90): One year = 365 days; three years = 1095 days
notwithstanding the fact that within the period, there is a leap year which is of 366days
F This concept was later, modified in the Philippines, by Section 13 of the Revised
Administrative Code, Pursuant to which, "month shall be understood to refer to a
calendar month." In the language of this Court, in People vs. Del Rosario, with the
approval of the Civil Code of the Philippines (Republic Act 386) ... we have reverted to
the provisions of the Spanish Civil Code in accordance with which a month is to be
considered as the regular 30-day month ... and not the solar or civil month," with the
particularity that, whereas the Spanish Code merely mentioned "months, days or
nights," ours has added thereto the term "years" and explicitly ordains that "it shall
be understood that years are of three hundred sixty-five days. (NAMARCO v. Tecson)
F

CIR v. Primetown Property Group, Inc: Both Article 13 of the Civil Code and Section
31, Chapter VIII, Book I of the Administrative Code of 1987 deal with the same subject
matter the computation of legal periods. Under the Civil Code, a year is
equivalent to 365 days whether it be a regular year or a leap year. Under the
Administrative Code of 1987, however, a year is composed of 12 calendar months.
Needless to state, under the Administrative Code of 1987, the number of days is
irrelevant.
There obviously exists a manifest incompatibility in the manner of computing legal
periods under the Civil Code and the Administrative Code of 1987. For this reason, we
hold that Section 31, Chapter VIII, Book I of the Administrative Code of 1987, being
the more recent law, governs the computation of legal periods.

EXTRAORDINARY PRESCRIPTION The tax may be assessed, or a proceeding in court for the collection
may be filed without assessment 10 YEARS after discovery of the falsity, fraud or omission (Sec. 222)
o Triggers of application:
F False return
F Fraudulent return with intent to evade tax

When the assessment has become final and executor, the fact of fraud shall
be judicially taken cognizance of in the civil or criminal action for the
collection thereof
F Failure to file a return
o RECKONING POINT: from the DISCOVERY of the falsity, fraud or omission hence effectively
imprescriptible
o There can be a collection without assessment
o CASES:
F Taligaman Lumber Co., Inc. v. CIR: Petitioner objects to the application of this section
332(a) upon the ground that there is no affirmative evidence that it had not filed the
corresponding returns for the years 1948-1949. Thus the issue boils down to which of
the two parties had the burden of proving such failure to file said returns. It is,
however, clear that since prescription is one of the affirmative defenses set up by
petitioner herein, it was incumbent upon the latter, if it wanted to avail itself of the
benefits of section 331, to prove that it had submitted said returns, and that, having
failed to do so, the conclusion must be that no such returns had been filed and that
the Government had ten (10) years within which to make the corresponding
assessments, as it did in this case.
F

Aznar v. CTA: The proper and reasonable interpretation of Section 222 NIRC should be
in three different cases of: (1) false return, (2) fraudulent return with intent to evade
tax, (3) failure to file a return. The tax may be assessed, or a proceeding in court for
the collection of such tax may be begun without assessment, at any time within ten
years after the discovery of the (1) falsity, (2) fraud, (3) omission. There is a difference

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between false return and fraudulent return. False return implies deviation from
the truth, whether intentional or not; Fraudulent return implies intentional or
deceitful entry with intent to evade the taxes due.
The ordinary period of prescription of 5 years (now 3 years) within which to assess
tax liabilities should be applicable to normal circumstances.

But whenever the government is placed at a disadvantage so as to prevent its lawful

agents from proper assessment of tax liabilities due to false returns, fraudulent
return intended to evade payment of tax or failure to file returns, the period of 10
years provided for in Sec. 222 from the time of the discovery of the falsity, fraud or
omission is applicable.
CIR v. BF Goodrich: Applying this provision of law to the facts at hand, it is clear that
the October 16, 1980 and the March 1981 assessments were issued by the BIR beyond
the five-year statute of limitations. The Court has thoroughly studied the records of
this case and found no basis to disregard the five-year period of prescription. As
succinctly pronounced by the Court of Appeals:
The subsequent assessment made by the respondent Commissioner on
October 10, 1980, modified by that of March 16, 1981, violates the
law. Involved in this petition is the income of the petitioner for the year
1974, the returns for which were required to be filed on or before April 15 of
the succeeding year. The returns for the year 1974 were duly filed by the
petitioner, and assessment of taxes due for such year -- including that on
the transfer of properties on June 21, 1974 -- was made on April 13, 1975 and
acknowledged by Letter of Confirmation No. 101155 terminating the
examination on this subject. The subsequent assessment of October 10,
1980 modified, by that of March 16, 1981, was made beyond the period
expressly set in Section 331 of the National Intenal Revenue Code xxx.
Petitioner relies on the CTA ruling, the salient portion of which reads:
Falsity is what we have here, and for that matter, we hasten to add that
the second assessment (March 16, 1981) of the Commissioner was welladvised having been made in contemplation of his power under Section 15
of the 1974 Code (now Section 16, of NIRC) to assess the proper tax on
the best evidence obtainable when there is reason to believe that a report
of a taxpayer is false, incomplete or erroneous. More, when there is falsity
with intent to evade tax as in this case, the ordinary period of limitation
upon assessment and collection does not apply so that contrary to the
averment of petitioner, the right to assess respondent has not prescribed.
What is the considered falsity? The transfer through sales of the parcels of
land in Tumajubong, Lamitan, Basilan in favor of Siltown Realty for the sum
ofP500,000.00 only whereas said lands had been sworn to under
Presidential Decree No. 76 (Dec. 6, 1972) as having a value of P2,683,467
(P2,475, 467 +P207,700) (see Declaration of Real Property form, p. 28, and
p. 15, no. 5, BIR Record).
For the purpose of safeguarding taxpayers from any unreasonable examination,
investigation or assessment, our tax law provides a statute of limitations in the
collection of taxes. Thus, the law on prescription, being a remedial measure, should
be liberally construed in order to afford such protection. As a corollary, the
exceptions to the law on prescription should perforce be strictly construed.
Section 15 of the NIRC, on the other hand, provides that [w]hen 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 law or regulation, or when there is reason to
believe that any such report is false, incomplete, or erroneous, the Commissioner of
Internal Revenue shall assess the proper tax on the best evidence
obtainable. Clearly, Section 15 does not provide an exception to the statute of
limitations on the issuance of an assessment, by allowing the initial assessment to be
made on the basis of the best evidence available. Having made its initial assessment

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in the manner prescribed, the commissioner could not have been authorized to issue,
beyond the five-year prescriptive period, the second and the third assessments under
consideration before us.
F

Pilipinas Shell Petroleum Corp. v. CIR: Logically, therefore, the excise tax returns filed
by PSPC duly covered by the TDM and ATAPETs issued by the BIR confirming the full
payment and satisfaction of the excise tax liabilities of PSPC, have not been
fraudulently filed. Consequently, as PSPC is a transferee in good faith and for value,
Sec. 222(a) of the NIRC does not apply in the instant case as PSPC has neither been
shown nor proven to have committed any fraudulent act in the transfer and
utilization of the subject TCCs. With more reason, therefore, that the three-year
prescriptive period for assessment under Art. 203 of the NIRC has already set in and
bars respondent from assessing anew PSPC for the excise taxes already paid in 1992
and 1994 to 1997. Besides, even if the period for assessment has not prescribed, still,
there is no valid ground for the assessment as the excise tax liabilities of PSPC have
been duly settled and paid.

CIR v. Tulio: The lower court erroneously applied Section 203 of the same Code
providing for the three-year prescriptive period from the filing of the tax return
within which internal revenue taxes shall be assessed. It held that such period
should be counted from the day the return was filed, or from August 15, 1990 up to
August 15, 1993. However, as shown by the records, respondent failed to file a tax
return, forcing petitioner to invoke the powers of his office in tax administration and
enforcement. Respondents failure to file his tax returns is thus covered by Section
223 providing for a ten-year prescriptive period within which a proceeding in court
may be filed.
Here, respondent failed to file his tax returns for 1986 and 1987. On September 14,
1989, petitioner found respondents omission. Hence, the running of the ten-year
prescriptive period within which to assess and collect the taxes due from respondent
commenced on that date until September 14, 1999. The two final assessment
notices were issued on February 28, 1991, well within the prescriptive period of three
(3) years. When respondent failed to question or protest the deficiency assessments
thirty (30) days therefrom, or until March 30, 1991, the same became final and
executory.

WHEN IS AN ASSESSMENT DEEMED MADE (Basilan Estates, Inc. v. CIR)

An assessment is deemed made when the notice to that effect is RELEASED, MAILED, or SENT to the
taxpayer for the purpose of giving effect to the assessment, even though the same is actually received
by the taxpayer upon the expiration of the prescriptive period.
o Prima facie presumed that the taxpayer received the mailed notice within the period of time
when mail of such kind is ordinarily received. The presumption is in favor of the Government.
o Assessments are prima facie presumed correct and made in good faith. Contrary to the theory
of ACMDC, it is the taxpayer and not the BIR who has the duty of proving otherwise. It is an
elementary rule that in the absence of proof of any irregularities in the performance of official
duties, an assessment will not be disturbed. All presumptions are in favor of tax assessments.
Under Sec. 331 of the Tax Code requiring five years within which to assess deficiency taxes, the
assessment is deemed made when notice to this effect is RELEASED, MAILED or SENT by the Collector
to the taxpayer. It is not required that the notice be received by the taxpayer within the aforementioned
five-year period.

EFFECT OF FILING
AN AMENDED RETURN reckon from the filing of amended return
o CIR v. Phoenix Assurance Co, Inc: The changes and alterations embodied in the amended
income tax return consisted of the exclusion of reinsurance premiums received from domestic
insurance companies by Phoenix Assurance Co., Ltd.'s London head office, reinsurance
premiums ceded to foreign reinsurers not doing business in the Philippines and various items
of deduction attributable to such excluded reinsurance premiums thereby substantially

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modifying the original return. Furthermore, although the deduction for head office expenses
allocable to Philippine business, whose disallowance gave rise to the deficiency tax, was
claimed also in the original return, the Commissioner could not have possibly determined a
deficiency tax thereunder because Phoenix Assurance Co., Ltd. declared a loss of P199,583.93
therein which would have more than offset such disallowance of P15,826.35. Considering that
the deficiency assessment was based on the amended return which, as aforestated, is
substantially different from the original return, the period of limitation of the right to issue the
same should be counted from the filing of the amended income tax return. From August 30,
1955, when the amended return was filed, to July 24, 1958, when the deficiency assessment
was issued, less than five years elapsed. The right of the Commissioner to assess the deficiency
tax on such amended return has not prescribed.

A WRONG RETURN
o Butuan Sawmill, Inc. v. CTA: The above contention has already been raised and rejected as not
meritorious in a previous case decided by this Court. Thus, we held that an income tax return
cannot be considered as a return for compensating tax for purposes of computing the period
of prescription under Section 331 of the Tax Code, and that the taxpayer must file a return for
the particular tax required by law in order to avail himself of the benefits of Section 331 of the
Tax Code; otherwise, if he does not file a return, an assessment may be made within the time
stated in Section 332(a) of the same Code. The principle enunciated in this last cited case is
applicable by analogy to the case at bar.
It being undisputed that petitioner failed to file a return for the disputed sales corresponding
to the years 1951, 1952 and 1953, and this omission was discovered only on September 17, 1957,
and that under Section 332(a) of the Tax Code assessment thereof may be made within ten
(10) years from and after the discovery of the omission to file the return, it is evident that the
lower court correctly held that the assessment and collection of the sales tax in question has
not yet prescribed.

WAIVER OF PRESCRIPTIVE PERIOD (Sec. 222 and RMO 20-90)

Before the prescriptive period for assessment expires, the Commissioner and the taxpayer may agree in
WRITING to its assessment AFTER such time. The tax may be assessed within the period agreed upon,
which may be extended by subsequent written agreement made before the expiration of the period
previously agreed upon.
PROCEDURES that should be strictly followed:
o The waiver must be in the FORM identified in the RMO
o It shall be signed by the TAXPAYER himself or his duly authorized REPRESENTATIVE and the
COMMISSIONER or REVENUE OFFICIAL authorized
o Executed in 3 copies, the original copy to be attached to the docket of the case, the second
copy for the taxpayer, and the third copy for the Office accepting the waiver
Any internal revenue tax may be collected by distraint or levy or by a proceeding in court within the
period agreed upon in writing before the expiration of the 5-year period. (Sec. 222d)
o Since the period for assessment was extended, there was also an agreement to extend period
to collect (cf. Sec. 203)
Philippine Journalists, Inc. v. CIR: 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
Court of Appeals. It is an agreement between the taxpayer and the BIR that the period to issue an
assessment and collect the taxes due is 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, our tax law provides a statute of limitations in the collection
of taxes. Thus, the law on prescription, being a remedial measure, should be liberally construed in order
to afford such protection. As a corollary, the exceptions to the law on prescription should perforce be
strictly construed.

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As found by the CTA, the Waiver of Statute of Limitations, signed by petitioners comptroller on
September 22, 1997 is not valid and binding because it does not conform with the provisions of RMO No.
20-90. It did not specify a definite agreed date between the BIR and petitioner, within which the former
may assess and collect revenue taxes. Thus, petitioners waiver became unlimited in time, violating
Section 222(b) of the NIRC.
The waiver is also defective from the government side because it was signed only by a revenue district
officer, not the Commissioner, as mandated by the NIRC and RMO No. 20-90. The records also show that
the petitioner was not furnished with a copy of the waiver. Under RMO No. 20-90, the waiver must be
executed in 3 copies with the second copy for the taxpayer.
d

SUSPENSION OF PRESCRIPTIVE PERIOD (Sec. 223)

Period for making assessment and the beginning of distraint or levy or a proceeding in court for
collection shall be suspended for the period during which the CIR is prohibited from making the
assessment, etc. and for 60 days thereafter in the ff. instances:
o When the taxpayer requests for a REINVESTIGATION which is granted by the CIR;
o When the taxpayer CANNOT BE LOCATED in the address given by him in the return filed upon
which a tax is being assessed/collected
F If the taxpayer informs the CIR of any change in address, the running shall not be
suspended
o When the warrant of distraint or levy is DULY SERVED upon the taxpayer, his authorized
representative, or a member of his household with sufficient discretion, and NO PROPERTY
can be located; and
o When the taxpayer is OUT of the Philippines
Protectors Services, Inc. v. CA: The act of a taxpayer in filing a petition before the CTA to prevent
collection of the assessed deficiency tax and in elevating the case to the SC for review after the CA
dismissed the petition suspended the running of the statute of limitations. In the instant case, PSI filed a
petition before the CTA to prevent the collection of the assessed deficiency tax. When the CTA
dismissed the case, PSI elevated the case before the SC, hoping for a review in its favor. The actions
taken by the petitioner before the CTA and before the SC suspended the running of the statute of
limitations.

Period to collect
d Any internal revenue tax which has been assessed within the period of limitation may be collected WITHIN
5YEARS from the date of assessment
Counted from the ASSESSMENT and NOT from the time of filing of the return
d CASES:
Running of period shall be suspended for the period during which the CIR is prohibited from beginning
a D/L or instituting a proceeding in court, and for 60days thereafter
o Republic v. Ker & Co: Did the pendency of the taxpayer's appeal in the Court of Tax Appeals
and in the Supreme Court have the effect of legally preventing the Commissioner of Internal
Revenue from instituting an action in the Court of First Instance for the collection of the tax?
Our view is that it did.
From March 1, 1956 when Ker & Co., Ltd. filed a petition for review in the Court of Tax Appeals
contesting the legality of the assessments in question, until the termination of its appeal in the
Supreme Court, the Commissioner of Internal Revenue was prevented, as recognized in this
Court's ruling in Ledesma, et al. v. Court of Tax Appeals, 10 from filing an ordinary action in the
Court of First Instance to collect the tax. Besides, to do so would be to violate the judicial
policy of avoiding multiplicity of suits and the rule on lis pendens. 11
It would be interesting to note that when the Commissioner of Internal Revenue issued the
final deficiency assessments on January 5, 1954, he had already lost, by prescription, the right
to collect the tax (except that for 1950) by the summary method of warrant of distraint and
levy. Ker & Co., Ltd. immediately thereafter requested suspension of the collection of the tax
without penalty incident to late payment pending the filing of a memorandum in support of its
views. As requested, no tax was collected. On May 22, 1954 the projected memorandum was

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filed, but as of that date the Commissioner's right to collect by warrant of distraint and levy the
deficiency tax for 1950 had already prescribed. So much so, that on March 1, 1956 when Ker &
Co., Ltd. filed a petition for review in the Court of Tax Appeals, the Commissioner of Internal
Revenue had but one remedy left to collect the tax, that is, by judicial action. 12 However, as
stated, an independent ordinary action in the Court of First Instance was not available to the
Commissioner pursuant to Our ruling in Ledesma, et al. v. Court of Tax Appeals, supra, in view
of the pendency of the taxpayer's petition for review in the Court of Tax Appeals. Precisely he
urgently filed a motion to dismiss the taxpayer's petition for review with a view to terminating
therein the proceedings in the shortest possible time in order that he could file a collection
case in the Court of First Instance before his right to do so is cut off by the passage of time. As
moved, the Tax Court dismissed the case and Ker & Co., Ltd. appealed to the Supreme Court.
By the time the Supreme Court affirmed the order of dismissal of the Court of Tax Appeals in L12396 on January 31, 1962 more than five years had elapsed since the final assessments were
made on January 5, 1954. Thereafter, the Commissioner of Internal Revenue demanded extrajudicially the payment of the deficiency tax in question and in reply the taxpayer, by its letter
dated March 28, 1962, advised the Commissioner of Internal Revenue that the right to collect
the tax has prescribed pursuant to Section 332 (c) of the Tax Code

Request for reinvestigation that was granted by the BIR suspends the running of the period
o CIR v. Wyeth Suaco Laboratories, Inc: Settled is the rule that the prescriptive period provided
by law to make a collection by distraint or levy or by a proceeding in court is interrupted once a
taxpayer requests for reinvestigation or reconsideration of the assessment. In the case
of Commissioner of Internal Revenue vs. Capitol Subdivision, Inc., this Court held:
The period of prescription of action to collect a taxpayer's deficiency income tax
assessment is interrupted when the taxpayer request for a review or reconsideration
of said assessment, and starts to run again when said request is denied.
In another case, this Court stated that the statutory period of limitation for collection may be
interrupted if by the taxpayer's repeated requests or positive acts the Government has been,
for good reasons, persuaded to postpone collection to make him feel that the demand was not
unreasonable or that no harassment or injustice is meant by the Goverrument. 13 Also in the
case of Cordero vs. Gonda, we held:
Partial payment would not prevent the government from suing the taxpayer.
Because, by such act of payment, the government is not thereby "persuaded to
postpone collection to make him feel that the demand was not unreasonable or that
no harassment or injustice is meant." This is the underlying reason behind the rule
that the prescriptive period is arrested by the taxpayer's request for re-examination
or reinvestigation even if he "has not previously waived it (prescription in
writing)"
After carefully examining the records of the case, we find that Wyeth Suaco admitted that it
was seeking reconsideration of the tax assessments as shown in a letter of James A. Gump, its
President and General Manager. Furthermore, when Wyeth Suaco thru its tax consultant SGV
& Co. sent the letters protesting the assessments, the Bureau of Internal Revenue,
Manufacturing Audit Division, conducted a review and reinvestigation of the assessments. This
fact was admitted by Wyeth Suaco thru its Finance Manager in a letter dated July 1, 1975
addressed to the Chief, Tax Accounts Division.
Although the protest letters prepared by SGV & Co. in behalf of private respondent did not
categorically state or use th words "reinvestigation" and "reconsideration," the same are to be
treated as letters of reinvestigation and reconsideration. By virtue of these letters, the Bureau
of Internal Revenue ordered its Manufacturing Audit Division to review the assessment made.
Furthermore, private respondent's claim that it did not seek reinvestigation or reconsideration
of the assessments is belied by the subsequent correspondence or letters written by its
officers, as shown above. These letters of Wyeth Suaco interrupted the running of the five-year
prescriptive period to collect the deficiency taxes.
o

Collector v. Suyoc Consolidated Mining Co: It is obvious from the foregoing that petitioner
refrained from collecting the tax by distraint or levy or by proceeding in court within the 5-year

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period from the filing of the second amended final return due to the several requests of
respondent for extension to which petitioner yielded to give it every opportunity to prove its
claim regarding the correctness of the assessment. Because of such requests, several
reinvestigations were made and a hearing was even held by the Conference Staff organized in
the collection office to consider claims of such nature which, as the record shows, lasted for
several months. After inducing petitioner to delay collection as he in fact did, it is most unfair
for respondent to now take advantage of such desistance to elude his deficiency income, tax
liability to the prejudice of the Government invoking the technical ground of prescription.
While we may agree with the Court of Tax Appeals that a mere request for reexamination or
reinvestigation may not have the effect of suspending the running of the period of limitation
for in such case there is need of a written agreement to extend the period between the
Collector and the taxpayer, there are cases however where a taxpayer may be prevented from
setting up the defense of prescription even if he has not previously waived it in writing as
when by his repeated requests or positive acts the Government has been, for good reasons,
persuaded to postpone collection to make him feel that the demand was not unreasonable or
that no harassment or injustice is meant by the Government. And when such situation comes
to pass there are authorities that hold, based on weighty reasons, that such an attitude or
behavior should not be countenanced if only to protect the interest of the Government.
o

BPI v. CIR (2005): The protest letter of petitioner BPI, dated 16 November 1989 and filed with
the BIR the next day, on 17 November 1989, did not specifically request for either a
reconsideration or reinvestigation. A close review of the contents thereof would reveal,
however, that it protested Assessment No. FAS-5-85-89-002054 based on a question of law, in
particular, whether or not petitioner BPI was liable for DST on its sales of foreign currency to
the Central Bank in taxable year 1985. The same protest letter did not raise any question of
fact; neither did it offer to present any new evidence. In its own letter to petitioner BPI, dated
10 September 1992, the BIR itself referred to the protest of petitioner BPI as a request for
reconsideration. These considerations would lead this Court to deduce that the protest letter
of petitioner BPI was in the nature of a request for reconsideration, rather than a request for
reinvestigation and, consequently, Section 224 of the Tax Code of 1977, as amended, on the
suspension of the running of the statute of limitations should not apply.
Even if, for the sake of argument, this Court glosses over the distinction between a request for
reconsideration and a request for reinvestigation, and considers the protest of petitioner BPI
as a request for reinvestigation, the filing thereof could not have suspended at once the
running of the statute of limitations. Article 224 of the Tax Code of 1977, as amended, very
plainly requires that the request for reinvestigation had been granted by the BIR
Commissioner to suspend the running of the prescriptive periods for assessment and
collection.
That the BIR Commissioner must first grant the request for reinvestigation as a requirement
for suspension of the statute of limitations is even supported by existing jurisprudence.
In all these cases, the request for reinvestigation of the assessment filed by the taxpayer was
evidently granted and actual reinvestigation was conducted by the BIR, which eventually
resulted in the issuance of an amended assessment. On the basis of these facts, this Court
ruled in the same cases that the period between the request for reinvestigation and the
revised assessment should be subtracted from the total prescriptive period for the assessment
of the tax; and, once the assessment had been reconsidered at the taxpayers instance, the
period for collection should begin to run from the date of the reconsidered or modified
assessment.
The rulings of the foregoing cases do not apply to the present Petition because: (1) the protest
filed by petitioner BPI was a request for reconsideration, not a reinvestigation, of the
assessment against it; and (2) even granting that the protest of petitioner BPI was a request
for reinvestigation, there was no showing that it was granted by respondent BIR
Commissioner and that actual reinvestigation had been conducted.

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BIR v. CIR (2008): There is nothing in the records of this case which indicates, expressly or
impliedly, that the CIR had granted the request for reinvestigation filed by BPI. What is
reflected in the records is the piercing silence and inaction of the CIR on the request for
reinvestigation, as he considered BPIs letters of protest to be.
In fact, it was only in his comment to the present petition that the CIR, through the OSG,
argued for the first time that he had granted the request for reinvestigation. His consistent
stance invoking the Wyeth Suaco case, as reflected in the records, is that the prescriptive
period was tolled by BPIs request for reinvestigation, without any assertion that the same had
been granted or at least acted upon.
In the Wyeth Suaco case, private respondent Wyeth Suaco Laboratories, Inc. sent letters
seeking the reinvestigation or reconsideration of the deficiency tax assessments issued by the
BIR. The records of the case showed that as a result of these protest letters, the BIR
Manufacturing Audit Division conducted a review and reinvestigation of the assessments. The
records further showed that the company, thru its finance manager, communicated its inability
to settle the tax deficiency assessment and admitted that it knew of the ongoing review and
consideration of its protest.
As differentiated from the Wyeth Suaco case, however, there is no evidence in this case that
the CIR actually conducted a reinvestigation upon the request of BPI or that the latter was
made aware of the action taken on its request. Hence, there is no basis for the tax courts
ruling that the filing of the request for reinvestigation tolled the running of the prescriptive
period for collecting the tax deficiency.
Neither did the waiver of the statute of limitations signed by BPI supposedly effective until 31
December 1994 suspend the prescriptive period. The CIR himself contends that the waiver is
void as it shows no date of acceptance in violation of RMO No. 20-90. At any rate, the records
of this case do not disclose any effort on the part of the Bureau of Internal Revenue to collect
the deficiency tax after the expiration of the waiver until eight (8) years thereafter when it
finally issued a decision on the protest.
We also find the Suyoc case inapplicable. In that case, several requests for reinvestigation and
reconsideration were filed by Suyoc Consolidated Mining Company purporting to question the
correctness of tax assessments against it. As a result, the Collector of Internal Revenue
refrained from collecting the tax by distraint, levy or court proceeding in order to give the
company every opportunity to prove its claim. The Collector also conducted several
reinvestigations which eventually led to a reduced assessment. The company, however, filed a
petition with the CTA claiming that the right of the government to collect the tax had already
prescribed.
When the case reached this Court, we ruled that Suyoc could not set up the defense of
prescription since, by its own action, the government was induced to delay the collection of
taxes to make the company feel that the demand was not unreasonable or that no harassment
or injustice was meant by the government.
In this case, BPIs letters of protest and submission of additional documents pertaining to its
SWAP transactions, which were never even acted upon, much less granted, cannot be said to
have persuaded the CIR to postpone the collection of the deficiency DST.

Republic v. Ablaza: The question in the case at bar boils down to the interpretation of Exhibit
"P", dated March 10, 1954, quoted above. If said letter be interpreted as a request for further
investigation or a new investigation, different and distinct from the investigation demanded or
prayed for in Ablaza's first letter, Exhibit "L", then the period of prescription would continue to
be suspended thereby. but if the letter in question does not ask for another investigation, the
result would be just the opposite. In our opinion the letter in question, Exhibit "P", does not
ask for another investigation. Its first paragraph quoted above shows that the reinvestigation
then being conducted was by virtue of its request of October 16, 1951. All that the letter asks is

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that the taxpayer be furnished a copy of the computation. The request may be explained in
this manner: As the reinvestigation was allowed on October 1, 1951 and on October 16, 1951, the
taxpayer supposed or expected that at the time, March, 1954 the reinvestigation was about to
be finished and he wanted a copy of the re-assessment in order to be prepared to admit or
contest it. Nowhere does the letter imply a demand or request for a ready requested and,
therefore, the said letter may not be interpreted to authorize or justify the continuance of the
suspension of the period of limitations.
o

Mambulao Lumber Co. v. Republic: Furthermore, it is not disputed that on October 18, 1958,
petitioner requested for a reinvestigation of its tax liability. In reply thereto, respondent in a
letter dated July 8, 1959, gave petitioner a period of twenty (20) days from receipt thereof to
submit the results of its verification of payments and failure to comply therewith would be
construed as abandonment of the request for reinvestigation. Petitioner failed to comply with
this requirement. Neither did it appeal to the Court of Tax Appeals within thirty (30) days from
receipt of the letter dated July 8, 1959, as prescribed under Section 11 of Republic Act No. 1125,
thus making the assessment final and executory.

Republic v. Hizon: Petitioners reliance on the Courts ruling in Advertising Associates Inc. v.
Court of Appeals is misplaced. What the Court stated in that case and, indeed, in the earlier
case of Palanca v. Commissioner of Internal Revenue, is that the timely service of a warrant of
distraint or levy suspends the running of the period to collect the tax deficiency in the sense
that the disposition of the attached properties might well take time to accomplish, extending
even after the lapse of the statutory period for collection. In those cases, the BIR did not file
any collection case but merely relied on the summary remedy of distraint and levy to collect
the tax deficiency. The importance of this fact was not lost on the Court. Thus, in Advertising
Associates, it was held: It should be noted that the Commissioner did not institute any judicial
proceeding to collect the tax. He relied on the warrants of distraint and levy to interrupt the
running of the statute of limitations.
Moreover, if, as petitioner in effect says, the prescriptive period was suspended
twice, i.e., when the warrants of distraint and levy were served on respondent on January 12,
1989 and then when respondent made her request for reinvestigation of the tax deficiency
assessment on November 3, 1992, the three-year prescriptive period must have commenced
running again sometime after the service of the warrants of distraint and levy. Petitioner,
however, does not state when or why this took place and, indeed, there appears to be no
reason for such. It is noteworthy that petitioner raised this point before the lower court
apparently as an alternative theory, which, however, is untenable.

Period to prosecute violations of the nirc (sec. 281)

d RECKONING POINT of 5YEARS:
If violation is KNOWN from the DAY of the COMMISSION of the violation
If violation is UNKNOWN from the DISCOVERY and the INSTITUTION of judicial proceedings for
investigation and punishment IMPRESCRIPTIBLE
d INTERRUPTION:
When proceedings are instituted against the guilty persons
o If the proceedings are DISMISSED for reasons not constituting jeopardy prescription shall
begin to run again
When the offender is absent from the Philippines

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Rights and remedies of

the TAXPAYER under the
tax code
Amend Tax Return
d

Sec. 6A: The taxpayer has 3 YEARS from the date of filing to MODIFY, CHANGE or AMEND the return provided that
No notice for audit or investigation has been actually served to the taxpayer OR
No assessment has been actually made

Protest Assessment
PROCEDURE (Sec. 3, RR 12-99)
d NOTICE OF INFORMAL CONFERENCE
Sent to the taxpayer in case he does not agree with the findings of the Revenue Officer to give him an
opportunity to explain his side
Taxpayer is given 15DAYS to respond to the Notice failure to respond will make the taxpayer in
default
o The case shall then be endorsed to the Assessment Division for appropriate review and
issuance of deficiency tax assessment, if warranted
d PRELIMINARY ASSESSMENT NOTICE
Must state the FACTS and the LAW on which the proposed assessment was based
EFFECT OF FAILURE TO RECEIVE PAN
o CIR v. Menguito: There is no doubt that petitioner failed to prove that it served on respondent
a post-reporting notice and a pre-assessment notice. Exhibit "11"of petitioner is a mere
photocopy of a July 28, 1997 letter it sent to respondent, informing him of the initial outcome
of the investigation into his sales, and the release of a preliminary assessment upon
completion of the investigation, with notice for the latter to file any objection within five days
from receipt of the letter. "Exhibit "13"of petitioner is also a mere photocopy of an August 11,
1997 Preliminary Ten (10) Day Letter to respondent, informing him that he had been found to
be liable for deficiency income and percentage tax and inviting him to submit a written
objection to the proposed assessment within 10 days from receipt of notice. But nowhere on
the face of said documents can be found evidence that these were sent to and received by
respondent. Nor is there separate evidence, such as a registry receipt of the notices or a
certification from the Bureau of Posts, that petitioner actually mailed said notices.
However, while the lack of a post-reporting notice and pre-assessment notice is a deviation
from the requirements under Section 1[68] and Section 2[69] of Revenue Regulation No. 12-85,
the same cannot detract from the fact that formal assessments were issued to and actually
received by respondents in accordance with Section 228 of the National Internal Revenue Code
which was in effect at the time of assessment.
It should be emphasized that the stringent requirement that an assessment notice be
satisfactorily proven to have been issued and released or, if receipt thereof is denied, that said
assessment notice have been served on the taxpayer, applies only to formal assessments
prescribed under Section 228 of the National Internal Revenue Code, but not to post-reporting
notices or pre-assessment notices. The issuance of a valid formal assessment is a substantive

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prerequisite to tax collection, for it contains not only a computation of tax liabilities but also a
demand for payment within a prescribed period, thereby signaling the time when penalties
and interests begin to accrue against the taxpayer and enabling the latter to determine his
remedies therefor. Due process requires that it must be served on and received by the
taxpayer.
o

CIR v. Metro Star Superama: The Court agrees with the CTA that the CIR failed to discharge its
duty and present any evidence to show that Metro Star indeed received the PAN
dated January 16, 2002. It could have simply presented the registry receipt or the certification
from the postmaster that it mailed the PAN, but failed. Neither did it offer any explanation on
why it failed to comply with the requirement of service of the PAN. It merely accepted the
letter of Metro Stars chairman dated April 29, 2002, that stated that he had received the
FAN dated April 3, 2002, but not the PAN; that he was willing to pay the tax as computed by
the CIR; and that he just wanted to clarify some matters with the hope of lessening its tax
liability.
Indeed, Section 228 of the Tax Code clearly requires that the taxpayer must first be informed
that he is liable for deficiency taxes through the sending of a PAN. He must be informed of the
facts and the law upon which the assessment is made. The law imposes a substantive, not
merely a formal, requirement. To proceed heedlessly with tax collection without first
establishing a valid assessment is evidently violative of the cardinal principle in administrative
investigations - that taxpayers should be able to present their case and adduce supporting
evidence.
Sec. 3 of RR 12-99 provides that the sending of a PAN to taxpayer to inform him of the
assessment made is but part of the due process requirement in the issuance of a deficiency
tax assessment, the absence of which renders nugatory any assessment made by the tax
authorities. The use of the word shall in subsection 3.1.2 describes the mandatory nature of
the service of a PAN. The persuasiveness of the right to due process reaches both substantial
and procedural rights and the failure of the CIR to strictly comply with the requirements laid
down by law and its own rules is a denial of Metro Stars right to due process. Thus, for its
failure to send the PAN stating the facts and the law on which the assessment was made as
required by Section 228 of R.A. No. 8424, the assessment made by the CIR is void.
The case of CIR v. Menguito cited by the CIR in support of its argument that only the nonservice of the FAN is fatal to the validity of an assessment, cannot apply to this case because
the issue therein was the non-compliance with the provisions of R. R. No. 12-85 which sought
to interpret Section 229 of the old tax law. RA No. 8424 has already amended the provision of
Section 229 on protesting an assessment. The old requirement of merely notifying the
taxpayer of the CIRs findings was changed in 1998 to informing the taxpayer of not only the
law, but also of the facts on which an assessment would be made. Otherwise, the assessment
itself would be invalid. The regulation then, on the other hand, simply provided that a notice be
sent to the respondent in the form prescribed, and that no consequence would ensue for
failure to comply with that form.

FORMAL ASSESSMENT NOTICE

WHAT IS A FAN?
o Notice issued by the CIR or his duly authorized representative to the taxpayer informing the
latter f his tax liabilities and demanding for the payment of such liabilities
o It contains a COMPUTATION of the tax liabilities and a DEMAND for its payment
LEGAL EFFECTS:
o Creates a legal obligation on the part of the taxpayer to pay the assessed tax to the
government
o Filing of the protest letter against the FAN within 30days from receipt does not make such
assessment final and executor
o Taxpayer does not have to pay the deficiency tax assessment, unlike in local business taxes
and real property taxes

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o

Business of the taxpayer does not become illegal because of non-payment of the deficiency
tax, unlike in local business tax
HOW SENT?
o Personal delivery OR
o Registered mail
3 DATES TO CONSIDER
o DATE of ISSUE anterior to the date of the actual release or mailing of the assessment notice
and demand letter
o DATE of SERVICE or MAILING assessment is deemed made when notice is released or
mailed to the correct taxpayer
o DATE of RECEIPT notice is not required to be received within the prescriptive period
FACTUAL AND LEGAL BASES MUST BE STATED Failure to have factual and legal bases would make the
assessment NULL and VOID
o CIR v. Reyes: In the present case, Reyes was not informed in writing of the law and the facts on
which the assessment of estate taxes had been made. She was merely notified of the findings
by the CIR, who had simply relied upon the provisions of former Section 229 prior to its
amendment by Republic Act (RA) No. 8424, otherwise known as the Tax Reform Act of 1997.
First, RA 8424 has already amended the provision of Section 229 on protesting an assessment.
The old requirement of merely notifying the taxpayer of the CIRs findings was changed in 1998
to informing the taxpayer of not only the law, but also of the facts on which an assessment
would be made; otherwise, the assessment itself would be invalid.
It was on February 12, 1998, that a preliminary assessment notice was issued against the estate.
On April 22, 1998, the final estate tax assessment notice, as well as demand letter, was also
issued. During those dates, RA 8424 was already in effect. The notice required under
the old law was no longer sufficient under the new law.
To be simply informed in writing of the investigation being conducted and of the
recommendation for the assessment of the estate taxes due is nothing but a perfunctory
discharge of the tax function of correctly assessing a taxpayer. The act cannot be taken to
mean that Reyes already knew the law and the facts on which the assessment was based. It
does not at all conform to the compulsory requirement under Section 228. Moreover, the
Letter of Authority received by respondent on March 14, 1997 was for the sheer purpose of
investigation and was not even the requisite notice under the law.
The law imposes a substantive, not merely a formal, requirement. To proceed heedlessly with
tax collection without first establishing a valid assessment is evidently violative of the cardinal
principle in administrative investigations: that taxpayers should be able to present their case
and adduce supporting evidence. In the instant case, respondent has not been informed of the
basis of the estate tax liability. Without complying with the unequivocal mandate of first
informing the taxpayer of the governments claim, there can be no deprivation of property,
because no effective protest can be made. The haphazard shot at slapping an assessment,
supposedly based on estate taxations general provisions that are expected to be known by
the taxpayer, is utter chicanery.
Even a cursory review of the preliminary assessment notice, as well as the demand letter sent,
reveals the lack of basis for -- not to mention the insufficiency of -- the gross figures and details
of the itemized deductions indicated in the notice and the letter. This Court cannot
countenance an assessment based on estimates that appear to have been arbitrarily or
capriciously arrived at. Although taxes are the lifeblood of the government, their assessment
and collection "should be made in accordance with law as any arbitrariness will negate the very
reason for government itself."
o

CIR v. Enron Subic Power Corp: It is clear from the foregoing that a taxpayer must be informed
in writing of the legal and factual bases of the tax assessment made against him. The use of
the word shall in these legal provisions indicates the mandatory nature of the requirements
laid down therein. We note the CTAs findings:

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In [this] case, [the CIR] merely issued a formal assessment and indicated therein the
supposed tax, surcharge, interest and compromise penalty due thereon. The
Revenue Officers of the [the CIR] in the issuance of the Final Assessment Notice did
not provide Enron with the written bases of the law and facts on which the subject
assessment is based. [The CIR] did not bother to explain how it arrived at such an
assessment. Moreso, he failed to mention the specific provision of the Tax Code or
rules and regulations which were not complied with by Enron.
Both the CTA and the CA concluded that the deficiency tax assessment merely itemized the
deductions disallowed and included these in the gross income. It also imposed the preferential
rate of 5% on some items categorized by Enron as costs. The legal and factual bases were,
however, not indicated.
The CIR insists that an examination of the facts shows that Enron was properly apprised of its
tax deficiency. During the pre-assessment stage, the CIR advised Enrons representative of the
tax deficiency, informed it of the proposed tax deficiency assessment through a preliminary
five-day letter and furnished Enron a copy of the audit working paper allegedly showing in
detail the legal and factual bases of the assessment. The CIR argues that these steps sufficed
to inform Enron of the laws and facts on which the deficiency tax assessment was based.
We disagree. The advice of tax deficiency, given by the CIR to an employee of Enron, as well as
the preliminary five-day letter, were not valid substitutes for the mandatory notice in writing of
the legal and factual bases of the assessment. These steps were mere perfunctory discharges
of the CIRs duties in correctly assessing a taxpayer. The requirement for issuing a preliminary
or final notice, as the case may be, informing a taxpayer of the existence of a deficiency tax
assessment is markedly different from the requirement of what such notice must contain. Just
because the CIR issued an advice, a preliminary letter during the pre-assessment stage and a
final notice, in the order required by law, does not necessarily mean that Enron was informed
of the law and facts on which the deficiency tax assessment was made.
The law requires that the legal and factual bases of the assessment be stated in the formal
letter of demand and assessment notice. Thus, such cannot be presumed. Otherwise, the
express provisions of Article 228 of the NIRC and RR No. 12-99 would be rendered nugatory.
The alleged factual bases in the advice, preliminary letter and audit working papers did
not suffice. There was no going around the mandate of the law that the legal and factual bases
of the assessment be stated in writing in the formal letter of demand accompanying the
assessment notice.
We note that the old law merely required that the taxpayer be notified of the assessment
made by the CIR. This was changed in 1998 and the taxpayer must now be informed not only of
the law but also of the facts on which the assessment is made. Such amendment is in keeping
with the constitutional principle that no person shall be deprived of property without due
process. In view of the absence of a fair opportunity for Enron to be informed of the legal and
factual bases of the assessment against it, the assessment in question was void.
o

CIR v. BPI: Accordingly, when the assessments were made pursuant to the former Section 270,
the only requirement was for the CIR to "notify" or inform the taxpayer of his "findings."
Nothing in the old law required a written statement to the taxpayer of the law and facts on
which the assessments were based. The Court cannot read into the law what obviously was
not intended by Congress. That would be judicial legislation, nothing less.
Jurisprudence, on the other hand, simply required that the assessments contain a computation
of tax liabilities, the amount the taxpayer was to pay and a demand for payment within a
prescribed period. Everything considered, there was no doubt the October 28, 1988 notices
sufficiently met the requirements of a valid assessment under the old law and jurisprudence.

PROTEST
Filed within 30DAYS from receipt of FAN

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A valid protest is one that assails the FAN and not the PAN
SUBMISSION OF SUPPORTING DOCUMENTS the taxpayer has 60DAYS from the filing of protest to
submit all relevant documents
o FAILURE to submit within 60days will make the assessment FINAL and EXECUTORY
o The BIR may ask for additional documents; however, the determination of the sufficiency of
the documents depends on the taxpayer.
F CIR v. First Express Pawnshop Co, Inc: In a letter dated 12 March 2002, petitioner
requested respondent to present proof of payment of DST on subscription. In a
letter-reply, respondent stated that it could not produce any proof of DST payment
because it was not required to pay DST under the law considering that the deposit on
subscription was an advance made by its stockholders for future subscription, and no
stock certificates were issued.
Since respondent has not allegedly submitted any relevant supporting documents,
petitioner now claims that the assessment has become final, executory and
demandable, hence, unappealable.
We reject petitioners view that the assessment has become final and unappealable.
It cannot be said that respondent failed to submit relevant supporting documents
that would render the assessment final because when respondent submitted its
protest, respondent attached the GIS and Balance Sheet. Further, petitioner cannot
insist on the submission of proof of DST payment because such document does not
exist as respondent claims that it is not liable to pay, and has not paid, the DST on the
deposit on subscription.
The term "relevant supporting documents" should be understood as those
documents necessary to support the legal basis in disputing a tax assessment as
determined by the taxpayer. The BIR can only inform the taxpayer to submit
additional documents. The BIR cannot demand what type of supporting documents
should be submitted. Otherwise, a taxpayer will be at the mercy of the BIR, which
may require the production of documents that a taxpayer cannot submit.

FORMS:
o Request for RECONSIDERATION based on documents, arguments and legal authorities
already submitted or presented to the BIR
F Not required to submit supporting documents hence, the 180-day period in case of
inaction shall be counted from the filing of the protest
o Request for REINVESTIGATION based on existing as well as new or additional documents,
arguments and legal authorities not yet submitted or presented to the BIR
F Required to submit additional or supporting documents hence, the 180-day period for
in case of inaction shall be counted from the date of submission of the supporting
documents
FAILURE TO FILE PROTEST assessment shall become FINAL, EXECUTORY and DEMANDABLE
o Marcos II v. CA: Apart from failing to file the required estate tax return within the time required
for the filing of the same, petitioner, and the other heirs never questioned the assessments
served upon them, allowing the same to lapse into finality, and prompting the BIR to collect
the said taxes by levying upon the properties left by President Marcos.
The omission to file an estate tax return, and the subsequent failure to contest or appeal the
assessment made by the BIR is fatal to the petitioner's cause, as under the above-cited
provision, in case of failure to file a return, the tax may be assessed at any time within ten
years after the omission, and any tax so assessed may be collected by levy upon real property
within three years following the assessment of the tax. Since the estate tax assessment had
become final and unappealable by the petitioner's default as regards protesting the validity of
the said assessment, there is now no reason why the BIR cannot continue with the collection
of the said tax. Any objection against the assessment should have been pursued following the
avenue paved in Section 229 of the NIRC on protests on assessments of internal revenue taxes.

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o

Dayrit v. Cruz: Anent petitioners' claim that the tax assessments against the estates of the
Teodoro spouses are not yet final, the court finds the claim untenable. In petitioners' motion
for reconsideration of the aforementioned assessments, petitioners requested then
Commissioner Misael P. Vera for a period of thirty (30) days from October 7, 1972 within which
to submit a position paper that would embody their grounds for reconsideration. However, no
position paper was ever filed. 15 Such failure to file a position paper may be construed as
abandonment of the petitioners' request for reconsideration. The court notes that it took the
respondent Commissioner a period of more than one (1) year and five (5) months, from
October 7, 1972 to March 14, 1974, before finally instituting the action for collection. Under the
circumstances of the case, the act of the Commissioner in filing an action for allowance of the
claim for estate and inheritance taxes, may be considered as an outright denial of petitioners'
request for reconsideration.
From the date of receipt of the copy of the Commissioner's letter for collection of estate and
inheritance taxes against the estates of the late Teodoro spouses, petitioners must contest or
dispute the same and, upon a denial thereof, the petitioners have a period of thirty (30) days
within which to appeal the case to the Court of Tax Appeals. This they failed to avail of.

Appeal to cta in case of denial of protest

d WHAT CONSTITUTES DENIAL OF PROTEST
GENERAL RULE: There should be a WRITTEN DECISION
EXCEPTIONS:
o Issuance of REVISED ASSESSMENT upon REINVESTIGATION
o

FINAL NOTICE before Seizure

F Oceanic Wireless Network, Inc. v. CIR: A demand letter for payment of delinquent
taxes may be considered a decision on a disputed or protested assessment. The
determination on whether or not a demand letter is final is conditioned upon the
language used or the tenor of the letter being sent to the taxpayer.
We laid down the rule that the Commissioner of Internal Revenue should always
indicate to the taxpayer in clear and unequivocal language what constitutes his final
determination of the disputed assessment, thus:
. . . we deem it appropriate to state that the Commissioner of Internal Revenue
should always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Sections 7 and 11 of
Republic Act No. 1125, as amended. On the basis of his statement indubitably showing
that the Commissioners communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able
to determine when his right to appeal to the tax court accrues.
The rule of conduct would also obviate all desire and opportunity on the part of the
taxpayer to continually delay the finality of the assessment and, consequently, the
collection of the amount demanded as taxes by repeated requests for
recomputation and reconsideration. On the part of the Commissioner, this would
encourage his office to conduct a careful and thorough study of every questioned
assessment and render a correct and definite decision thereon in the first instance.
This would also deter the Commissioner from unfairly making the taxpayer grope in
the dark and speculate as to which action constitutes the decision appealable to the
tax court. Of greater import, this rule of conduct would meet a pressing need for fair
play, regularity, and orderliness in administrative action.
In this case, the letter of demand dated January 24, 1991, unquestionably constitutes
the final action taken by the Bureau of Internal Revenue on petitioners request for
reconsideration when it reiterated the tax deficiency assessments due from

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petitioner, and requested its payment. Failure to do so would result in the issuance
of a warrant of distraint and levy to enforce its collection without further notice. In
addition, the letter contained a notation indicating that petitioners request for
reconsideration had been denied for lack of supporting documents.
The demand letter received by petitioner verily signified a character of finality.
Therefore, it was tantamount to a rejection of the request for reconsideration. As
correctly held by the Court of Tax Appeals, while the denial of the protest was in the
form of a demand letter, the notation in the said letter making reference to the
protest filed by petitioner clearly shows the intention of the respondent to make it as
[his] final decision.
F

CIR v. Isabela Cultural Corp. (2001): In the normal course, the revenue district officer
sends the taxpayer a notice of delinquent taxes, indicating the period covered, the
amount due including interest, and the reason for the delinquency. If the taxpayer
disagrees with or wishes to protest the assessment, it sends a letter to the BIR
indicating its protest, stating the reasons therefor, and submitting such proof as may
be necessary. That letter is considered as the taxpayers request for reconsideration
of the delinquent assessment. After the request is filed and received by the BIR, the
assessment becomes a disputed assessment on which it must render a decision. That
decision is appealable to the Court of Tax Appeals for review.
Prior to the decision on a disputed assessment, there may still be exchanges between
the commissioner of internal revenue (CIR) and the taxpayer. The former may ask
clarificatory questions or require the latter to submit additional evidence. However,
the CIRs position regarding the disputed assessment must be indicated in the final
decision. It is this decision that is properly appealable to the CTA for review.
Indisputably, respondent received an assessment letter dated February 9, 1990,
stating that it had delinquent taxes due; and it subsequently filed its motion for
reconsideration on March 23, 1990. In support of its request for reconsideration, it
sent to the CIR additional documents on April 18, 1990. The next communication
respondent received was already the Final Notice Before Seizure dated November 10,
1994.
In the light of the above facts, the Final Notice Before Seizure cannot but be
considered as the commissioners decision disposing of the request for
reconsideration filed by respondent, who received no other response to its
request. Not only was the Notice the only response received; its content and tenor
supported the theory that it was the CIRs final act regarding the request for
reconsideration. The very title expressly indicated that it was a final notice prior to
seizure of property. The letter itself clearly stated that respondent was being given
this LAST OPPORTUNITY to pay; otherwise, its properties would be subjected to
distraint and levy. How then could it have been made to believe that its request for
reconsideration was still pending determination, despite the actual threat of seizure
of its properties?

FINAL DEMAND LETTER

F CIR v. Ayala Securities Corp: The letter of February 18, 1963 is tantamount to a denial
of the reconsideration or protest of Ayala on the assessment made by CIR,
considering that the said letter is in itself a reiteration of the demand by the BIR for
the settlement of the assessment already made, and for the immediate payment of
the sum of P758, 687.04 in spite of the vehement protest of the respondent
corporation on April 21, 1961
It is a clear indication of the firm stand of CIR against the reconsideration of the
disputed assessment in view of the continued refusal of the respondent corporation
to execute the waiver of the period of limitation upon the assessment in question

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Said letter amounts to a decision on a disputed or protested assessment and,

therefore, the court a quo did not err in taking cognizance of this case.
o

Filing of COLLECTION SUIT

F CIR v. Union Shipping Corp: The SC had already laid down the dictum that the
Commissioner should always indicate to the taxpayer in clear and unequivocal
language what constitutes his final determination of the disputed assessment.
Specifically, this Court ruled:
. . . we deem it appropriate to state that the Commissioner of Internal Revenue
should always indicate to the taxpayer in clear and unequivocal language whenever
his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by sections 7 and 11 of
Republic Act 1125, as amended. On the basis of this statement indubitably showing
that the Commissioner's communicated action is his final decision on the contested
assessment, the aggrieved taxpayer would then be able to take recourse to the tax
court at the opportune time. Without needless difficulty, the taxpayer would be able
to determine when his right to appeal to the tax court accrues. This rule of conduct
would also obviate all desire and opportunity on the part of the taxpayer to
continually delay the finality of the assessment and, consequently, the collection
of the amount demanded as taxes by repeated requests for recomputation and
reconsideration. On the part of the Commissioner, this would encourage his office to
conduct a careful and thorough study of every questioned assessment and render a
correct and definite decision thereon in the first instance. This would also deter the
Commissioner from unfairly making the taxpayer grope in the dark and speculate as
to which action constitutes the decision appealable to the tax court. Of greater
import, this rule of conduct would meet a pressing need for fair play, regularity, and
orderliness in administrative action. (Surigao Electric Co., Inc. v. C.T.A., 57 SCRA 523,
528, [1974]).
There appears to be no dispute that petitioner did not rule on private respondent's
motion for reconsideration but contrary to the above ruling of this Court, left private
respondent in the dark as to which action of the Commissioner is the decision
appealable to the Court of Tax Appeals.
Had he categorically stated that he denies private respondent's motion for
reconsideration and that his action constitutes his final determination on the
disputed assessment, private respondent without needless difficulty would have
been able to determine when his right to appeal accrues and the resulting confusion
would have been avoided.
SC reiterates in another ruling that the reviewable decision of the Bureau of Internal
Revenue is that contained in the letter of its Commissioner, that such constitutes the
final decision on the matter which may be appealed to the Court of Tax Appeals and
not the warrants of distraint (Advertising Associates, Inc. v. Court of Appeals). It was
likewise stressed that the procedure enunciated is demanded by the pressing need
for fair play, regularity and orderliness in administrative action.
Under the circumstances, the Commissioner of Internal Revenue, not having clearly
signified his final action on the disputed assessment, legally the period to appeal has
not commenced to run. Thus, it was only when private respondent received the
summons on the civil suit for collection of deficiency income on December 28, 1978
that the period to appeal commenced to run.
The request for reinvestigation and reconsideration was in effect considered denied
by petitioner when the latter filed a civil suit for collection of deficiency income. So.
that on January 10, 1979 when private respondent filed the appeal with the Court of

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Tax Appeals, it consumed a total of only thirteen (13) days well within the thirty day
period to appeal pursuant to Section 11 of R.A. 1125.
o

REFERRAL to Solicitor General for Collection

F Republic v. Lim Tian Teng Sons & Co: We will now resolve the issue of whether or not
the court a quo erred in considering as final and executory the assessment contained
in the letter of the Collector of Internal Revenue dated January 16, 1957. As stated,
defendant received said assessment on January 30, 1957 and on the following day
requested reinvestigation of its tax liability. The Collector of Internal Revenue
however did not reply to the request for reinvestigation. Instead, he referred the
case to the Solicitor General for collection of the tax. The lower court interpreted this
action of the Collector of Internal Revenue as a denial of defendant's request for
reinvestigation.
Said court, to our mind, committed no error. For what is more indicative of the
Collector's decision against reinvestigation than his insistence to collect the tax? This
decision was communicated to defendant in a letter dated September 20, 1957 of the
office of the Solicitor General which must have been received by defendant not later
than October 8, 1957 for on said date it acknowledged receipt thereof. It had thirty
days from October 8, 1957 within which to appeal to the Court of Tax Appeals
pursuant to Section 11 of Republic Act 1125.6Instead of appealing to the Tax Court,
however, the defendant herein in a letter dated October 8, 1957 reiterated its request
for reinvestigation.

Issuance of WARRANT OF DISTRAINT and LEVY

F CIR v. Algue, Inc: Although the general rule is that a warrant of distraint and levy is
proof of the finality of the assessment, being tantamount to an outright denial, there
are special circumstances in this case which prevent the application of this general
rule.
Four days after Algue received the assessment, he filed a letter protest which,
unfortunately was not acted upon. It was only when Algue gave BIR a copy of the
letter that his protest was considered. During this period, the warrant of distraint and
levy was still premature and could therefore not be served.
The protest had the effect of suspending the period to appeal on January 18. The
period started running again only on April 7 when Algue was finally informed of the
implied rejection of his protest.

Effect for MR of Denial of Protest

F Surigao Electric Co., Inc. v. CTA: The Revised Assessment and demand for payment of
the Commissioner dated April 29, 1963 and received by SURECO on May 8, 1963 was
considered as the final action of the Commissioner reviewable by the CTA. It not only
demanded the payment of the deficiency tax but also gave warning that in the event
it failed to pay, the said Commissioner would be constrained to enforce the collection
thereof by means of the remedies provided by law. The tenor of the letter,
specifically the statement regarding the resort to legal remedies unmistakably
indicated the final nature of the determination made by the Commissioner of
SURECOs deficiency franchise tax liability.
From the date of SURECOs receipt of the revised assessment, the 30-day period of
appeal began to run from May 8, 1963 to June 7, 1963 (the day the letter for
recomputation was sent by registered mail).The request for recomputation,
partaking of a Motion for Reconsideration, tolled the running of the thirty-day period
from June 7, 1963 to July 16, 1963. The prescriptive period commenced to run again
on July 16, 1963. SURECO filed its petition for review with the CTA on August 1, 1963
after the lapse of an additional 16 days. Hence, it was the petition was correctly
dismissed for having been filed beyond the thirty-day period.

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The thirty-day period prescribed by Sec. 11 RA 1125 is jurisdictional. Failure to file an

appeal within the prescribed period bars any appeal and renders the decision final
and executor.
The CIR should always indicate to the taxpayer in clear and unequivocal language
whenever his action on an assessment questioned by a taxpayer constitutes his final
determination on the disputed assessment, as contemplated by Secs. 7 & 11 of RA
1125.
d

JURISDICTION OF THE CTA

MATTERS APPEALABLE (Sec. 7, RA 1125)
o CIR decisions in cases involving disputed assessments, refunds of internal revenue taxes, fees
or other charges, penalties in relation thereto, or other matters arising under the NIRC or other
laws administered b the BIR
o Inaction b the CIR where the NIRC provides a specific period of action, which inaction is
deemed a denial
o

Meralco Securities Corp. v. Savellano: Respondent judge has no jurisdiction to take cognizance
of the case because the subject matter thereof clearly falls within the scope of cases now
exclusively within the jurisdiction of the Court of Tax Appeals. Section 7 of Republic Act No.
1125, enacted June 16, 1954, granted to the Court of Tax Appeals exclusive appellate jurisdiction
to review by appeal, among others, decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters arising under the National Internal
Revenue Code or other law or part of law administered by the Bureau of Internal Revenue. The
law transferred to the Court of Tax Appeals jurisdiction over all cases involving said
assessments previously cognizable by Courts of First Instance, and even those already pending
in said courts. The question of whether of not to impose a deficiency tax assessment on
Meralco Securities Corporation undoubtedly comes within the purview of the words "disputed
assessments" or of "other matters arising under the National Internal Revenue Code." In the
case of Blaquera, etc. vs. Rodriguez, etc.(103 Phil. 511 [1958]), this Court ruled that the
determination of the correctness or incorrectness of a tax assessment to which the taxpayer is
not agreeable, falls within the jurisdiction of the Court of Tax Appeals and not of the Court of
First Instance, for under the provisions of Section 7 of Republic Act No. 1125, the Court of Tax
Appeals has exclusive appellate jurisdiction to review, on appeal, any decision of the Collector
of Internal Revenue in cases involving disputed assessments and other matters arising under
the National Internal Revenue Code or other law or part of law administered by the Bureau of
Internal Revenue.

CIR v. Leal: While the Court of Appeals correctly took cognizance of the petition for certiorari,
however, let it be stressed that the jurisdiction to review the rulings of the Commissioner of
Internal Revenue pertains to the Court of Tax Appeals, not to the RTC.

Asia International Auctioneers, Inc. v. Parayno, Jr: Now, to the main issue: does the trial court
have jurisdiction over the subject matter of this case?
Petitioners contend that jurisdiction over the case at bar properly pertains to the regular
courts as this is "an action to declare as unconstitutional, void and against the provisions of
[R.A. No.] 7227" the RMCs issued by the CIR. They explain that they "do not challenge the rate,
structure or figures of the imposed taxes, rather they challenge the authority of the
respondent Commissioner to impose and collect the said taxes." They claim that the challenge
on the authority of the CIR to issue the RMCs does not fall within the jurisdiction of the Court
of Tax Appeals (CTA). Petitioners arguments do not sway.

MATTERS NOT APPEALABLE

o TAX RULINGS
o UNFAIR COMPETITION

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o
d

DECLARATORY RELIEF

MODE OF APPEAL
APPEAL TO A DIVISION (Sec. 11, RA 1125)
o Commissioner of Customs v. Gelmart Industries Phils: Petitioner had indeed committed
procedural missteps on his way to this Court.
First. Under Sec. 9 of R.A. No. 9282, "A party adversely affected by a ruling, order or decision
of a Division of the CTA may file a motion for reconsideration or new trial before the same
Division of the CTA within fifteen (15) from thereof" In this case, no motion was filed by
petitioner to seek the reconsideration of the assailed decision of the CTA.
Second. Sec. 11 of the same law provides that, "x x x A party adversely affected by a resolution
of a Division of the CTA on a motion for reconsideration or new trial may file a petition for
review with the CTA en banc." In turn, "A party adversely affected by a decision or ruling of the
CTA en banc may file with the Supreme Court a verified petition for review on certiorari
pursuant to Rule 45 of the 1997 Rules of Civil Procedure" as ordained under Sec. 12 of R.A. No.
9282.
Again, this procedure was not followed by petitioner and no adequate explanation was
offered to justify his disregard of the rules. Petitioner vaguely suggests that filing a petition for
review with the CTA en banc would have been futile because the assailed decision was
concurred in by three (3) associate justices. This is obviously not a defensible argument
considering that the affirmative vote of four (4) members of the CTA en banc is necessary for
the rendition of a decision. Even if three (3) members had already concurred in the assailed
decision, it cannot be predicted how the deliberations of the CTA en banc could have gone had
petitioner rid himself of his blas attitude towards the rules and followed the tiered appeals
procedure laid out in the law.
Third. Sec. 2, Rule 4 of the Revised Rules of the Court of Tax Appeals reiterates the exclusive
appellate jurisdiction of the CTA en banc relative to the review of decisions or resolutions on
motion for reconsideration or new trial of the courts two (2) divisions in cases arising from
administrative agencies such as the Bureau of Customs. Hence, the Court is without jurisdiction
to review decisions rendered by a division of the CTA, exclusive appellate jurisdiction over
which is vested in the CTA en banc.
Petitioners failure to file a motion for reconsideration of the assailed decision of the CTA First
Division, or at least a petition for review with the CTA en banc, invoking the latters exclusive
appellate jurisdiction to review decisions of the CTA divisions, rendered the assailed decision
final and executory. Necessarily, all the arguments professed by petitioner on the validity of
the seizure, detention and ultimate forfeiture of the subject shipments have been foreclosed.

APPEAL TO CTA EN BANC (Sec. 18, RA 1125)

o Judy Anne Santos v. People: Indeed, the filing of a petition for review with the CTA en
banc from a decision, resolution, or order of a CTA Division is a remedy newly made available in
proceedings before the CTA, necessarily adopted to conform to and address the changes in
the CTA.
There was no need for such rule under Republic Act No. 1125, prior to its amendment, since the
CTA then was composed only of one Presiding Judge and two Associate Judges. Any two
Judges constituted a quorum and the concurrence of two Judges was necessary to
promulgate any decision thereof.
The amendments introduced by Republic Act No. 9282 to Republic Act No. 1125 elevated the
rank of the CTA to a collegiate court, with the same rank as the Court of Appeals, and
increased the number of its members to one Presiding Justice and five Associate Justices. The
CTA is now allowed to sit en banc or in two Divisions with each Division consisting of three
Justices. Four Justices shall constitute a quorum for sessions en banc, and the affirmative

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votes of four members of the Court en banc are necessary for the rendition of a decision or
resolution; while two Justices shall constitute a quorum for sessions of a Division and the
affirmative votes of two members of the Division shall be necessary for the rendition of a
decision or resolution.
d

PERIOD TO APPEAL within 30days from receipt of decision

St. Stephens Association v. Collector: The period for appeal to the respondent court in this case must,
therefore, be computed from the time petitioners received the decision of the respondent Collector of
Internal Revenue on the disputed assessment, and not from the time they received said assessment. The
next question now is: which is the decision of the Collector on the disputed assessment his letter of
April 6, 1955, received by petitioners on April 21, 1955, denying their first request for the withdrawal and
cancellation of the assessment; or his letter of July 11, 1955, received by petitioners on July 25, 1955,
denying their second request that the assessment be cancelled and withdrawn, and stating that:
This decision becomes final thirty days after your receipt hereof unless an appeal is taken to the Court of
Tax Appeals within the same period, in accordance with the provision of Republic Act No. 1125.
From the above-quoted statement appearing in his letter of July 11, 1955, it is evident that the
respondent Collector himself considered said letter as his final decision in the case, hence his warning
that the same would become final in thirty days unless petitioners appealed to the Court of Tax Appeals
within the same period. Prior to his letter-decision of July 11, 1955, then, the Collector must have held the
matter under advisement and considered his preceding rulings as merely tentative in character, pending
his final determination and resolution of the merits of the arguments of fact and law submitted by
petitioners in support of their requests for the cancellation and withdrawal of the assessment. This must
have been the reason why, in said letter-decision of July 11, 1955, the Collector included an express
statement that said decision was to become final in thirty days unless appealed from within the same
period; and it must also have been for this reason that, throughout the proceedings in the respondent
Collector never claimed that petitioners' appeal was filed out of time, and it was the Tax Court that motu
proprio dismissed the petition because it believed it was not filed within the period provided by Republic
Act No. 1125.

APPLICATION OF 180-DAY RULE

Lascona v. CIR: In case of inaction, Sec. 228 of the Tax Code merely gave the taxpayer an option: first, he
may appeal to the CTA within 30 days from the lapse of the 180-day period; or second, he may wait until
the Commissioner decides on his protest before he elevates his case. The court believes that the
taxpayer was given this option so that in case his protest is not acted upon within the 180-day period, he
may be able to seek immediate relief and need not wait for an indefinite period of time for the
Commissioner to decide. But if he chooses to wait for a positive action on the part of the Commissioner,
then the same could not result in the assessment becoming final, executory and demandable.
RCBC v. CIR: In case the Commissioner failed to act on the disputed assessment within the 180-day
period from date of submission of documents, the taxpayer can either (1) file a petition for review with
the CTA within 30 days after the expiration of the 180-day period; or (2) await the final decision of the
Commissioner on the disputed assessments and appeal such final decision to the CTA within 30 days
after receipt of a copy of such decision. However, these options are mutually exclusive, and resort to
one bars the application of the other.

APPEAL TO SUPREME COURT

d MODE OF APPEAL Verified petition for review (Rule 45)
d EFFECT OF APPEAL

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Refund and/or Tax Credit of Erroneously Paid Tax

d

WHAT CONSTITUTES ERRONEOUS PAYMENT

CIR v. PNB: Black defines the term erroneous or illegal tax as one levied without statutory authority. In
the strict legal viewpoint, therefore, PNBs claim for tax credit did not proceed from, or is a consequence
of overpayment of tax erroneously or illegally collected. It is beyond cavil that respondent PNB issued to
the BIR the check for P180 Million in the concept of tax payment in advance, thus eschewing the notion
that there was error or illegality in the payment. What in effect transpired when PNB wrote its July 28,
1997 letter was that respondent sought the application of amounts advanced to the BIR to future annual
income tax liabilities, in view of its inability to carry-over the remaining amount of such advance
payment to the four (4) succeeding taxable years, not having incurred income tax liability during that
period.
The instant case ought to be distinguished from a situation where, owing to net losses suffered during a
taxable year, a corporation was also unable to apply to its income tax liability taxes which the law
requires to be withheld and remitted. In the latter instance, such creditable withholding taxes, albeit
also legally collected, are in the nature of erroneously collected taxes which entitled the corporate
taxpayer to a refund under Section 230 of the Tax Code.

SOLUTIO INDEBITI AS BASIS OF REFUND OR CREDIT

PROPER PARTY TO FILE A CLAIM

CIR v. Wander Philippines, Inc: The submission of the CIR that Wander is but a withholding agent of the
government and therefore cannot claim reimbursement of the alleged overpaid taxes, is untenable. It
will be recalled, that said corporation is first and foremost a wholly owned subsidiary of Glaro. The fact
that it became a withholding agent of the government which was not by choice but by compulsion
under Section 53 (b) of the Tax Code, cannot by any stretch of the imagination be considered as an
abdication of its responsibility to its mother company. Thus, this Court construing Section 53 (b) of the
Internal Revenue Code held that "the obligation imposed thereunder upon the withholding agent is
compulsory." It is a device to insure the collection by the Philippine Government of taxes on incomes,
derived from sources in the Philippines, by aliens who are outside the taxing jurisdiction of this Court. In
fact, Wander may be assessed for deficiency withholding tax at source, plus penalties consisting of
surcharge and interest (Section 54, NLRC). Therefore, as the Philippine counterpart, Wander is the
proper entity who should for the refund or credit of overpaid withholding tax on dividends paid or
remitted by Glaro.

Silkair v. CIR: Section 129 of the NIRC provides that excise taxes refer to taxes imposed on specified
goods manufactured or produced in the Philippines for domestic sale or consumption or for any other
disposition and to things imported. The excise taxes are collected from manufacturers or producers
before removal of the domestic products from the place of production. Although excise taxes can be
considered as taxes on production, they are really taxes on property as they are imposed on certain
specified goods.
Section 148(g) of the NIRC provides that there shall be collected on aviation jet fuel an excise tax
ofP3.67 per liter of volume capacity. Since the tax imposed is based on volume capacity, the tax is
referred to as "specific tax." However, excise tax, whether classified as specific or ad valorem tax, is
basically an indirect tax imposed on the consumption of a specified list of goods or products. The tax is
directly levied on the manufacturer upon removal of the taxable goods from the place of production but
in reality, the tax is passed on to the end consumer as part of the selling price of the goods sold.
When Petron removes its petroleum products from its refinery in Limay, Bataan, it pays the excise tax
due on the petroleum products thus removed. Petron, as manufacturer or producer, is the person liable
for the payment of the excise tax as shown in the Excise Tax Returns filed with the BIR. Stated
otherwise, Petron is the taxpayer that is primarily, directly and legally liable for the payment of the
excise taxes. However, since an excise tax is an indirect tax, Petron can transfer to its customers the

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amount of the excise tax paid by treating it as part of the cost of the goods and tacking it on to the
selling price.
The person entitled to claim a tax refund is the statutory taxpayer. Section 22(N) of the NIRC defines a
taxpayer as "any person subject to tax." In Commissioner of Internal Revenue v. Procter and Gamble
Phil. Mfg. Corp., the Court ruled that:
A "person liable for tax" has been held to be a "person subject to tax" and properly considered a
"taxpayer." The terms "liable for tax" and "subject to tax" both connote a legal obligation or duty to pay
a tax.
The excise tax is due from the manufacturers of the petroleum products and is paid upon removal of the
products from their refineries. Even before the aviation jet fuel is purchased from Petron, the excise tax
is already paid by Petron. Petron, being the manufacturer, is the "person subject to tax." In this case,
Petron, which paid the excise tax upon removal of the products from its Bataan refinery, is the "person
liable for tax." Petitioner is neither a "person liable for tax" nor "a person subject to tax." There is also
no legal duty on the part of petitioner to pay the excise tax; hence, petitioner cannot be considered the
taxpayer.
Even if the tax is shifted by Petron to its customers and even if the tax is billed as a separate item in the
aviation delivery receipts and invoices issued to its customers, Petron remains the taxpayer because the
excise tax is imposed directly on Petron as the manufacturer. Hence, Petron, as the statutory taxpayer,
is the proper party that can claim the refund of the excise taxes paid to the BIR.
d

REQUIREMENT OF FILING ADMINISTRATIVE CLAIM

GENERAL RULE: It must be filed before filing for refund or claim
o Sec. 204(C): No credit or refund of taxes or penalties shall be allowed unless the taxpayer files
in writing with the CIR a CLAIM for credit or refund WITHIN 2YEARS after the payment of the
tax or penalty
o Sec. 229: No suit or proceeding shall be maintained in any court for the recovery of any tax
alleged to have been erroneously or illegally assessed or collected until a CLAIM for refund or
credit WITHIN 2YEARS after payment
o Santiago Bermejo v. Collector: The law clearly stipulates that after paying the tax, the citizen
must submit a claim for refund before resorting to the courts. The idea probably is, first, to
afford the collector an opportunity to correct the action of subordinate officers; and second,
to notify the Government that such taxes have been questioned, and the notice should then
be borne in mind in estimating the revenue available for expenditure. Previous objections to
the tax may not take place of that claim for refund, because there may be reason to believe
that, in paying, the tax payer has finally come to realize the validity of assessment. Anyway,
strict compliance with the conditions imposed for the return of revenue collected is a doctrine
consistently applied here and in the United States.
o Aguinaldo v. CIR: The third paragraph of Section 309, afore-quoted, clearly requires the filing
by the taxpayer of a written claim for credit or refund within two years after payment of the
tax, before the Commissioner of Internal Revenue can exercise his authority to grant the credit
or refund. Such requirement is therefore a condition precedent and non-compliance therewith
precludes the Commissioner of Internal Revenue from exercising the authority thereunder
given. As noted, the Aguinaldos paid the income tax for 1953 on August 14, 1954 although the
adjustment took place on August 29, 1955. From both dates to January 13, 1958, when the
claim for tax credit was filed, more than two years have elapsed. Evidently, petitioner's claim
for tax credit was filed beyond the period stated in Section 309.
o CIR v. Acosta: Moreover, it should be emphasized that a party seeking an administrative
remedy must not merely initiate the prescribed administrative procedure to obtain relief, but
also pursue it to its appropriate conclusion before seeking judicial intervention in order to give
the administrative agency an opportunity to decide the matter itself correctly and prevent
unnecessary and premature resort to court action. This the respondent did not follow through.
Additionally, it could not escape notice that at the time respondent filed her amended return,
the 1997 NIRC was not yet in effect. Hence, respondent had no reason at that time to think
that the filing of an amended return would constitute the written claim for refund required by
applicable law.

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EXCEPTION
o Sec. 204(C): A return filed showing an OVERPAYMENT shall be considered as a written claim for
credit or refund
o Sec. 229: The CIR may refund or credit even without a written claim where ON the FACE of the
RETURN such payment appears clearly to have been erroneously paid

EFFECT OF SUPERVENING EVENT (Sec. 229) Still 2YEARS regardless of any supervening cause that may arise
after payment

PAYMENT UNDER PROTEST NOT NEEDED

Ramie Textiles v. Mathay: Protest is not a requirement in order that a taxpayer who paid under a
mistaken belief that it is required by law, may claim for a refund. Section 54 of Commonwealth Act No.
470 does not apply to petitioner which could conceivably not have been expected to protest a payment
it honestly believed to be due. The same refers only to the case where the taxpayer, despite his
knowledge of the erroneous or illegal assessment, still pays and fails to make the proper protest, for in
such case, he should manifest an unwillingness to pay, and failing so, the taxpayer is deemed to have
waived his right to claim a refund.

UTILIZATION OF TAX CREDIT CERTIFICATE It may be applied against any internal revenue tax, EXCLUDING
withholding taxes, for which the taxpayer is directly liable

FORFEITURE OF REFUND OR TAX CREDIT (Sec. 230)

Refund A refund check or warrant issued that shall remain UNCLAIMED or UNCASHED WITHIN 5
YEARS from the DATE the warrant or check was MAILED or DELIVERED shall be forfeited in favor of the
Government and the amount shall revert to the general fund.
Credit A TCC issued that shall remain UNUTILIZED AFTER 5 YEARS from the DATE of ISSUE shall be
considered INVALID and shall NOT be allowed as payment for internal revenue tax liabilities of the
taxpayer and the amount shall revert to the general fund.
o Exception: When the TCC is REVALIDATED The TCC does not become stale and is effectively
perpetual

OFFSETTING
TAXES NOT SUBJECT TO SET-OFF
o Philex Mining Corp. v. CIR: Taxes are compulsory rather than a matter of bargain. A tax does
not depend upon the consent of the taxpayer. If any taxpayer can defer payment of taxes by
raising the defense that it still has a pending claim for refund or credit, this would adversely
affect the government revenue system. A taxpayer cannot refuse to pay his taxes when they
fall due simply because he has a claim against the government or that the collection is
contingent on the result of the lawsuit it filed against the government.
o

CIR v. Citytrust Banking Corp: The fact of such deficiency assessment is intimately related to
and inextricably intertwined with the right of Citytrust to claim for a tax refund for the same
year. To award such refund despite the existence of that deficiency assessment is an absurdity
and a polarity in conceptual effects. Herein private respondent cannot be entitled to refund
and at the same time be liable for a tax deficiency assessment for the same year.
The deficiency assessment, although not yet final, created a doubt as to and constitutes a
challenge against the truth and accuracy of the facts stated in said return which, by itself and
without unquestionable evidence, cannot be the basis for the grant of the refund.
Moreover, to grant the refund without determination of the proper assessment and the tax
due would inevitably result in multiplicity of proceedings or suits. If the deficiency assessment
should subsequently be upheld, the Government will be forced to institute anew a proceeding
for the recovery of erroneously refunded taxes which recourse must be filed within the
prescriptive period of ten years after discovery of the falsity, fraud or omission in the false or
fraudulent return involved.

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Thus, to avoid multiplicity of suits and unnecessary difficulties or expenses, it is both logically
necessary and legally appropriate that the issue of the deficiency tax assessment against
Citytrust be resolved jointly with its claim for tax refund, to determine once and for all in a
single proceeding the true and correct amount of tax due or refundable.

REFUND/CREDIT MAY BE OFFSET AGAINST DEFICIENCY TAX ASSESSMENTS

o Republic v. Mambulao Lumber Co: And the weight of authority is to the effect that internal
revenue taxes, such as the forest charges in question, can be the subject of set-off or
compensation.
A claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off
under the statutes of set-off, which are construed uniformly, in the light of public policy, to
exclude the remedy in an action or any indebtedness of the state or municipality to one who is
liable to the state or municipality for taxes. Neither are they a proper subject of recoupment
since they do not arise out of the contract or transaction sued on. ... (80 C.J.S. 73-74. ) .
The general rule, based on grounds of public policy is well-settled that no set-off is admissible
against demands for taxes levied for general or local governmental purposes. The reason on
which the general rule is based, is that taxes are not in the nature of contracts between the
party and party but grow out of a duty to, and are the positive acts of the government, to the
making and enforcing of which, the personal consent of individual taxpayers is not required. ...
If the taxpayer can properly refuse to pay his tax when called upon by the Collector, because
he has a claim against the governmental body which is not included in the tax levy, it is plain
that some legitimate and necessary expenditure must be curtailed. If the taxpayer's claim is
disputed, the collection of the tax must await and abide the result of a lawsuit, and meanwhile
the financial affairs of the government will be thrown into great confusion. (47 Am. Jur. 766767.)
o

Domingo v. Garlitos: Another ground for denying the petition of the provincial fiscal is the fact
that the court having jurisdiction of the estate had found that the claim of the estate against
the Government has been recognized and an amount of P262,200 has already been
appropriated for the purpose by a corresponding law (Rep. Act No. 2700). Under the above
circumstances, both the claim of the Government for inheritance taxes and the claim of the
intestate for services rendered have already become overdue and demandable is well as fully
liquidated. Compensation, therefore, takes place by operation of law, in accordance with the
provisions of Articles 1279 and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:
ART. 1200. When all the requisites mentioned in article 1279 are present, compensation takes
effect by operation of law, and extinguished both debts to the concurrent amount, even
though the creditors and debtors are not aware of the compensation.
It is clear, therefore, that the petitioner has no clear right to execute the judgment for taxes
against the estate of the deceased Walter Scott Price. Furthermore, the petition
for certiorari and mandamus is not the proper remedy for the petitioner. Appeal is the remedy.

GOVERNMENT LIABILITY FOR INTEREST, ATTORNEYS FEES, ETC.

Victorias Milling Co. v. CIR: Upon the other hand, the milling Company appealed from the Tax Court's
decision in Case G.R. No. L-24769, contending that the refund of the protested sales tax collected by the
revenue authorities should have been ordered with payment of interest thereon, for the reason that in
ruling that the bags and materials imported by said company the Commissioner of Internal Revenue was
guilty of arbitrariness, since he had previously ruled that such importations were exempt from sales tax.
As we have concluded in the preceding case G.R. No. L-21171, the mere fact of the reversal of a ruling
previously rendered is not per se evidence of arbitrariness, neither is the fact that the administrative
ruling is found by the courts not in accordance with law. Arbitrariness presupposes inexcusable or
obstinate disregard of legal provisions, which, in this case, we do not think exists, the Commissioner's
holding being to some extent, plausible on the strict letter of the law.

SUBSTANTIATION REQUIREMENTS

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CIR v. Manila Mining: For a judicial claim for refund to prosper, however, respondent must not only
prove that it is a VAT registered entity and that it filed its claims within the prescriptive period. It
must substantiate the input VAT paid by purchase invoices or official receipts. This respondent failed to
do.
Revenue Regulation No. 3-88 amending Revenue Regulation No. 5-87 provides the requirements in
claiming tax credits/refunds. Sec.2. Section 16 of Revenue Regulations 5-87 is hereby amended to read as
follows:
Sec. 16. Refunds or tax credits of input tax. (a) Zero-rated sales of goods and services Only a VAT-registered person may be granted a tax
credit or refund of value-added taxes paid corresponding to the zero-rated sales of goods and
services, to the extent that such taxes have not been applied against output taxes, upon
showing of proof of compliance with the conditions stated in Section 8 of these Regulations.
For export sales, the application should be filed with the Bureau of Internal Revenue within
two years from the date of exportation. For other zero-rated sales, the application should be
filed within two years after the close of the quarter when the transaction took place.
xxx
(c) Claims for tax credits/refunds. - Application for Tax Credit/Refund of Value-Added Tax Paid
(BIR Form No. 2552) shall be filed with the Revenue District Office of the city or municipality
where the principal place of business of the applicant is located or directly with the
Commissioner, Attention: VAT Division.
A photocopy of the purchase invoice or receipt evidencing the value added tax paid shall be
submitted together with the application. The original copy of the said invoice/receipt,
however, shall be presented for cancellation prior to the issuance of the Tax Credit Certificate
or refund. xxx (Emphasis and underscoring supplied)
Under Section 8 of RA 1125, the CTA is described as a court of record. As cases filed before it are
litigated de novo, party litigants should prove every minute aspect of their cases. No evidentiary value
can be given the purchase invoices or receipts submitted to the BIR as the rules on documentary
evidence require that these documents must be formally offered before the CTA.
A sales or commercial invoice is a written account of goods sold or services rendered indicating the
prices charged therefore or a list by whatever name it is known which is used in the ordinary course of
business evidencing sale and transfer or agreement to sell or transfer goods and services.
A receipt on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and
client or customer.
These sales invoices or receipts issued by the supplier are necessary to substantiate the actual amount
or quantity of goods sold and their selling price, and taken collectively are the best means to prove the
input VAT payments.
Respondent contends, however, that the certification of the independent CPA attesting to the
correctness of the contents of the summary of suppliers invoices or receipts which were examined,
evaluated and audited by said CPA in accordance with CTA Circular No. 1-95 as amended by CTA Circular
No. 10-97 should substantiate its claims.
There is nothing, however, in CTA Circular No. 1-95, as amended by CTA Circular No. 10-97, which either
expressly or impliedly suggests that summaries and schedules of input VAT payments, even if certified
by an independent CPA, suffice as evidence of input VAT payments.

APPEAL IN CASE OF DENIAL OF CLAIM

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o
o

CTA (DIVISION AND EN BANC)

SUPREME COURT

Request for Ruling

d

PROCEDURE
Sec. 4: The CIR has power to INTERPRET the provisions of the NIRC and other tax laws subject to review
by the FINANCE SECRETARY
NON-RETROACTIVITY OF REVOCATION OF RULINGS OR REGULATIONS
Sec. 246: Any revocation, modification or reversal of any rule or regulations promulgated shall not be
given retroactive application if the revocation, modification or reversal will be prejudicial to the
taxpayers EXCEPT:
o Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the BIR
o Where the facts subsequently gathered by the BIR are materially different from the facts on
which the ruling is based
o Where the taxpayer acted in BF
WEIGHT OF BIR RULINGS
PBCom v. CIR: It bears repeating that Revenue memorandum-circulars are considered administrative
rulings (in the sense of more specific and less general interpretations of tax laws) which are issued from
time to time by the Commissioner of Internal Revenue. It is widely accepted that the interpretation
placed upon a statute by the executive officers, whose duty is to enforce it, is entitled to great respect
by the courts. Nevertheless, such interpretation is not conclusive and will be ignored if judicially found to
be erroneous. 20 Thus, courts will not countenance administrative issuances that override, instead of
remaining consistent and in harmony with the law they seek to apply and implement.
RELIANCE ON RULING ISSUED TO 3RD PARTY
Guidance for everyone who has business with the taxes
Relied upon if the facts of the case are similar with the rulings (Saniwares v. CIR)
AUTHORITY OF REGIONAL DIRECTORS TO ISSUE CERTAIN RULINGS

Amnesty, Abatement and Compromise

d

CIR v. CA, et al: May the withholding agent, in such capacity, be deemed a taxpayer for it to avail of the amnesty?
An income taxpayer covers all persons who derive taxable income. 47 ANSCOR was assessed by petitioner for
deficiency withholding tax under Section 53 and 54 of the 1939 Code. As such, it is being held liable in its capacity
as a withholding agent and not its personality as a taxpayer.
In the operation of the withholding tax system, the withholding agent is the payor, a separate entity acting no
more than an agent of the government for the collection of the tax 48 in order to ensure its payments; 49 the payer
is the taxpayer he is the person subject to tax impose by law; 50 and the payee is the taxing authority.51 In other
words, the withholding agent is merely a tax collector, not a taxpayer. Under the withholding system, however,
the agent-payor becomes a payee by fiction of law. His (agent) liability is direct and independent from the
taxpayer, because the income tax is still impose on and due from the latter. The agent is not liable for the tax as
no wealth flowed into him he earned no income. The Tax Code only makes the agent personally liable for the
tax arising from the breach of its legal duty to withhold as distinguish from its duty to pay tax since:
the government's cause of action against the withholding is not for the collection of income tax, but for
the enforcement of the withholding provision of Section 53 of the Tax Code, compliance with which is
imposed on the withholding agent and not upon the taxpayer.
Not being a taxpayer, a withholding agent, like ANSCOR in this transaction is not protected by the amnesty under
the decree.

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Declaratory Relief, Certiorari, Prohibition and Mandamus

d

CJH Development Corp. v. BIR: Moreover, the proper subject matter of a declaratory relief is a deed, will, contract,
or other written instrument, or the construction or validity of statute or ordinance. CJH hinges its petition on the
demand letter or assessment sent to it by the BOC. However, it is really not the demand letter which is the subject
matter of the petition. Ultimately, this Court is asked to determine whether the decision of the Court en banc in
G.R. No. 119775 has a retroactive effect. This approach cannot be countenanced. A petition for declaratory relief
cannot properly have a court decision as its subject matter. In Tanda v. Aldaya, we ruled that:
x x x [A] court decision cannot be interpreted as included within the purview of the words "other
written instrument," as contended by appellant, for the simple reason that the Rules of Court already
provide[s] for the ways by which an ambiguous or doubtful decision may be corrected or clarified
without need of resorting to the expedient prescribed by Rule 66 [now Rule 64].
There are other remedies available to a party who is not agreeable to a decision whether it be a question of law or
fact. If it involves a decision of an appellate court, the party may file a motion for reconsideration or new trial in
order that the defect may be corrected. In case of ambiguity of the decision, a party may file a motion for a
clarificatory judgment. One of the requisites of a declaratory relief is that the issue must be ripe for judicial
determination. This means that litigation is inevitable or there is no adequate relief available in any other form or
proceeding.

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Local taxation
General Principles
Local autonomy
d Each LGU has the power to CREATE its own source of revenue and to LEVY taxes, fees and charges which shall
accrue exclusively to the LGUs. (Sec. 129, LGC and Sec. 5, Art. X, 1987 Constitution)
d

Mactan Cebu Intl Airport Authority v. Marcos: 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 by virtue of a valid delegation as
before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution. 22 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.
There can be no question that under Section 14 of R.A. No. 6958 the petitioner is exempt from the payment of
realty taxes imposed by the National Government or any of its political subdivisions, agencies, and
instrumentalities. Nevertheless, since taxation is the rule and exemption therefrom the exception, the exemption
may thus be withdrawn at the pleasure of the taxing authority. The only exception to this rule is where the
exemption was granted to private parties based on material consideration of a mutual nature, which then
becomes contractual and is thus covered by the non-impairment clause of the Constitution. 23
The LGC, enacted pursuant to Section 3, Article X of the constitution provides for the exercise by local
government units of their power to tax, the scope thereof or its limitations, and the exemption from taxation.

Meralco v Province of Laguna: 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 self-sufficiency 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,[6] 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) local taxation will be fair, uniform, and just.

Fundamental principles (Sec. 130)

d Taxation shall be UNIFORM in each LGU
Pepsi Cola Bottling Co. v. Tanuan: Even if this tax was regarded as one on the sale of softdrinks, it would
still be invalid, as discriminatory, since only sales by agents or consignees or outside dealers would be
subject to the tax. Sales by local dealers, not acting for or on behalf of other merchants, regardless of
the volume of their sales, would be exempt from the disputed tax.
Uniformity essential to the valid exercise of the power of taxation does not require equality under all
circumstances, or negate the authority to classify the objects of taxation.
There is valid and reasonable classification when:

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a) it is based upon substantial distinctions which make real differences;
b) these are germane to the purpose of the legislation/ordinance;
c) the classification applies, not only to present conditions, but also, to future conditions
substantially identical to those of the present; and
d) the classification applies equally to all those who belong to the same class.
If the purpose were merely to levy a burden upon the sale of softdrinks, there is no reason why sales by
dealers other than agents/consignees of producers established outside the City of Butuan should be
exempt from the tax.
d

Taxes, fees, charges and other impositions shall:

Be EQUITABLE and based as far as practicable on the taxpayers ABILITY to PAY
Be levied and collected only for PUBLIC PURPOSES
Not be UNJUST, EXCESSIVE, OPPRESSIVE, or CONFISCATORY
o Matalin Coconut Co. v. Municipal Council of Malabang: Ordinance must be stricken down for
being unjust and unreasonable, excessive and confiscatory. However, the tax imposed under
the ordinance can be stricken down on another ground. According to 2 of the
abovementioned Act, the tax levied must be "for public purposes, just and uniform." As
correctly held by the trial court, the so-called "police inspection fee" levied by the ordinance is
"unjust and unreasonable." Said the court a quo:
... It has been proven that the only service rendered by the Municipality of Malabang, by way
of inspection, is for the policeman to verify from the driver of the trucks of the petitioner
passing by at the police checkpoint the number of bags loaded per trip which are to be
shipped out of the municipality based on the trip tickets for the purpose of computing the
total amount of tax to be collect (sic) and for no other purpose. The pretention of respondents
that the police, aside from counting the number of bags shipped out, is also inspecting the
cassava flour starch contained in the bags to find out if the said cassava flour starch is fit for
human consumption could not be given credence by the Court because, aside from the fact
that said purpose is not so stated in the ordinance in question, the policemen of said
municipality are not competent to determine if the cassava flour starch are fit for human
consumption. The further pretention of respondents that the trucks of the petitioner hauling
the bags of cassava flour starch from the mill to the bodega at the beach of Malabang are
escorted by a policeman from the police checkpoint to the beach for the purpose of protecting
the truck and its cargoes from molestation by undesirable elements could not also be given
credence by the Court because it has been shown, beyond doubt, that the petitioner has not
asked for the said police protection because there has been no occasion where its trucks have
been molested, even for once, by bad elements from the police checkpoint to the bodega at
the beach, it is solely for the purpose of verifying the correct number of bags of cassava flour
starch loaded on the trucks of the petitioner as stated in the trip tickets, when unloaded at its
bodega at the beach. The imposition, therefore, of a police inspection fee of P.30 per bag,
imposed by said ordinance is unjust and unreasonable.

The Court finally finds the inspection fee of P0.30 per bag, imposed by the ordinance in
question to be excessive and confiscatory. It has been shown by the petitioner, Matalin
Coconut Company, Inc., that it is merely realizing a marginal average profit of P0.40, per bag,
of cassava flour starch shipped out from the Municipality of Malabang because the average
production is P15.60 per bag, including transportation costs, while the prevailing market price
is P16.00 per bag. The further imposition, therefore, of the tax of P0.30 per bag, by the
ordinance in question would force the petitioner to close or stop its cassava flour starch milling
business considering that it is maintaining a big labor force in its operation, including a force of
security guards to guard its properties. The ordinance, therefore, has an adverse effect on the
economic growth of the Municipality of Malabang, in particular, and of the nation, in general,
and is contrary to the economic policy of the government.
Not be CONTRARY to law, public policy, national economic policy or in restraint of trade

The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person
It is the actual act of collection that is prohibited to be designated to private persons

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d

The revenue collected shall inure solely to the benefit of and be subjected to the disposition by the LGU levying
the tax, fee, charge or other imposition unless otherwise specifically provided in the code

Each LGU shall, as far as practicable, evolve a PROGRESSIVE system of taxation

The taxpayer is ALREADY TAXED ON HIS MAIN BUSINESS

Standard Vacuum Oil v. Antigua: If a company manufactures tin cans to be sold to the public or to
companies engaged in the sale and distribution of the liquids, then said manufacturer would be a
business or occupation subject to the tax imposed by the ordinance. However, where the manufacture
of tin cans is conducted not as independent business and for profit, but merely as an incident to or part
of its main business, then it may not be considered as an occupation or business which may be taxed
separately.
While gasoline may be sold and distributed to its dealers and to the public at gasoline stations and
without the use of tin cans this may not be done with kerosene or petroleum which is being sold in small
towns with no kerosene stations. There arises the necessity of providing suitable containers such as 5gallon tin cans.
SC upheld the factual finding of the TC that the tin cans were not manufactured by the appellant
company for sale to the public, but for the purpose of distributing its products which are in liquid
form.
When a person or company is already taxed on its main business, it may not be further taxed for doing
something or engaging in an activity or work which is merely a part of, incidental to and is necessary
to its main business.

City of Manila v. Fortune Enterprises: Where something is done as a mere incident to, or as a necessary
consequence of, the principal business, it is not ordinarily taxed as an independent business in itself.
What is usually taken as essential is the main activity in which the taxpayer is engaged. All the various
transactions tending to better accomplish the principal end in view must be treated as merely incidental
to the principal purpose of the business, in the absence of circumstances evidencing a different intent.
Fortune is not a retailer of auto parts. It does not appear that the appellee company carries or keeps in
stock auto spare parts and other supplies for sale or as likewise a part of its regular business. The
records disclose that said spare parts or supplies are merely procured from different automobile spare
parts dealers around the city where the customers prefer it that way and do not wish to secure them
themselves, and only when said materials are needed in connection with the repairing job to be done by
it. It is not even shown that the company charges an extra profit for the spare parts used or needed in
the repair. If at all, the appellee was merely buying the required materials for and in behalf of its
customers. Of course, "dealing" is not compatible with agency, but it has a persuasive effect in negating
the fact that the appellee has regularly engaged in that business as to come within the term "dealer"
under the taxing ordinances in question.
Fortune is not engaged in the business of battery charging. In maintaining the battery charging unit in
question, it appears that the same was not allowed to be used unless as a part of repair service.
Fortune is not engaged in the upholstering business. As regards the upholstering business, it is not
disclosed that the appellee actually engages in it. On the contrary, it was satisfactorily established that
whenever a customer required an upholstering job, the same was done by outside contractors, but that
the money is only advanced by the appellee, more as a matter of convenience to its customers, which in
a way also tends to promote its goodwill. That the materials were itemized as separate charges does not
evidence an intent to supply them as a separate transaction, since the itemization served to allay any
suspicion of the customers that they were being over-charged for the materials thus supplied.

Ah Nam v. City of Manila: Neither may appellee be obliged to pay the permit and license fees required
under Ordinance No. 3000 because, as heretofore, stated, the sale of the empty bags is not being
carried as a separate or distinct trade or enterprise, but merely as incident to the bakery business. As a
matter of fact, the sale of the flour bags depends on the volume of consumption or use by appellee's

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bakery business. Appellee does not but empty flour bags, independently of the flour he uses, for the
purpose of re-selling them, nor does he buy flour in order to get the empty bags for sale, the main
reason for the purchase being a utility of the flour to the bakery business. That after attaining his
purpose, appellee finds some use for the empty bags, is certainly incidental only to his bakery business.
As under the ordinance the fees are imposed on persons engaged in the trade or business of dealer, and
as appellee is not, in the real sense of the term, engaged in the business of buying and selling used flour
bags, the lower court committed no error in exempting appellee from payment of the license and
permit fees in connection with the sale of such empty flour bags.
Common limitations on taxing powers (sec. 133)
d Income tax EXCEPT when levied on banks and other financial institutions
d Documentary stamp tax
d Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa EXCEPT as otherwise provided
herein
d Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of
customs fees, charges and dues EXCEPT wharfage on wharves constructed and maintained by the local
government unit concerned
d Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the
territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise
d Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen
d Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of
six (6) and four (4) years, respectively from the date of registration
d Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or
charges on petroleum products
Province of Bulacan v. CA: It is clearly apparent from the above provision that 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.
Phil. Petroleum Corp. v. Municipality of Pililia: Provincial Circular No. 6-77 enjoining all city and municipal
treasurers to refrain from collecting the so-called storage fee on flammable or combustible materials
imposed in the local tax ordinance of their respective locality frees petitioner PPC from the payment of
storage permit fee. The storage permit fee being imposed by Pililla's tax ordinance is a fee for the
installation and keeping in storage of any flammable, combustible or explosive substances. Inasmuch as
said storage makes use of tanks owned not by the municipality of Pililla, but by petitioner PPC, same is
obviously not a charge for any service rendered by the municipality as what is envisioned in Section 37 of
the same Code.
Petron v. Tiangco: The language of Section 133(h) makes plain that the prohibition with respect to
petroleum products extends not only to excise taxes thereon, but all "taxes, fees and charges." The
earlier reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation: all
articles already covered by excise taxation under the NIRC, such as alcohol products, tobacco products,
mineral products, automobiles, and such non-essential goods as jewelry, goods made of precious
metals, perfumes, and yachts and other vessels intended for pleasure or sports. In contrast, the later
reference to "taxes, fees and charges" pertains only to one class of articles of the many subjects of
excise taxes, specifically, "petroleum products". While local government units are authorized to burden
all such other class of goods with "taxes, fees and charges," excepting excise taxes, a specific
prohibition is imposed barring the levying of any other type of taxes with respect to petroleum
products.
d Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services
EXCEPT as otherwise provided herein
When the tax is NOT imposed on the manufacture of goods, it is not a sales tax

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o

Pepsi Cola Bottling v. Tanauan: That brings Us to the question of whether the remaining
Ordinance No. 27 imposes a percentage or a specific tax. Undoubtedly, the taxing authority
conferred on local governments under Section 2, Republic Act No. 2264, is broad enough as to
extend to almost "everything, accepting those which are mentioned therein." As long as the
text levied under the authority of a city or municipal ordinance is not within the exceptions and
limitations in the law, the same comes within the ambit of the general rule, pursuant to the
rules of exclucion attehus andexceptio firmat regulum in cabisus non excepti 19 The limitation
applies, particularly, to the prohibition against municipalities and municipal districts to impose
"any percentage tax or other taxes in any form based thereonnor impose taxes on articles
subject to specific tax except gasoline, under the provisions of the National Internal Revenue
Code." For purposes of this particular limitation, a municipal ordinance which prescribes a set
ratio between the amount of the tax and the volume of sale of the taxpayer imposes a sales
tax and is null and void for being outside the power of the municipality to enact. 20 But, the
imposition of "a tax of one centavo (P0.01) on each gallon (128 fluid ounces, U.S.) of volume
capacity" on all soft drinks produced or manufactured under Ordinance No. 27 does not
partake of the nature of a percentage tax on sales, or other taxes in any form based thereon.
The tax is levied on the produce (whether sold or not) and not on the sales. The volume
capacity of the taxpayer's production of soft drinks is considered solely for purposes of
determining the tax rate on the products, but there is not set ratio between the volume of
sales and the amount of the tax
The amount of the local tax to be paid is separate from the volume of sales subject to percentage/sales
tax
o San Miguel Corp. v Municipal Council of Mandaue: The phrase "actual market value" has been
construed as the price which an article "would command in the ordinary course of business,
that is to say, when offered for sale by one willing to sell, but not under compulsion to sell, and
purchased by another who is willing to buy, but under no obligation purchase it, 5 or the price
which the property will bring in a fair market after fair and reasonable efforts have been made
to find a purchaser who will give the highest price for it. 6 The "actual market value" of
property, for purposes of taxation, therefore means the selling price of the article in the
course of ordinary business.
Considering that the phrase "gross value in money" is followed by the words "or actual market
value", it is evident that the latter was intended to explain and clarify the preceding phrase.
For the word "or" may be used as the equivalent of "that is to say" and gives that which
precedes it the same significance as that which follows it. It is not always disjunctive and is
sometimes interpretative or expository of the preceding word. 7Certainly We cannot assume
that the phrase "or actual market value" was a mere surplusage, for it serves to clarify and
explain the meaning and import of the preceding phrase. In any event, it is the duty of the
courts, so far reasonably practicable, to read and interpret a statute as to give life and effect to
its provisions, so as to render it a harmonious whole.
It is also significant to note, that there is a set ratio between the amount of the tax and the
volume of sales. Thus if the "gross value in money or actual market value" of the beer removed
from the factory exceeds P37,500.00 per quarter, the taxpayer is required to pay a quarterly
license tax of P160.00 plus P0.30 for every P1,000.00 or fraction of the excess. In other words
in excess of P37,500.00, the taxpayer will pay to the municipality a certain amount of tax
measured by a percentage of the sales. It is therefore evident that the challenged ordinance
was a transparent attempt on the part of the municipality to impose a tax based on sales.
Although section 2 of the ordinance in question provides in a vague manner that the tax shall
be assessed and collected on the basis of the sworn statement of the manager of a firm or
corporation "of the gross value in money during the preceding quarter," in actual practice the
quarterly tax levied upon the petitioner, was computed on the basis of the total market of the
beer, per quarter, as shown by the shipping memorandum certified to by the storekeeper of
the Bureau Internal Revenue assigned to the brewery. Thus the amounting to P309.40 and
P5,171.80, paid by petition January 22, 1968 and July 18, 1968, were actually determined
respectively on the basis of 70,412 and 2,203.070 cases manufactured and removed from the

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Mandaue plant, multiplied by P7.60 which is the prevailing market price (wholesaler's price)
per case of beer.
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
First Philippine Industrial Corp. v. CA: Based on the above definitions and requirements, there is no
doubt that petitioner is a common carrier. It is engaged in the business of transporting or carrying
goods, i.e. petroleum products, for hire as a public employment. It undertakes to carry for all persons
indifferently, that is, to all persons who choose to employ its services, and transports the goods by land
and for compensation.
The fact that petitioner has a limited clientele does not exclude it from the definition of a common
carrier. Also, respondent's argument that the term "common carrier" as used in Section 133 (j) of the
Local Government Code refers only to common carriers transporting goods and passengers through
moving vehicles or vessels either by land, sea or water, is erroneous.

d
d
d
d
d

As correctly pointed out by petitioner, the definition of "common carriers" in the Civil Code makes no
distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that
the transportation of the passengers or goods should be by motor vehicle. In fact, in the United States,
oil pipe line operators are considered common carriers.
Taxes on premiums paid by way or reinsurance or retrocession
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
Taxes, fees, or other charges on Philippine products actually exported EXCEPT as otherwise provided herein
Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered
under R.A. No. 6810 and R.A. No. 6938 otherwise known as the "Cooperative Code of the Philippines" respectively
Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local
government units.

Scope of Taxing Powers of LGUs

d

PROVINCES may levy ONLY the taxes ENUMERATED (Sec. 134)

LOCAL TRANSFER TAX (Sec. 135) On the sale, donation, barter or any other mode of transferring
ownership or title of real property EXCEPT the sale, transfer or disposition pursuant to RA 6657
o RATE: not more than .5%
o BASE: Whichever is higher between
F Total consideration
F FMV in case the monetary consideration involved is not substantial
o Duty of the seller, donor, transferor, executor or administrator to pay the tax WITHIN 60 DAYS
from the date of the execution of the deed or from the date of the decedents death
o This tax completes the taxes on transfer: CAPITAL GAINS TAX + DST + .5% LOCAL TAX
TAX ON BUSINESS OF PRINTING AND PUBLICATION (Sec. 136) Printing and/or publication of books,
cards, posters, leaflets, etc.
o RATE:
F General rule: .5 % of gross annual receipts for preceding calendar year
F Except: For newly started business 1/20 f 1% of the capital investment
FRANCHISE TAX (Sec. 137) Notwithstanding any exemption granted by law or other special law,
franchise tax shall be imposed
o EXEMPTED: receipts from the printing and/or publishing of books or other reading materials
prescribed by the DepEd as school texts or references shall be exempt
o RATE:
F General rule: .5% gross annual receipts for the preceding calendar year based on the
incoming receipt, or realized, within its territorial jurisdiction
F Except: newly started business 1/20 of 1% of the capital investment

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TAX ON SAND, GRAVEL and OTHER QUARRY RESOURCES (Sec. 138) Ordinary stones, sand, gravel, earth
and other quarry resources extracted from PUBLIC lands or from the beds of the seas, lakes, rivers,
streams, creeks and other PUBLIC waters within its territorial jurisdiction
o RATE: 10%
o BASE: FMV in the locality per cubic meter
o Distribution of proceeds:
F Province 30%
F Component city or municipality where extracted 30%
F Barangay where extracted 40%
PROFESSIONAL TAX (Sec. 139) Not based on the amount of earnings but on the privilege of exercising
profession
o Imposed annually on each person engaged in the exercise or practice of his profession
requiring government exam
o EXEMPT: Professionals exclusively employed in the government
F A profession does not become exempt by being conducted with some other
profession for which the tax has been paid (ex: doctor who pays tax on the practice
of medicine cannot practice dentistry without paying tax for such)

Except when one profession is necessarily incident to the practice of

another profession
o RATE: not exceeding P300
o WHERE to pay: To the province
F Where he practices his profession OR
F Where he maintains his principal office in case he practices in several places
AMUSEMENT TAX (Sec. 140) Tax imposed on the admission to theaters or places of amusement (tax
on the right/privilege to enter the place) and not a tax on the right/privilege to hold or stage a show or
performance
o Theaters, cinemas, concert halls, circuses, boxing stands and other place of amusement
F PBA v. CA: From the foregoing it is clear that the "proprietor, lessee or operator of . . .
professional basketball games" is required to pay an amusement tax equivalent to
fifteen per centum (15%) of their gross receipts to the Bureau of Internal Revenue,
which payment is a national tax. The said payment of amusement tax is in lieu of all
other percentage taxes of whatever nature and description.
While Section 13 of the Local Tax Code mentions "other places of amusement",
professional basketball games are definitely not within its scope. Under the principle
of ejusdem generis, where general words follow an enumeration of persons or
things, by words of a particular and specific meaning, such general words are not to
be construed in their widest extent, but are to be held as applying only to persons or
things of the same kind or class as those specifically mentioned.9 Thus, in
determining the meaning of the phrase "other places of amusement", one must refer
to the prior enumeration of theaters, cinematographs, concert halls and circuses with
artistic expression as their common characteristic. Professional basketball games do
not fall under the same category as theaters, cinematographs, concert halls and
circuses as the latter basically belong to artistic forms of entertainment while the
former caters to sports and gaming.
A historical analysis of pertinent laws does reveal the legislative intent to place
professional basketball games within the ambit of a national tax. The Local Tax Code,
which became effective on June 28, 1973, allowed the province to collect a tax on
admission from the proprietors, lessees, or operators of theaters, cinematographs,
concert halls, circuses and other places of amusement. On January 6, 1976, the
operation of petitioner was placed under the supervision and regulation of the
Games and Amusement Board by virtue of PD 871, with the proviso (Section 8) that ".
. . all professional basketball games conducted by the Philippine Basketball
Association shall only be subject to amusement tax of five per cent of the gross
receipts from the sale of admission tickets." Then, on June 11, 1978, PD 1456 came
into effect, increasing the amusement tax to ten per cent, with a categorical referral
to PD 871, to wit, "[t]en per centum in the case of professional basketball games as

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envisioned in Presidential Decree No. 871 . . ." Later in 1984, PD 1959 increased the
rate of amusement tax to fifteen percent by making reference also to PD 871. With
the reference to PD 871 by PD 1456 and PD 1959, there is a recognition under the laws
of this country that the amusement tax on professional basketball games is a
national, and not a local, tax. Even up to the present, the category of amusement
taxes on professional basketball games as a national tax remains the same. This is so
provided under Section 125 of the 1997 National Internal Revenue Code. Section
14011 of the Local Government Code of 1992 (Republic Act 7160), meanwhile, retained
the areas (theaters, cinematographs, concert halls, circuses and other places of
amusement) where the province may levy an amusement tax without including
therein professional basketball games.
o EXEMPT: holding of operas, concerts, dramas, recitals, painting and art exhibitions, flowers
shows, musical programs, literary and oratorical presentations, EXCEPT pop, rock or similar
concerts
o RATE: 30%
o BASE: gross receipts from admission fees
o Liability to pay attaches upon the sale of the ticket although the tax is payable at a later period
by the proprietor
o Sanggunian may prescribe TIME, MANNER, TERMS and CONDITIONS for the payment of tax.
F Fraud or failure to pay the tax surcharges, interests and penalties may be imposed
as deemed appropriate
o Proceeds shall be shared EQUALLY by the province and the municipality where the amusement
places are located
ANNUAL FIXED tax for every deliver truck or van of manufacturers or produces, wholesalers of, dealers,
or retailers in, certain products (Sec. 141) Delivery or distribution of distilled spirits, fermented liquors,
soft drinks, cigars and cigarettes and other products to SALES OUTLETS or CONSUMERS, whether
directly or indirectly, within the province
o They are exempted from tax on peddlers
o Not exceeding P500

MUNICIPALITIES May levy taxes, fees and charges which are NOT otherwise levied by PROVINCES (Sec. 142)
LOCAL BUSINESS TAXES
o Based on GROSS SALES OR RECEIPTS except for peddlers
F Ericsson Telecommunications v. City of Pasig: Whether the local business tax on
contractors should be based on gross receipts or gross revenue.
The law is clear. Gross receipts include money or its equivalent actually or
constructively received in consideration of services rendered or articles sold,
exchanged or leased, whether actual or constructive. There is, therefore,
constructive receipt, when the consideration for the articles sold, exchanged or
leased, or the services rendered has already been placed under the control of the
person who sold the goods or rendered the services without any restriction by
the payor.
In contrast, gross revenue covers money or its equivalent actually or constructively
received, including the value of services rendered or articles sold, exchanged or
leased, the payment of which is yet to be received. This is in consonance with the
International Financial Reporting Standards, which defines revenue as the gross
inflow of economic benefits (cash, receivables, and other assets) arising from the
ordinary operating activities of an enterprise (such as sales of goods, sales of
services, interest, royalties, and dividends), which is measured at the fair value of the
consideration received or receivable.
In petitioners case, its audited financial statements reflect income or revenue which
accrued to it during the taxable period although not yet actually or constructively
received or paid. This is because petitioner uses the accrual method of accounting,
where income is reportable when all the events have occurred that fix the taxpayers
right to receive the income, and the amount can be determined with reasonable

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accuracy; the right to receive income, and not the actual receipt, determines when to
include the amount in gross income.
The imposition of local business tax based on petitioners gross revenue will
inevitably result in the constitutionally proscribed double taxation taxing of the
same person twice by the same jurisdiction for the same thing inasmuch as
petitioners revenue or income for a taxable year will definitely include its gross
receipts already reported during the previous year and for which local business tax
has already been paid.
Thus, respondent committed a palpable error when it assessed petitioners local
business tax based on its gross revenue as reported in its audited financial
statements, as Section 143 of the Local Government Code and Section 22(e) of
the Pasig Revenue Code clearly provide that the tax should be computed based
on gross receipts.
o

CLASSIFICATION (Sec 143)

F MANUFACTURERS, assemblers, repackers, processors, brewers, distillers, rectifiers
and compounders of LIQUORS, DISTILLED SPIRITS and WINES or manufacturers of
any ARTICLE of COMMERCE of whatever kind or nature max of 37 of 1%
F WHOLESALERS, distributors or dealers in any ARTICLE of COMMERCE of whatever
kind or nature max of .5%
F Exporters and on manufacturers, millers, producers, wholesalers, distributors,
dealers or retailers of ESSENTIAL COMMODITIES enumerated (143c) not exceeding
of the rates prescribed under (a), (b) and (d)
F RETAILERS

RATES:
P400k or less 2%
More than P400k 1%

BARANGAYS shall have the exclusive power to levy taxes on GROSS SALES
or RECEIPTS of the preceding calendar year
Cities P50k or less
Municipalities P30k or less
F CONTRACTORS and other INDEPENDENT CONTRACTORS max of .5%
F BANKS and other FINANCIAL INSTITUTIONS (143f) max of .5%

RATE: not exceeding .5% on the gross receipts of the preceding calendar
year

Interest, commissions, and discounts from lending activities, income from

financial leasing, dividends, rentals on property and profit from exchange or
sale of property, insurance premium
F PEDDLERS P50 per peddler annually
F On ANY BUSINESS, not otherwise specified in the others which the sanggunian may
deem proper

But those businesses subject to excise, VAT or percentage taxes under the
NIRC rate shall not exceed 2% of gross sales or receipts of the preceding
calendar year (can be assessed higher rate)

Rules on PAYMENT of business taxes

F TIME of PAYMENT

Unless otherwise provided, all local taxes shall be paid WITHIN the FIRST
20DAYS of January or of each subsequent quarter (Sec. 167)
Sanggunian may extend the time for a period not exceeding
6months

Tax shall accrue on January 1st of each year (Sec. 166)

New taxes, fees, or charges or changes in the rate shall accrue on
the 1st day of the quarter next following the effectivity of the
ordinance imposing such new levies or rates

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Business that is retiring must submit a sworn statement of its gross slaes or
receipts for the current year. If tax paid is less than tax due, the difference
shall be paid before the business is considered officially retired. (Sec. 145)
Termination business operations are stopped completely. The
local treasurer shall make sure that payment of taxes is not
avoided by simulating termination or retirement. (Art. 241, LGC
IRR)
MANNER of PAYMENT (Sec. 146 and Art. 242)

Payable for every SEPARATE or DISTINCT establishment or place where

business subject to the tax is conducted
One line of business does not become exempt by being
conducted with some other business for which such tax has been
paid

WHO shall pay? Person conducting the business

In case a person conducts 2 or more of the businesses mentioned:

SAME rate tax shall be computed on the COMBINED TOTAL
gross sales or receipts of the 2 or more related businesses
DIFFERENT rates gross sales or receipts shall be SEPARATELY
REPORTED for computation of tax

Consequence of NON-PAYMENT: the business shall not be given a mayors

permit which will result to the closing down of the business

Pajaro v. Sandiganbayan: To continue the prosecution of the petitioner

despite the Court of Appeals' finding that his acceptance of McAdore's
promissory note was not illegal and did not unduly benefit McAdore, nor
did it cause damage and prejudice to the City Government of Dagupan,
would in effect diminish the authority and jurisdiction of the second highest
court of the land, and denigrate the binding force of its final judgment.

SITUS (Sec. 150 and Art. 243) for purposes of collection of taxes, those businesses mentioned
which:
F Maintains or operates a BRANCH or SALES OUTLET elsewhere

Record the sale in the branch or sales outlet making the sale or transaction

Tax shall accrue and shall be paid to the municipality where such branch or
sales outlet is LOCATED
F Has NO BRANCH or SALES OUTLET in the city or municipality where the sale or
transaction is made

Record the sale or transaction in the PRINCIPAL OFFICE

Taxes shall accrue and shall be paid to the city or municipality where the
sale or transaction is made

ALLOCATION of SALES in case of MANUFACTURERS (assemblers,

contractors, producers and exporters) with factories, project offices, plants
and plantations
30% of sales recorded in principal office taxable by the city or
municipality where PRINCIPAL OFFICE is LOCATED
70% of sales recorded in principal office taxable by the city or
municipality where the FACTORY, PROJECT OFFICE, PLANT or
PLANTATION is LOCATED;

If plantation is located at a place other that the place

where the factory is located:
60% city or municipality where FACTORY is
LOCATED
40% city or municipality where PLANTATION
is LOCATED

In case there are 2 or more factories, etc. the 70% sales

allocation shall be PRORATED among the localities
where the factories, etc. are located in proportion to
their respective VOLUME of PRODUCTION during the
period for which the tax is due

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This sales allocation shall be applied irrespective of whether or not

sales are made in the locality where the factory, etc is located.
Sales made by ROUTE TRUCKS or VANS
Sale in a locality where a manufacturer, producer, wholesaler,
retailer or dealer has a branch or sales office or warehouse

Recorded in the branch, sales office or warehouse

Tax is paid to the LGU where such branch, sales office or

warehouse is located
Sale in a locality where there is no branch or sales office of
warehouse

Recorded in the branch, sales office or warehouse from

where the route trucks withdraw their products for sale

Tax is paid to the LGU where such branch, sales office or

warehouse is located
LGUs where route trucks deliver merchandise cannot impose any
tax on said trucks except the annual fixed tax
Iloilo Bottlers, Inc. v. City of Iloilo: The right to manufacture implies
the right to sell or distribute the manufactured products. Hence,
for tax purposes, a manufacturer does not necessarily become
engaged in the separate business of selling simply because it sells
the products it manufactures.
There are certain cases, however, where a manufacturer may also
be considered as engaged in the separate business of selling their
products. This can be determined by looking at the corporations
marketing system.
The SC has previously had occasion to distinguish between two
marketing systems:
FIRST SYSTEM the manufacturer enters into sales
transactions and invoices the sales at its main office
where purchase orders are received and approved
before delivery orders are sent to the companys
warehouse, where in turn actual deliveries are made.
SECOND SYSTEM sales transactions are entered into
and perfected at stores or warehouses maintained by
the company and anyone who desires to purchase the
products may decide to go to such stores.
Under the first system, the entity is not considered engaged in the
separate business of selling their products, while under the
second system, they are considered as so engaged.
In this case, IBI operates under the second system. It distributes
its softdrinks by means of a fleet of delivery trucks which go
directly to customers in different places in Iloilo. Sales
transactions were entered into, perfected and consummated by
route salesmen. Truck sales were made independently of
transactions in the main office. The trucks are what were then
called rolling stores, much the same as stores under the second
marketing system.
Since the ordinance imposes an excise tax, it is imposed on the
privilege to distribute, manufacture or bottle softdrinks. It may be
imposed only when the situs of the activity is within the territorial
jurisdiction of the taxing authority. In this case, IBI was engaged in

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selling or distributing its products in the City of Iloilo and is
therefore liable under the Ordinance.

Has BRANCH in
the
city/municipality

Record the sale

and pay the tax
where the branch
is located

DISTRIBUTORS

SITUS

Record the sale and

pay the tax where the
transaction occurred

NO BRANCH in the
city/municipality
where the
sale/transaction is
made

30% to LGU where

principal lace of
business is located
MANUFACTURERS

70% to LGU where

factory, project
office, plant or
plantation is
located

42% to LGU
where factory is
located
28% to LGU
where plantation
is located

FEES AND CHARGES On business and occupation EXCEPT as reserved to the province on the PRACTICE
of ANY PROFESSION or CALLING
o Fishery rentals, fees and charges (Sec. 149) Shall have EXCLUSIVE AUTHORITY to grant fishery
privileges in the municipal waters and impose rentals, fees or charges
o Fees for sealing and licensing of weights and measures Reasonable rates as prescribed by the
SB
F SB shall prescribe necessary regulations for the use of such weights and measures
subject to guidelines prescribed by DOST
F SB shall penalize fraudulent practices and unlawful possession or use of instruments
of weights and measures

CITY May impose taxes which the PROVINCE or MUNICIPALITY may impose (Sec. 151)
Taxes, fees and charges levied and collected by highly urbanized and independent component cities
shall accrue to them and distributed in accordance with the LGC
o RATES: may exceed the maximum rates allowed for provinces or municipalities by NOT MORE
THAN 50%
F EXCEPT rates of professional and amusement taxes
Levy and collect a percentage tax on any business not otherwise specified under paragraphs (a) to (g),
Article 233, at rates not exceeding 3% of the gross sales or receipts of the preceding calendar year. (Art.
237, LGC IRR)

Mobil Philippines, Inc. v. City Treasurer of Makati: Under the Makati Revenue Code, it appears that the
business tax, like income tax, is computed based on the previous years figures. This is the reason for the
confusion. A newly-started business is already liable for business taxes (i.e. license fees) at the start of
the quarter when it commences operations. In computing the amount of tax due for the first quarter of
operations, the business capital investment is used as the basis. For the subsequent quarters of the
first year, the tax is based on the gross sales/receipts for the previous quarter. In the following year(s),
the business is then taxed based on the gross sales or receipts of the previous year. The business taxes
paid in the year 1998 is for the privilege of engaging in business for the same year, and not for having
engaged in business for 1997.

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Upon its transfer, petitioner was apparently subjected to Sec. 3A.11 par. (g). Based on this foregoing
provision, on the year an establishment retires or terminates its business within the municipality, it
would be required to pay the difference in the amount if the tax collected, based on the previous years
gross sales or receipts, is less than the actual tax due based on the current years gross sales or receipts.
For the year 1998, petitioner paid a total of P2,262,122.48 to the City Treasurer of Makati as business
taxes for the year 1998. The amount of tax as computed based on petitioners gross sales for 1998 is
only P1,331,638.84. Since the amount paid is more than the amount computed based on petitioners
actual gross sales for 1998, petitioner upon its retirement is not liable for additional taxes to the City of
Makati. Thus, we find that the respondent erroneously treated the assessment and collection of
business tax as if it were income tax, by rendering an additional assessment of P1,331,638.84 for the
revenue generated for the year 1998.

San Juan v. Castro: It is beyond dispute that under the abovementioned provision of the law, transfer tax
is computed on the total consideration involved. The intention of the law is not to automatically apply
the whichever is higher rule. Clearly, from a reading of the above-quoted provision, it is only when
there is a monetary consideration involved and the monetary consideration is not substantial that the
tax rate is based on the higher fair market value .
In his Comment on petitioners petition before the RTC, respondent stated:
[M]onetary consideration as used in Section 135 of R.A. 7160 does not only pertain to the price or
money involved but likewise, as in the case of donations or barters, this refers to the value or monetary
equivalent of what is received by the transferor.
In the case at hand, the monetary consideration involved is the par value of shares of stocks acquired by
the petitioner in exchange for his real properties. As admitted by the petitioner himself, the fair market
value of the properties transferred is more than seven million pesos. It is undeniable therefore that the
actual consideration for the assignment in the amount of two million five hundred eighty four thousand
and three hundred forty pesos (P2,584,340.00) is far less substantial than the aforesaid fair market
value. Thus, the City Treasurer is constrained to assess the transfer tax on the higher base.

Yamane v. BA Lepanto Condominium Corp: As stated earlier, local tax on businesses is authorized under
Section 143 of the Local Government Code. The word 'business' itself is defined under Section 131(d) of
the Code as 'trade or commercial activity regularly engaged in as a means of livelihood or with a view to
profit. This definition of 'business' takes on importance, since Section 143 allows local government units
to impose local taxes on businesses other than those specified under the provision. Moreover, even
those business activities specifically named in Section 143 are themselves susceptible to broad
interpretation. For example, Section 143(b) authorizes the imposition of business taxes on wholesalers,
distributors, or dealers in any article of commerce of whatever kind or nature.
It is thus imperative that in order that the Corporation may be subjected to business taxes, its activities
must fall within the definition of business as provided in the Local Government Code. And to hold that
they do is to ignore the very statutory nature of a condominium corporation.
The creation of the condominium corporation is sanctioned by Republic Act No. 4726, otherwise known
as the Condominium Act. Under the law, a condominium is an interest in real property consisting of a
separate interest in a unit in a residential, industrial or commercial building and an undivided interest in
common, directly or indirectly, in the land on which it is located and in other common areas of the
building. To enable the orderly administration over these common areas which are jointly owned by the
various unit owners, the Condominium Act permits the creation of a condominium corporation, which is
specially formed for the purpose of holding title to the common area, in which the holders of separate
interests shall automatically be members or shareholders, to the exclusion of others, in proportion to
the appurtenant interest of their respective units. The necessity of a condominium corporation has not
gained widespread acceptance, and even is merely permissible under the Condominium
Act. Nonetheless, the condominium corporation has been resorted to by many condominium projects,
such as the Corporation in this case.
We can elicit from the Condominium Act that a condominium corporation is precluded by statute from
engaging in corporate activities other than the holding of the common areas, the administration of the
condominium project, and other acts necessary, incidental or convenient to the accomplishment of such

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purposes. Neither the maintenance of livelihood, nor the procurement of profit, fall within the scope of
permissible corporate purposes of a condominium corporation under the Condominium Act.
d

BARANGAY May impose the ff (Sec. 152):

TAXES on stores and retailers with fixed business establishments not
o Gross sales or receipts of preceding calendar year of P50k or less cities
o Gross sales or receipts of preceding calendar year of P50k or less municipalities
Reasonable FEES or CHARGES for services rendered in connection with the regulation or the use of
barangay-owned properties or service facilities (palay, copra or tobacco dryers)
BARANGAY CLEARANCE (reasonable fee) should be obtained by a business before any license or
permit is issued
Other fees and charges:
o Commercial breeding of fighting cocks, cockfights and cockpits;
o Places of recreation which charge admission fees;
Billboards, signboards, neon signs and outdoor advertisements

Community Tax Certificate

d
d

d
d

NATURE: poll tax fixed amount imposed upon inhabitants of the Philippines without regard to their property or
the occupation in which they may be engaged.
WHO are liable?
NATURAL persons
o Every inhabitant, 18yrs old
F Who has been regularly EMPLOYED on wage or salary basis for at least 30
consecutive working days during any calendar year; or
F Who is engaged in business or occupation; or
F Who owns real property with an aggregate assessed value of P1k or more; or
F Who is require by law to file an ITR
o RATE: P5 annually + P1 for every P1k of income regardless of whether from business, exercise
of profession or from property
F Additional tax hall not exceed P5k
o Husband and wife additional tax shall be based on total property owned by them and the
total gross receipts or earnings derived by them
JURIDICAL persons Every corporation no matter how created or organized, domestic or resident
foreign, engaged in or doing business in the Phils
o RATE: P500 annually + additional tax which shall not exceed P10k in accordance with this
schedule:
F For every P5k worth of REAL PROPERTY in the Phils owned by it during the preceding
year based on the valuation used for the payment of RPT P2
F For every 5k of GROSS RECEIPTS OR EARNINGS derived by it from its business in the
Phils during the preceding year P2
o Included are dividends received by the corporation from another
corporation
EXEMPTED:
Diplomatic and consular representatives; and
Transient visitors when their stay in the Phils does NOT exceed 3mos
WHERE to pay? Place of RESIDENCE of individual or where the PRINCIPAL OFFICE or a corporation is located
WHEN to pay?
Accrue on Jan. 1
Paid not later than the last day of Feb
Natural persons
o If person reaches 18 or loses benefit of exemption on or before
F Last day of June liable for tax on the day he reaches 18 or upon the day the
exemption ends

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F Last day of March has 20days to pay tax without becoming delinquent
Persons who come to reside here or reach 18 on or after July 1 of any year or who cease to
belong to an exempt class not subject to tax for that year
Corporations established and organized
o On or before last day of June liable for tax for that year
o On or before last day of March has 20 days to pay without being delinquent
o On or after July not liable for tax for that year
Non-payment within time prescribed 25% interest per annum until paid
o

CTC
Issued to every person or corporation upon payment of the tax
May be issued to persons not subject to tax upon payment of P1
PROCEEDS collected by
City of municipal treasurer shall accrue entirely to the GENERAL FUND of the city or municipality
concerned
Brgy treasurer shall be apportioned as ff:
o 50% shall accrue to the general fund of the city/municipality
o 50% shall accrue to the brgy

Enactment of Tax Ordinances and Other Revenue Measures

d

PUBLICATION of PROPOSED ORDINANCE (Art. 276, LGC IRR)

Publish for 3 days in a local newspaper or in conspicuous places in the city hall
Notice to stakeholders specifying the date and venue of all public hearings

PUBLIC HEARINGS the ordinance shall not be enacted without any prior public hearing (Sec. 186, last proviso)
Figueras v. CA: Petitioner is right in contending that public hearings are required to be conducted prior
to the enactment of an ordinance imposing real property taxes. R.A. No. 7160, 186 provides that an
ordinance levying taxes, fees, or charges "shall not be enacted without any prior public hearing
conducted for the purpose."
However, it is noteworthy that apart from her bare assertions, petitioner Figuerres has not presented
any evidence to show that no public hearings were conducted prior to the enactment of the ordinances
in question. On the other hand, the Municipality of Mandaluyong claims that public hearings were
indeed conducted before the subject ordinances were adopted, 10 although it likewise failed to submit
any evidence to establish this allegation.

APPROVAL process (Secs. 187-193)

Public hearings shall be conducted prior to the enactment
Publication
o Within 10days after approval
o Published in full for 3 consecutive wks in a newspaper of local circulation
F If no newspaper post in at least 2 conspicuous and publicly accessible places
o Coca Cola Bottlers Phils. v. City of Manila: It is clear from the above-quoted provisions of R.A.
No. 7160 and its implementing rules that the requirement of publication is MANDATORY and
leaves no choice. The use of the word "shall" in both provisions is imperative, operating to
impose a duty that may be enforced.
Its essence is simply to inform the people and the entities who may likely be affected, of the
existence of the tax measure. It bears emphasis, that, strict observance of the said procedural
requirement is the only safeguard against any unjust and unreasonable exercise of the taxing
powers by ensuring that the taxpayers are notified through publication of the existence of the
measure, and are therefore able to voice out their views or objections to the said measure. For,
after all, taxes are obligatory exactions or enforced contributions corollary to taking of
property.

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In the case at bar, respondents, by its failure to file their comments and present documentary
evidence to show that the mandatory requirement of law on publication, among other things,
has been met, may be deemed to have waived its right to controvert or dispute the
documentary evidence submitted by petitioner which indubitably show that subject tax
ordinance was published only once, i.e., on the May 22, 2000 issue of the Philippine Post.
Clearly, therefore, herein respondents failed to satisfy the requirement that said ordinance
shall be published for three (3) consecutive days as required by law.
o

City of Manila v. Coca Cola Bottlers: Contrary to the assertions of petitioners, the CocaCola case is indeed applicable to the instant case. The pivotal issue raised therein was whether
Tax Ordinance No. 7988 and Tax Ordinance No. 8011 were null and void, which this Court
resolved in the affirmative. Tax Ordinance No. 7988 was declared by the Secretary of the
Department of Justice (DOJ) as null and void and without legal effect due to the failure of
herein petitioner City of Manila to satisfy the requirement under the law that said ordinance be
published for three consecutive days. Petitioner City of Manila never appealed said declaration
of the DOJ Secretary; thus, it attained finality after the lapse of the period for appeal of the
same. The passage of Tax Ordinance No. 8011, amending Tax Ordinance No. 7988, did not cure
the defects of the latter, which, in any way, did not legally exist.
Copies shall be furnished to the local treasurers for dissemination
Attempt to enforce void or suspended tax ordinance or measure sufficient ground for administrative
disciplinary action against the local officials and employees responsible
LGUs shall have the authority to adjust the tax rates prescribed in the LGC not oftener than EVERY 5
YEARS but in no case shall such adjustment EXCEED 10% of those rates fixed

APPEAL TO DOJ SECRETARY Any question as to the constitutionality or legality of a tax ordinance or revenue
measure
May be raised on appeal within 30days from the effectivity thereof with the DOJ Secretary who shall
render a decision within 60days from receipt of appeal
o Appeal shall not suspend effectivity of ordinance and the accrual and payment of taxes, fees or
charges levied
Reyes v. CA: Clearly, the law requires that the dissatisfied taxpayer who questions the validity or legality
of a tax ordinance must file his appeal to the Secretary of Justice, within 30 days from effectivity
thereof. In case the Secretary decides the appeals, a period also of 30 days is allowed for an aggrieved
party to go to court. But if the Secretary does not act thereon, after the lapse of 60 days, a party could
already proceed to seek relief in court. These three separate periods are clearly given for compliance as
a prerequisite before seeking redress in a competent court. Such statutory periods are set to prevent
delays as well as enhance the orderly and speedy discharge of judicial functions. 5 For this reason the
courts construct these provisions of statutes as mandatory.
A municipal tax ordinance empowers a local government unit to impose taxes. The power to tax is the
most effective instrument to raise needed revenues to finance and support the myriad activities of local
government units for the delivery of basic services essential to the promotion of the general welfare and
enhancement of peace, progress, and prosperity of the people. Consequently, any delay in
implementing tax measures would be to the detriment of the public. It is for this reason that protests
over tax ordinances are required to be done within certain time frames. In the instant case, it is our view
that the failure of petitioners to appeal to the Secretary of Justice within 30 days as required by Sec. 187
of R.A. 7160 is fatal to their cause.

APPEAL TO COURT OF COMPETENT JURISDICTION Within 30days after receipt of Secretarys decision or after
the lapse of 60days without action on the part of the Secretary appeal to the RTC

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Remedies
Government remedies for collection
d EXAMINATION OF TAXPAYERS BOOKS OF ACCOUNTS (Sec. 171)
Books of accounts and other pertinent records are examined in order to ascertain, assess and collect the
correct amount of the tax, fee or charge
Made during regular business hours, only once every tax period
d ISSUANCE OF DEFICIENCY ASSESSMENT (Sec. 194)
o Period for ASSESSMENT

General rule: within 5 YEARS from the DATE they BECAME DUE

Except in cases of FRAUD or INTENT TO EVADE PAYMENT: within 10 YEARS from DISCOVERY
of the fraud or intent to evade payment
o Period for COLLECTION within 5 YEARS from the DATE of ASSESSMENT by administrative or judicial
action
o SUSPENSION of running of prescription for the time during which:

The treasurer is legally prevented from making the assessment of collection;

The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration
of the period within which to assess or collect; and

The taxpayer is out of the country or otherwise cannot be located

d IMPOSITION OF SURCHARGES AND INTEREST (Sec. 168-169)
Surcharge max of 25%
Interest max of 2%/mo of unpaid taxes, fees and charges including the surcharge
o Total shall not exceed 36mos
d ADMINISTRATIVE REMEDIES
Distraint of goods, chattels or effects and other personal property of whatever character (Sec. 175)
o Garnishment of stocks and other securities, debts, credits, bank accounts and interest in and
rights to personal property
Levy upon real property and interest in or rights to real property (Sec. 176, 178-182)
o See LGC and Barops reviewer for process of distraint and levy
o Properties EXEMPT from distraint or levy
F Tools and implements necessarily used by the delinquent taxpayer in his trade or
employment;
F One (1) horse, cow, carabao, or other beast of burden, such as the delinquent
taxpayer may select, and necessarily used by him in his ordinary occupation;
F His necessary clothing, and that of all his family;
F Household furniture and utensils necessary for housekeeping and used for that
purpose by the delinquent taxpayer, such as he may select, of a value not exceeding
Ten thousand pesos (P10,000.00);
F Provisions, including crops, actually provided for individual or family use sufficient for
four (4) months;
F The professional libraries of doctors, engineers, lawyers and judges;
F One fishing boat and net, not exceeding the total value of Ten thousand pesos
(P10,000.00), by the lawful use of which a fisherman earns his livelihood; and
F Any material or article forming part of a house or improvement of any real property
Further distraint and levy may be done if necessary until full amount due, including expenses, is collected
(Sec. 184)
d JUDICIAL REMEDY (Sec. 183)
Taxpayers remedies
d PROTEST THE ASSESSMENT (Sec. 195 and Art. 285)
File a WRITTEN PROTEST WITHIN 60 DAYS from RECEIPT OF NOTICE OF ASSESSMENT with LOCAL
TREASURER otherwise it shall become final and executory
o Decision shall be made WITHIN 60 DAYS from the time of filing
F Wholly or partly meritorious issue a notice cancelling wholly or partially the
assessment

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F Wholly or partly correct deny protest
APPEAL TO RTC Taxpayer has 30 days after receipt of notice of denial of protests OR from the lapse
of the 60-day period within which to APPEAL TO COURT of competent jurisdiction otherwise the
assessment shall become conclusive and unappealable
APPEAL WITH CTA DIVISION then CTA en banc (Sec. 7(3) of RA 1175)
SUPREME COURT
CLAIM FOR REFUND (Sec. 196 and Art. 286)
File a written claim for recovery of tax, fee or charge ERRONEOUSLY or ILLEGALLY collected with the
local treasurer
2 YEARS from the DATE of the PAYMENT
Tax credit shall not be refundable in cash but shall only be applied to future tax obligations of the same
taxpayer for the same business
o If a taxpayer has paid in full the tax due for the entire year and he shall have no other tax
obligation payable to the LGU concerned during the year, his tax credits, if any, shall be applied
in full during the first quarter of the next calendar year on the tax due from him for the same
business of said calendar year.
o Any unapplied balance of the tax credit shall be refunded in cash in the event that he
terminates operation of the business involved within the locality

Authority of LGUs to Grant Tax Exemption Privileges and

Exemptions under Special Laws
d
d

LGUs, through ordinances, may grant tax exemptions, incentives or reliefs under such terms and conditions as
they may deem necessary (Sec. 192)
Unless otherwise provided in the LGC, tax exemptions or incentives granted to, or presently enjoyed by all
persons, whether natural or juridical, including GOCCs, except local water districts, cooperatives, non-stock and
non-profit hospitals and educational institutions, are hereby WITHDRAWN upon the effectivity of the LGC (Sec.
193)

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Real property taxation

General Principles and Definitions
d

FUNDAMENTAL PRINCIPLES (Sec. 198)

Real property shall be appraised at its CURRENT and FAIR MARKET VALUE
o Reyes v. Almanzar: By no strength of the imagination can the market value of properties
covered by P.D. No. 20 be equated with the market value of properties not so covered. The
former has naturally a much lesser market value in view of the rental restrictions.
Ironically, in the case at bar, not even the factors determinant of the assessed value of subject
properties under the "comparable sales approach" were presented by the public respondents,
namely: (1) that the sale must represent a bonafide arm's length transaction between a willing
seller and a willing buyer and (2) the property must be comparable property (Rollo, p. 27).
Nothing can justify or support their view as it is of judicial notice that for properties covered by
P.D. 20 especially during the time in question, there were hardly any willing buyers. As a
general rule, there were no takers so that there can be no reasonable basis for the conclusion
that these properties were comparable with other residential properties not burdened by P.D.
20. Neither can the given circumstances be nonchalantly dismissed by public respondents as
imposed under distressed conditions clearly implying that the same were merely temporary in
character. At this point in time, the falsity of such premises cannot be more convincingly
demonstrated by the fact that the law has existed for around twenty (20) years with no end to
it in sight.

Real property shall be classified for assessment purposes on the basis of its ACTUAL USE
o Province of Nueva Ecija v. Imperial Mining Corp: The legal issue is whether defendant-appellee
Imperial Mining Company, Inc. (IMC), lessee of some parcels of mineral land (placer mining
claims) in Carranglan, Nueva Ecija, is liable for real property tax thereon, although the said
mineral land forms part of the public domain. Incidentally, Presidential Decree 939 was
subsequently enacted exempting from real property tax "pasture and/or grazing lands
acquired by grant, purchase or lease from the public domain actually used for livestock
production, for a period of five years The foregoing exemptions make it very clear
that leased lands of the public domain would otherwise be subject to real property tax; if that
were not so, there would have been no need to specifically exempt some of them from real
property tax.
o Republic v. City of Kidapawan: It is clear from the above-cited provisions that the PNOC-EDC is
the beneficial user of the MAGRA and is thus liable to pay the real property tax assessments.
PNOC-EDC exclusively conducts geothermal operations in the area for commercial utilization. It
retains a profit in the amount of 40% of the net value of the amount realized from the sale of
geothermal resources. It is even allowed to charge its operating expenses from the gross value
of the sales.
The provisions of the service contract also show that it is the PNOC-EDC which actually utilizes
the MAGRA. Actual use refers to the purpose for which the property is principally or
predominantly utilized by the person in possession thereof. In fact, under the provisions of the
service contract, PNOC-EDC must surrender possession of 25% of the MAGRA to the
government after the 3rd year and another 25% on the 5th year, if the contract is extended.
Likewise, although it is the government which actually pays the income taxes, the contract
nonetheless specifically provided that the payment is for and in behalf of PNOC-EDC and is
chargeable against the 60% share of the government in the net profits derived by the PNOCEDC arising from the geothermal operation. 'In reality, the PNOC-EDC is the actual payee while

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the government is only its agent in the payment of the income taxes. In fact, the official receipt
is being issued in the name of PNOC-EDC.

Real property shall be assessed on the basis of a UNIFORM CLASSIFICATION within each LGU

The appraisal, assessment, levy and collection of RPT shall NOT be let to any PRIVATE PERSON

The appraisal and assessment of real property shall be EQUITABLE

o Testate Estate of Lim v. City of Manila: To impose the real property tax on the estate which was
neither the owner nor the beneficial user of the property during the designated periods would
not only be contrary to law but also unjust. If plaintiff-appellant intended to assume the liability
for realty taxes for the prior periods, the contract should have specifically stated "real estate
taxes" due for the years 1977,1978 and first quarter of 1979. The payments made by the
plaintiff-appellant cannot be construed to be an admission of a tax liability since they were
paid under protest and were done only in compliance with one of the requirements for the
consummation of the sale as directed by the City Treasurer of Manila. Hence, the tax assessed
and collected from the plaintiff-appellants is not valid and a refund by the City government is in
order.

SOME DEFINITIONS (Sec. 199)

ACTUAL USE purpose for which the property is principally or predominantly utilized by the person in
possession thereof
ASSESSMENT act or process of determining the value of the property, or proportion thereof subject to
tax, including the discovery, listing, classification and appraisal of properties
ASSESSED VALUE FMV of the real property * assessment level
MACHINERY
o Includes machines, equipment, mechanical contrivances, instruments, appliances or apparatus
which may or may not be attached, permanently or temporarily, to the real property
F Meralco v. CBAA: Meralco Securities insists that its pipeline is not subject to realty tax
because it is not real property within the meaning of article 415. This contention is not
sustainable under the provisions of the Assessment Law, the Real Property Tax Code
and the Civil Code.
It is incontestable that the pipeline of Meralco Securities does not fall within any of
the classes of exempt real property enumerated in section 3 of the Assessment Law
and section 40 of the Real Property Tax Code.
Pipeline means a line of pipe connected to pumps, valves and control devices for
conveying liquids, gases or finely divided solids. It is a line of pipe running upon or in
the earth, carrying with it the right to the use of the soil in which it is placed.
Article 415[l] and [3] provides that real property may consist of constructions of all
kinds adhered to the soil and 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.
The pipeline system in question is indubitably a construction adhering to the soil. It is
attached to the land in such a way that it cannot be separated therefrom without
dismantling the steel pipes which were welded to form the pipeline.
Insofar as the pipeline uses valves, pumps and control devices to maintain the flow of
oil, it is in a sense machinery within the meaning of the Real Property Tax Code.
It should be borne in mind that what are being characterized as real property are not
the steel pipes but the pipeline system as a whole. Meralco Securities has apparently
two pipeline systems. A pipeline for conveying petroleum has been regarded as real
property for tax purposes.

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F

BAA v Meralco: It is evident, therefore, that the word "poles", as used in Act No. 484
and incorporated in the petitioner's franchise, should not be given a restrictive and
narrow interpretation, as to defeat the very object for which the franchise was
granted. The poles as contemplated thereon, should be understood and taken as a
part of the electric power system of the respondent Meralco, for the conveyance of
electric current from the source thereof to its consumers. If the respondent would be
required to employ "wooden poles", or "rounded poles" as it used to do fifty years
back, then one should admit that the Philippines is one century behind the age of
space. It should also be conceded by now that steel towers, like the ones in question,
for obvious reasons, can better effectuate the purpose for which the respondent's
franchise was granted.
Granting for the purpose of argument that the steel supports or towers in question
are not embraced within the term poles, the logical question posited is whether they
constitute real properties, so that they can be subject to a real property tax. The tax
law does not provide for a definition of real property; but Article 415 of the Civil Code
does, by stating the following are immovable property:
(1) Land, buildings, roads, and constructions of all kinds adhered to the soil;
xxx
xxx
xxx
(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;
xxx
xxx
xxx
(5) Machinery, receptacles, instruments or implements intended by the
owner of the tenement for an industry or works which may be carried in a
building or on a piece of land, and which tends directly to meet the needs of
the said industry or works;
The steel towers or supports in question, do not come within the objects mentioned
in paragraph 1, because they do not constitute buildings or constructions adhered to
the soil. They are not construction analogous to buildings nor adhering to the soil. As
per description, given by the lower court, they are removable and merely attached to
a square metal frame by means of bolts, which when unscrewed could easily be
dismantled and moved from place to place. They can not be included under
paragraph 3, as they are not attached to an immovable in a fixed manner, and they
can be separated without breaking the material or causing deterioration upon the
object to which they are attached. Each of these steel towers or supports consists of
steel bars or metal strips, joined together by means of bolts, which can be
disassembled by unscrewing the bolts and reassembled by screwing the same. These
steel towers or supports do not also fall under paragraph 5, for they are not
machineries, receptacles, instruments or implements, and even if they were, they are
not intended for industry or works on the land. Petitioner is not engaged in an
industry or works in the land in which the steel supports or towers are constructed.

Mindanao Bus Co. v. City Assessor and Treasurer: Note that the stipulation expressly
states that the equipment are placed on wooden or cement platforms. They can be
moved around and about in petitioner's repair shop.
So that movable equipments to be immobilized in contemplation of the law must
first be "essential and principal elements" of an industry or works without which such
industry or works would be "unable to function or carry on the industrial purpose for
which it was established." We may here distinguish, therefore, those movable which
become immobilized by destination because they are essential and principal
elements in the industry for those which may not be so considered immobilized
because they are merely incidental, not essential and principal. Thus, cash registers,
typewriters, etc., usually found and used in hotels, restaurants, theaters, etc. are
merely incidentals and are not and should not be considered immobilized by
destination, for these businesses can continue or carry on their functions without

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these equity comments. Airline companies use forklifts, jeep-wagons, pressure
pumps, IBM machines, etc. which are incidentals, not essentials, and thus retain their
movable nature. On the other hand, machineries of breweries used in the
manufacture of liquor and soft drinks, though movable in nature, are immobilized
because they are essential to said industries; but the delivery trucks and adding
machines which they usually own and use and are found within their industrial
compounds are merely incidental and retain their movable nature.
Similarly, the tools and equipments in question in this instant case are, by their
nature, not essential and principle municipal elements of petitioner's business of
transporting passengers and cargoes by motor trucks. They are merely incidentals
acquired as movables and used only for expediency to facilitate and/or improve its
service. Even without such tools and equipments, its business may be carried on, as
petitioner has carried on, without such equipments, before the war. The
transportation business could be carried on without the repair or service shop if its
rolling equipment is repaired or serviced in another shop belonging to another.
Aside from the element of essentiality the above-quoted provision also requires that
the industry or works be carried on in a building or on a piece of land. Thus in the case
of Berkenkotter vs. Cu Unjieng, supra, the "machinery, liquid containers, and
instruments or implements" are found in a building constructed on the land. A
sawmill would also be installed in a building on land more or less permanently, and
the sawing is conducted in the land or building.
But in the case at bar the equipments in question are destined only to repair or
service the transportation business, which is not carried on in a building or
permanently on a piece of land, as demanded by the law. Said equipments may not,
therefore, be deemed real property.
F

Caltex Phils. v. CBAA: We hold that the said equipment and machinery, as
appurtenances to the gas station building or shed owned by Caltex (as to which it is
subject to realty tax) and which fixtures are necessary to the operation of the gas
station, for without them the gas station would be useless, and which have been
attached or affixed permanently to the gas station site or embedded therein, are
taxable improvements and machinery within the meaning of the Assessment Law
and the Real Property Tax Code.
Caltex invokes the rule that machinery which is movable in its nature only becomes
immobilized when placed in a plant by the owner of the property or plant but not
when so placed by a tenant, a usufructuary, or any person having only a temporary
right, unless such person acted as the agent of the owner (Davao Saw Mill Co. vs.
Castillo, 61 Phil 709).
That ruling is an interpretation of paragraph 5 of article 415 of the Civil Code
regarding machinery that becomes real property by destination. In the Davao Saw
Mills case the question was whether the machinery mounted on foundations of
cement and installed by the lessee on leased land should be regarded as real
property for purposes of execution of a judgment against the lessee. The sheriff
treated the machinery as personal property. This Court sustained the sheriff's action.
(Compare with Machinery & Engineering Supplies, Inc. vs. Court of Appeals, 96 Phil.
70, where in a replevin case machinery was treated as realty).
Here, the question is whether the gas station equipment and machinery permanently
affixed by Caltex to its gas station and pavement (which are indubitably taxable
realty) should be subject to the realty tax. This question is different from the issue
raised in the Davao Saw Mill case.
Improvements on land are commonly taxed as realty even though for some purposes
they might be considered personalty (84 C.J.S. 181-2, Notes 40 and 41). "It is a familiar

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phenomenon to see things classed as real property for purposes of taxation which on
general principle might be considered personal property" (Standard Oil Co. of New
York vs. Jaramillo, 44 Phil. 630, 633).
This case is also easily distinguishable from Board of Assessment Appeals vs. Manila
Electric Co., 119 Phil. 328, where Meralco's steel towers were considered poles within
the meaning of paragraph 9 of its franchise which exempts its poles from taxation.
The steel towers were considered personalty because they were attached to square
metal frames by means of bolts and could be moved from place to place when
unscrewed and dismantled.
Nor are Caltex's gas station equipment and machinery the same as tools and
equipment in the repair shop of a bus company which were held to be personal
property not subject to realty tax (Mindanao Bus Co. vs. City Assessor, 116 Phil. 501).
F

Fels Energy Inc v. Province of Batangas: As found by the appellate court, the CBAA
and LBAA power barges are real property and are thus subject to real property tax.
This is also the inevitable conclusion, considering that G.R. No. 165113 was dismissed
for failure to sufficiently show any reversible error. Tax assessments by tax examiners
are presumed correct and made in good faith, with the taxpayer having the burden
of proving otherwise. Besides, factual findings of administrative bodies, which have
acquired expertise in their field, are generally binding and conclusive upon the Court;
we will not assume to interfere with the sensible exercise of the judgment of men
especially trained in appraising property. Where the judicial mind is left in doubt, it is
a sound policy to leave the assessment undisturbed. We find no reason to depart
from this rule in this case.
In Consolidated Edison Company of New York, Inc., et al. v. The City of New York, et
al., a power company brought an action to review property tax assessment. On the
citys motion to dismiss, the Supreme Court of New York held that the barges on
which were mounted gas turbine power plants designated to generate electrical
power, the fuel oil barges which supplied fuel oil to the power plant barges, and the
accessory equipment mounted on the barges were subject to real property taxation.
Moreover, Article 415 (9) of the New Civil Code provides that "[d]ocks and structures
which, though floating, are intended by their nature and object to remain at a fixed
place on a river, lake, or coast" are considered immovable property. Thus, power
barges are categorized as immovable property by destination, being in the nature of
machinery and other implements intended by the owner for an industry or work
which may be carried on in a building or on a piece of land and which tend directly to
meet the needs of said industry or work.

Includes the physical facilities for production, the installations and appurtenant service
facilities, those which are mobile, self-powered 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.
F Benguet Corp. v. CBAA: Is the tailings dam an improvement on the mine? Section 3(k)
of the Real Property Tax Code defines improvement as follows:
(k) Improvements is a valuable addition made to property or an
amelioration in its condition, amounting to more than mere repairs or
replacement of waste, costing labor or capital and intended to enhance its
value, beauty or utility or to adopt it for new or further purposes.
The term has also been interpreted as "artificial alterations of the physical condition
of the ground that are reasonably permanent in character."

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The Court notes that in the Ontario case the plaintiff admitted that the mine involved
therein could not be operated without the aid of the drain tunnels, which were
indispensable to the successful development and extraction of the minerals therein.
This is not true in the present case.
Even without the tailings dam, the petitioner's mining operation can still be carried
out because the primary function of the dam is merely to receive and retain the
wastes and water coming from the mine. There is no allegation that the water
coming from the dam is the sole source of water for the mining operation so as to
make the dam an integral part of the mine. In fact, as a result of the construction of
the dam, the petitioner can now impound and recycle water without having to spend
for the building of a water reservoir. And as the petitioner itself points out, even if
the petitioner's mine is shut down or ceases operation, the dam may still be used for
irrigation of the surrounding areas, again unlike in the Ontario case.
As correctly observed by the CBAA, the Kendrick case is also not applicable because it
involved water reservoir dams used for different purposes and for the benefit of the
surrounding areas. By contrast, the tailings dam in question is being
used exclusively for the benefit of the petitioner.
Curiously, the petitioner, while vigorously arguing that the tailings dam has no
separate existence, just as vigorously contends that at the end of the mining
operation the tailings dam will serve the local community as an irrigation facility,
thereby implying that it can exist independently of the mine.
From the definitions and the cases cited above, it would appear that whether a
structure constitutes an improvement so as to partake of the status of realty would
depend upon the degree of permanence intended in its construction and use. The
expression "permanent" as applied to an improvement does not imply that the
improvement must be used perpetually but only until the purpose to which the
principal realty is devoted has been accomplished. It is sufficient that the
improvement is intended to remain as long as the land to which it is annexed is still
used for the said purpose.
The Court is convinced that the subject dam falls within the definition of an
"improvement" because it is permanent in character and it enhances both the value
and utility of petitioner's mine. Moreover, the immovable nature of the dam defines
its character as real property under Article 415 of the Civil Code and thus makes it
taxable under Section 38 of the Real Property Tax Code.
F

RCPI v Provincial Assessor of South Cotabato: As found by the appellate court, RCPIs
radio relay station tower, radio station building, and machinery shed are real
properties and are thus subject to the real property tax. Section 14 of RA 2036, as
amended by RA 4054, states that [i]n consideration of the franchise and rights
hereby granted and any provision of law to the contrary notwithstanding, the
grantee shall pay the same taxes as are now or may hereafter be required by
law from other individuals, copartnerships, private, public or quasi-public
associations, corporations or joint stock companies,on real estate, buildings and
other personal property x x x. The clear language of Section 14 states that RCPI shall
pay the real estate tax.
The in lieu of all taxes clause in Section 14 of RA 2036, as amended by RA 4054,
cannot exempt RCPI from the real estate tax because the same Section 14 expressly
states that RCPI shall pay the same taxes x x x on real estate, buildings x x x. The
in lieu of all taxes clause in the third sentence of Section 14 cannot negate the first
sentence of the same Section 14, which imposes the real estate tax on RCPI. The
Court must give effect to both provisions of the same Section 14. This means that the
real estate tax is an exception to the in lieu of all taxes clause.

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Coverage
d
d

PROPERTIES SUBJECT TO RPT (Sec. 232) Annual ad valorem tax shall be imposed on real property such as
LAND, BUILDING, MACHINERY, and OTHER IMPROVEMENT which are not specifically exempted under the LGC
EXEMPTIONS FROM RPT (Sec. 234)
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;
o LRTA v. CBAA: Under the Real Property Tax Code, real property "owned by the Republic of the
Philippines or any of its political subdivisions and any government-owned or controlled
corporation so exempt by its charter, provided, however, that this exemption shall not apply
to real property of the abovenamed entities the beneficial use of which has been granted, for
consideration or otherwise, to a taxable person."
Executive Order No. 603, the charter of petitioner, does not provide for any real estate tax
exemption in its favor. Its exemption is limited to direct and indirect taxes, duties or fees in
connection with the importation of equipment not locally available. Even granting that the
national government indeed owns the carriageways and terminal stations, the exemption
would not apply because their beneficial use has been granted to petitioner, a taxable entity.
o

MIAA v. CA: There is no dispute that a government-owned or controlled corporation is not

exempt from real estate tax. However, MIAA is not a government-owned or controlled
corporation.
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. Clearly, under its Charter, MIAA
does not have capital stock that is divided into shares.
MIAA is also not a non-stock corporation because it has no members. Section 87 of the
Corporation Code defines a non-stock corporation as "one where no part of its income is
distributable as dividends to its members, trustees or officers." A non-stock corporation must
have members. Even if we assume that the Government is considered as the sole member of
MIAA, this will not make MIAA a non-stock corporation. Non-stock corporations cannot
distribute any part of their income to their members. Section 11 of the MIAA Charter mandates
MIAA to remit 20% of its annual gross operating income to the National Treasury. This prevents
MIAA from qualifying as a non-stock corporation.
Since MIAA is neither a stock nor a non-stock corporation, MIAA does not qualify as a
government-owned or controlled corporation. What then is the legal status of MIAA within the
National Government? MIAA is a government instrumentality vested with corporate powers
to perform efficiently its governmental functions. MIAA is like any other government
instrumentality, the only difference is that MIAA is vested with corporate powers.
When the law vests in a government instrumentality corporate powers, the instrumentality
does not become a corporation. Unless the government instrumentality is organized as a stock
or non-stock corporation, it remains a government instrumentality exercising not only
governmental but also corporate powers. Thus, MIAA exercises the governmental powers of
eminent domain, police authority and the levying of fees and charges. At the same time, MIAA
exercises "all the powers of a corporation under the Corporation Law, insofar as these powers
are not inconsistent with the provisions of this Executive Order."
Likewise, when the law makes a government instrumentality operationally autonomous, the
instrumentality remains part of the National Government machinery although not integrated
with the department framework. The MIAA Charter expressly states that transforming MIAA
into a "separate and autonomous body" will make its operation more "financially viable."

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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;
o Bishop v. Provincial Board: The exemption in favor of the convent in the payment of the land
tax (sec. 344 [c] Administrative Code) refers to the home of the parties who presides over the
church and who has to take care of himself in order to discharge his duties. In therefore must,
in the sense, include not only the land actually occupied by the church, but also the adjacent
ground destined to the ordinary incidental uses of man. Except in large cities where the density
of the population and the development of commerce require the use of larger tracts of land
for buildings, a vegetable garden belongs to a house and, in the case of a convent, it use is
limited to the necessities of the priest, which comes under the exemption.
All machineries and equipment that are actually, directly and exclusively used by local water districts and
government owned or controlled corporations engaged in the supply and distribution of WATER and/or
generation and transmission of ELECTRIC POWER;
All real property owned by duly registered COOPERATIVES as provided for under R.A. No. 6938; and
Machinery and equipment used for POLLUTION CONTROL and ENVIRONMENTAL PROTECTION
PROVISO: EXCEPT AS PROVIDED HEREIN, any exemption from payment of real property tax previously
granted to, or presently enjoyed by, all persons, whether natural or juridical, including all governmentowned or controlled corporations are hereby WITHDRAWN upon the effectivity of this Code.

How to Determine the Tax Payable

d

DETERMINE THE KIND OF REAL PROPERTY INVOLVED

BASIS FOR ASSESSING RPT
o Before OWNERSHIP of the property
o Now ACTUAL USE of the property regardless of where located, whoever owns it, and
whoever uses it (Sec. 217, LGC)

CLASSIFICATION (Secs. 215-216) The city or municipality within MM shall have the power o classify
lands in accordance with their zoning ordinances.
o Residential land principally devoted to habitation (Sec. 199u)
o Agricultural principally devoted to planting of trees, raising of crops, livestock and poultry,
dairying, salt making, inland fishing and similar aquacultural activities, and other agricultural
activities (Sec. 199d)
o Commercial principally devoted for the object of profit (Sec. 199i)
o Industrial principally devoted to industrial activity as capital investment (Sec. 199n)
o Mineral lands in which minerals, metallic or non-metallic, exist in sufficient quantity or grade
to justify the necessary expenditures to extract and utilize such materials (Sec. 199p)
o Timberland
o Special 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 GOCCs rendering essential public services in the supply and
distribution of water and/or generation and transmission of electric power (Sec. 216)

APPRAISAL
HOW APPRAISED
o REAL PROPERTY (Sec. 201) ALL real property, whether taxable or exempt SHALL be
appraised at the CURRENT and FAIR MARKET VALUE prevailing in the locality where the
property is situated
o MACHINERIES
F Fair Market Value (Sec. 224)

BRAND NEW acquisition cost

If IMPORTED, acquisition cost includes: freight, insurance, bank
and other charges, brokerage, arrastre and handling, duties and
taxes, plus charges at the present site

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DECLARATION OF REAL PROPERTY

o VOLUNTARY Sworn statement declaring the true value of the property shall be filed with the
assessor
F Real Property owned at the time of enactment of the LGC (Sec. 202)

Who should file: All persons, natural or juridical, owning or administrating

real property, including improvements, OR their duly authorized
representative
Cenido v. Apacionado: The Real Property Tax Code provides that
real property tax be assessed in the name of the person "owning
or administering" the property on which the tax is levied. Since
petitioner Cenido has not proven any successional or
administrative rights to Bonifacio's estate, Tax Declaration No. 026368 in Cenido's name must be declared null and void.

Contents of declaration: Description of the property sufficient to enable

the assessor to identify it for assessment purposes

When filed: Once every 3years during the period from January 1st to June
30th
F Upon acquisition of property or upon completion or occupancy of the improvement
(Sec. 203)

Who should file: BUYER

When filed: Within 60DAYS after the acquisition or completion

Notification of transfer (Sec. 208): The TRANSFEROR has the duty to notify
the assessor within 60DAYS from the date of the transfer
The notification shall include the mode of transfer, the description
of the property, and the name and address of the transferee
If no notification is given, the assessment shall continue to be sent
to the old owner. As a consequence, the new owner forfeits his
right to question the assessment.

Duty of the Official issuing the permit or certificate (Sec. 110): Give a copy
of the permit or certificate to the assessor within 30DAYS from its issuance

Duty of the Geodetic Engineer (Sec. 211): Give the assessor a copy of
subdivision plans or maps of surveys within 30DAYS from receipt of the
plans from the Lands Management Bureau, the LRA, or the HLURB
o

Cost in foreign currency shall be converted to peso cost on the

basis of foreign currency exchange rates as fixed by the Central
Bank

ALL other cases divide remaining economic life by its estimated

economic life and multiplied by the replacement or reproduction cost
Depreciation allowance for purposes of assessment (Sec. 225)

Not exceeding 5% of original cost or replacement/reproduction cost for

each yr of use

Remaining value for all kinds of machinery shall be fixed at not less than 20%
of such original, replacement or reproduction cost for so long as the
machinery is useful and in operation

INVOLUNTARY Declaration shall be filed by the ASSESSOR HIMSELF

F When the person required to file declaration FAILS or REFUSES to do so within the
time prescribed (Sec. 204)
F The assessor may summon the owners of the properties to be affected or persons
having legal interest therein and witnesses, administer oaths, and take deposition for
the purpose of obtaining information on which to base the market value of the
property (Sec. 213)

APPLY APPROPRIATE ASSESSMENT LEVEL

ASSESSMENT ROLLS (Sec. 205) The assessor shall prepare and maintain an assessment roll listing all
real property, WHETHER TAXABLE OR EXEMPT, located within the territorial jurisdiction of the LGU

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o

When the beneficial use of a government-owned property is granted to a private person, may
the tax declaration be issued in the name of the private person instead of the government?
YES. The real property shall be listed, valued, and assessed in the name of the possessor,
grantee or of the public entity if such property has been acquired or held for resale or lease.
(Sec. 205d)

ASSESSMENT LEVELS (Sec 218)

o LANDS
Class
Residential
Agricultural
Commercial
Industrial
Mineral
Timberland
o

Assessment Levels
20%
40%
50%
50%
50%
20%

BUILDING AND OTHER STRUCTURE

FMV Over

175,000
300,000
500,000
750,000
1,000,000
2,000,000
5,000,000
10,000,000

300,000
500,000
750,000
1,000,000
2,000,000

300,000
500,00
750,000
1,000,000
2,000,000
5,000,000
10,000,000

300,000
500,000
750,000
1,000,000
2,000,000

Not Over

Assessment Levels

RESIDENTIAL
P175,000
300,000
500,000
750,000
1,000,000
2,000,000
5,000,000
10,000,000
AGRICULTURAL
P300,000
500,000
750,000
1,000,000
2,000,000
COMMERCIAL/INDUSTRIAL
P300,000
500,000
750,000
1,000,000
2,000,000
5,000,000
10,000,000
TIMBERLAND
P300,000
500,000
750,000
1,000,000
2,000,000

0%
10%
20%
25%
30%
35%
40%
50%
60%
25%
30%
35%
40%
45%
50%
30%
35%
40%
50%
60%
70%
75%
80%
45%
50%
55%
60%
65%
70%

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MACHINERY
Class
Residential
Agricultural
Commercial
Industrial
SPECIAL CLASSES
Actual Use
Cultural
Scientific
Hospital
Local water districts
GOCCs (water and electric
power)

Assessment Levels
50%
40%
80%
80%

Assessment Levels
15%
15%
15%
10%
10%

ASSESSED VALUE = FMV * Assessment Level

GENERAL REVISION OF ASSESSMENTS (Sec. 219, LGC and Art. 310, IRR) The provincial city or municipal
assessor shall undertake general revision of real property assessments WITHIN 2YEARS after the
effectivity of the LGC and EVERY 3YEARS THEREAFTER
o Lopez v. City of Manila: Based on the evidence presented by the parties, 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 are as follows:
1. The preparation of Schedule of Fair Market Values.
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.
It was clear from the records that Mrs. Lourdes Laderas, the incumbent City Assessor,
prepared the fair market values of real properties and in preparation thereof, she considered
the fair market values prepared in the calendar year 1992. Upon that basis, the City Assessor's
Office updated the schedule for the year 1995. In fact, the initial schedule of fair market values
of real properties showed an increase in real estate costs, which ranges from 600% 3,330 %
over the values determined in the year 1979. However, after a careful study on the movement
of prices, Mrs. Laderas eventually lowered the average increase to 1,020%. Thereafter, the
proposed ordinance with the schedule of the fair market values of real properties was
published in the Manila Standard on October 28, 1995 and Balita on November 1, 1995. Under
the circumstances of this case, was compliance with the requirement provided under Sec. 212
of R.A. 7160

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REASSESSMENT (Sec. 220-221)

o The assessor shall make a classification, appraisal and assessment of real property listed and
described in the declaration irrespective of any previous assessment or taxpayers valuation in
the ff. cases:
F Real property is declared and listed for taxation purposes for the first time
F There is an ongoing general revision of property classification and assessment
F Request is made by the person in whose name the property is declared
o Assessment shall NOT be INCREASED oftener than ONCE EVERY 3YEARS except in case of NEW
IMPROVEMENTS substantially increasing the value of said property or of any change in its
actual use
o DATE OF EFFECTIVITY Those made after January 1st shall take effect on January 1st of the
next year

COMPUTE THE TAX PAYABLE

BASIC RPT (Sec. 233) Assessed Value * RPT%
o Province 1%
o City or municipality in MM 2%
SPECIAL LEVIES
o SPECIAL EDUCATION FUND (Sec. 235) 1% annual tax
o TAX ON IDLE LANDS (Sec. 236-237) 5%
F Idle lands covered

Agricultural lands more than 1hec, suitable for cultivation, dairying, inland
fishery and other agricultural uses, of which remain uncultivated

Other kinds of land more than 1,000sq. m. of which remain unutilized or

unimproved

Residential lots regardless of area

F Idle lands exempted

Force majeure

Civil disturbance

Natural calamity

Any cause or circumstance which physically or legally prevents the owner of

the property from improving, utilizing or cultivating it
o SPECIAL LEVY DUE TO IMPROVEMENTS (Sec. 240-243) LGU may impose a special levy on lands
specially benefited by public works projects or improvements funded by the LGU concerned
F The levy should NOT EXCEED 60% of actual cost of projects and improvements,
including cost of acquiring land and such other real property in connection therewith

60% is allocated to all the real property benefited by the improvement

F Does NOT apply to lands EXEMPT FROM BASIC RPT and the remainder of the land
portions of which have been DONATED to the LGU concerned for the construction of
such projects or improvements

PAYMENT OF RPT
DATE OF ACCRUAL (Sec. 245-246)
o BASIC RPT January 1st and from that date it shall constitute as a LIEN which shall be
SUPERIOR to any other lien
o SPECIAL LEVY 1st day of the quarter next following the effectivity of the ordinance
PAYMENT ON INSTALLMENT (Sec. 250) Basic RPT and SEF may be paid in 4 EQUAL INSTALLMENTS
without interest
DISCOUNT FOR ADVANCE PAYMENT (Sec. 251) 20% of annual tax due

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Remedies
Remedies of the lgu
d IN CASE OF DELINQUENCY IN PAYMENT
POSTING OF NOTICE OF DELIQUENCY (Sec. 254)
o Posted in the main entrance of the capitol or city/municipal hall and in a publicly accessible and
conspicuous place in each barangay of the LGU + published once a week for 2 consecutive
weeks in a newspaper of general circulation
o Notice shall specify the date when the tax became delinquent and shall state the personal
property that may be distrained to effect payment
IMPOSITION OF INTEREST (Sec. 255)
o 2% per month of the unpaid amount shall be imposed until delinquent tax is paid
o Total interest shall NOT exceed 36mos.
d

FOR COLLECTION (Sec. 256)

Period to Collect (Sec. 270)
o General Rule: 5YEARS from date they become due
F Exception: 10YEARS from discovery in case of fraud or intent to evade payment
o Period shall be SUSPENDED in the ff cases:
F The local treasurer is legally prevented from collecting the tax;
F The owner of the property or the person having legal interest therein requests for
reinvestigation and executes a waiver in writing before the expiration of the period
within which to collect; and
F The owner of the property or the person having legal interest therein is out of the
country or otherwise cannot be located.

LEVY (ADMINISTRATIVE)
o Upon expiration of the time required to pay, the real property subject to tax may be LEVIED
upon through the issuance of a WARRANT on or before, or simultaneously with the filing of a
CIVIL SUIT for collection
o The warrant is issued by the TREASURER and mailed or served to the owner
o Notice of levy with attached warrant shall be mailed or served to the Assessor who shall
annotate the levy on the tax declaration and certificate of title of the property
o The owner has 1year from the date of sale within which to redeem the property
F City Mayor v. RCBC: Meaning of date of sale
From the foregoing, the owner of the delinquent real property or person having legal
interest therein, or his representative, has the right to redeem the property within
one (1) year from the date of sale upon payment of the delinquent tax and other
fees. Verily, the period of redemption of tax delinquent properties should be counted
not from the date of registration of the certificate of sale, as previously provided by
Section 78 of P.D. No. 464, but rather on the date of sale of the tax delinquent
property, as explicitly provided by Section 261 of R.A. No. 7160.
Nonetheless, the government of Quezon City, pursuant to the taxing power vested
on local government units by Section 5, Article X of the 1987 Constitution13 and R.A.
No. 7160, enacted City Ordinance No. SP-91, S-93, otherwise known as the Quezon
City Revenue Code of 1993, providing, among other things, the procedure in the
collection of delinquent taxes on real properties within the territorial jurisdiction of
Quezon City. Section 14 (a), Paragraph 7, the Code provides:
7) Within one (1) year from the date of the annotation of the sale of the
property at the proper registry, the owner of the delinquent real property
or person having legal interest therein, or his representative, shall have the
right to redeem the property by paying to the City Treasurer the amount of
the delinquent tax, including interest due thereon, and the expenses of sale
plus interest of two percent (2) per month on the purchase price from the
date of sale to the date of redemption. Such payment shall invalidate the

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certificate of sale issued to the purchaser and the owner of the delinquent
real property or person having legal interest therein shall be entitled to a
certificate of redemption which shall be issued by the City Treasurer.
xxxx
Verily, the ordinance is explicit that the one-year redemption period should be
counted from the date of the annotation of the sale of the property at the proper
registry. At first glance, this provision runs counter to that of Section 261 of R.A. No.
7160 which provides that the one year redemption period shall be counted from the
date of sale of the tax delinquent property. There is, therefore, a need to reconcile
these seemingly conflicting provisions of a general law and a special law.

A general statute is one which embraces a class of subjects or places and does not
omit any subject or place naturally belonging to such class. A special statute, as the
term is generally understood, is one which relates to particular persons or things of a
class or to a particular portion or section of the state only. In the present case, R.A.
No. 7160 is to be construed as a general law, while City Ordinance No. SP-91, S-93 is a
special law, having emanated only from R.A. No. 7160 and with limited territorial
application in Quezon City only.
The taxpayer may question the validity of the auction sale in the courts provided that he
deposits with the court the AMOUNT for which the property was sold plus INTEREST of 2% per
month from the date of sale to the time of the institution of the action.
F Reason: If the sale is annulled, the deposited amount shall be returned to the buyer at
the auction sale.
F Is the government required to deposit amount? NO. NHA v. City of Iloilo states:
As is apparent from a reading of the foregoing provision, a deposit equivalent to the
amount of the sale at public auction plus two percent (2%) interest per month from
the date of the sale to the time the court action is instituted is a conditiona
prerequisite, to borrow the term used by the acknowledged father of the Local
Government Code which must be satisfied before the court can entertain any
action assailing the validity of the public auction sale. The law, in plain and
unequivocal language, prevents the court from entertaining a suit unless a deposit is
made. This is evident from the use of the word shall in the first sentence of Section
267. Otherwise stated, the deposit is a jurisdictional requirement the nonpayment of
which warrants the failure of the action.
The deposit requirement, to be sure, is not a tax measure. As expressed in Section
267 itself, the amount deposited shall be paid to the purchaser at the auction sale if
the deed is declared invalid; otherwise, it shall be returned to the depositor. The
deposit, equivalent to the value for which the real property was sold plus interest, is
essentially meant to reimburse the purchaser of the amount he had paid at the
auction sale should the court declare the sale invalid.
Clearly, the deposit precondition is an ingenious legal device to guarantee the
satisfaction of the tax delinquency, with the local government unit keeping the
payment on the bid price no matter the final outcome of the suit to nullify the tax
sale. Thus, the requirement is not applicable if the plaintiff is the government or any
of its agencies as it is
presumed to be solvent,[8] and more so where the tax exempt status of such plaintiff
as basis of the suit is acknowledged. In this case, NHA is indisputably a tax-exempt
entity whose exemption covers real property taxes and so its property should not
even be subjected to any delinquency sale. Perforce, the bond mandated in Section
267, whose purpose it is to ensure the collection of the tax delinquency should not be
required of NHA before it can bring suit assailing the validity of the auction sale.
Note should be taken that NHA had consistently insisted on the nullity of the
proceedings undertaken by respondent Iloilo City which eventually led to the public

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auction sale of its property. Since, as had been resolved, NHA is liable neither for real
property taxes nor for the bond requirement in Section 267, it necessarily follows
that any public auction sale involving property owned by NHA would be null and void
and any suit filed by the latter questioning such sale should not be dismissed for
failure to pay the bond.

NHA cannot be declared delinquent in the payment of real property tax obligations
which, by reason of its tax-exempt status, cannot even accrue in the first
place. Nonetheless, because respondent Iloilo City filed a motion to dismiss NHAs
Complaint dated5 June 2002 based on Section 267 and not an answer, it is both
proper and prudent to remand the case to the trial court in order to afford
respondent Iloilo City full opportunity to be heard on the matters raised in the
complaint.
COLLECTION SUIT IN COURTS (JUDICIAL)
o LGU may collect through CIVIL ACTION filed by the treasurer in ANY COURT OF COMPETENT
JURISDICTION (Sec. 266)
LOCAL GOVERNMENTS LIEN (Sec. 257)
o Superior to all other liens, charges or encumbrances in favor of any person, irrespective of the
owner or possessor thereof
o Enforceable by ADMINISTRATIVE or JUDICIAL ACTION
o Extinguished upon PAYMENT of tax and related interests and expenses

Remedies of the taxpayer

d DISPUTE THE ASSESSMENT
APPEAL TO LOCAL BOARD OF ASSESSMENT APPEALS
o Within 60DAYS from receipt of the written notice of assessment (Sec. 226)
o The LBAA has 120DAYS from receipt of the appeal to decide (Sec. 229)
APPEAL TO CENTRAL BOARD OF ASSESSMENT APPEALS
o Within 30DAYS from receipt of LBAA decision (Sec. 229)
APPEAL TO CTA
o Within30DAYS from receipt of CBAA decision (Sec. 7, RA 1125)

Effect of Appeal (Sec. 231) Shall NOT SUSPEND the collection of tax without prejudice to subsequent
adjustment depending on outcome of the appeal

PAYMENT UNDER PROTEST (Sec. 252, LGC and Art. 343, IRR)
File a written protest with the TREASURER within 30DAYS FROM PAYMENT
o Who is the proper party to protest?
F NPC v. Province of Quezon and Municipality of Pagbilao: Consistent with the BOT
concept and as implemented, BPPC the owner-manager-operator of the project is
the actual user of its machineries and equipment. BPPCs ownership and use of the
machineries and equipment are actual, direct, and immediate, while NAPOCORs is
contingent and, at this stage of the BOT Agreement, not sufficient to support its
claim for tax exemption. Thus, the CTA committed no reversible error in denying
NAPOCORs claim for tax exemption.
Given the special nature of a BOT agreement as discussed in the cited case, we find
Article 1503 inapplicable to define the contract between Napocor and Mirant, as it
refers only to ordinary contracts of sale. We thus declared in Tatad v. Garcia 13 that
under BOT agreements, the private corporations/investors are the owners of the
facility or machinery concerned. Apparently, even Napocor and Mirant recognize this
principle; Article 2.12 of their BOT Agreement provides that "until the Transfer Date,
[Mirant] shall, directly or indirectly, own the Power Station and all the fixtures,
fitting, machinery and equipment on the Site x x x. [Mirant] shall operate, manage,
and maintain the Power Station for the purpose of converting fuel of Napocor into
electricity."

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Moreover, if Napocor truly believed that it was the owner of the subject machineries,
it should have complied with Sections 202 and 206 of the LGC which obligates owners
of real property to:
a. file a sworn statement declaring the true value of the real property,
whether taxable or exempt; and
b. file sufficient documentary evidence supporting its claim for tax
exemption.
While a real property owners failure to comply with Sections 202 and 206 does not
necessarily negate its tax obligation nor invalidate its legitimate claim for tax
exemption, Napocors omission to do so in this case can be construed as
contradictory to its claim of ownership of the subject machineries. That it assumed
liability for the taxes that may be imposed on the subject machineries similarly does
not clothe it with legal title over the same. We do not believe that the phrase "person
having legal interest in the property" in Section 226 of the LGC can include an entity
that assumes another persons tax liability by contract.
F

Fels Energy, Inc. v. Province of Batangas: To recall, FELS gave NPC the full power and
authority to represent it in any proceeding regarding real property assessment.
Therefore, when petitioner NPC filed its petition for review docketed as G.R. No.
165113, it did so not only on its behalf but also on behalf of FELS. Moreover, the
assailed decision in the earlier petition for review filed in this Court was the decision
of the appellate court in CA-G.R. SP No. 67490, in which FELS was the petitioner.
Thus, the decision in G.R. No. 165116 is binding on petitioner FELS under the principle
of privity of interest. In fine, FELS and NPC are substantially "identical parties" as to
warrant the application of res judicata. FELSs argument that it is not bound by the
erroneous petition filed by NPC is thus unavailing.

Treasurer shall decide within 60DAYS from receipt of protest

o In FAVOR of taxpayer amount or portion shall be refunded or credited against existing or
future liability

If DENIED or upon LAPSE OF 60DAYS appeal to LBAA

o MR of the treasurers denial is NOT the proper remedy
F Callanta v. Office of the Ombudsman: Under the aforecited procedure, the issuance of
a notice of assessment by the local assessor shall be his last action on a particular
assessment. On the side of the property owner, it is this last action which gives him
[the] right to appeal to the Local Board of Assessment Appeals. The above
procedure also, does not grant the property owner the remedy of filing a motion for
reconsideration before the local assessor.
The act of herein petitioners in providing the corresponding notices of assessment
the chance for the property owners concerned to file a motion for reconsideration
and for acting on the motions filed is not in accordance with law and in excess of
their authority and therefore constitutes ultra vires acts.
o

Where do you appeal, to the LBAA or the RTC? IT DEPENDS

F If taxpayer is questioning the AUTHORITY of the assessor to issue the assessment
(question of law) RTC. The requirement of payment under protest may be
WAIVED.

NPC v. Province of Quezon and Municipality of Pagbilao citing Olivarez v.

Marquez and Ty v. Trampe: Like Olivarez, Napocor, by claiming exemption
from realty taxation, is simply raising a question of the correctness of the
assessment. A claim for tax exemption, whether full or partial, does not
question the authority of local assessor to assess real property tax. This
may be inferred from Section 206

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Prof. Baniqued
By providing that real property not declared and proved as tax-exempt shall
be included in the assessment roll, the above-quoted provision implies that
the local assessor has the authority to assess the property for realty taxes,
and any subsequent claim for exemption shall be allowed only when
sufficient proof has been adduced supporting the claim. Since Napocor was
simply questioning the correctness of the assessment, it should have first
complied with Section 252, particularly the requirement of payment under
protest. Napocors failure to prove that this requirement has been complied
with thus renders its administrative protest under Section 226 of the LGC
without any effect. No protest shall be entertained unless the taxpayer first
pays the tax.

City Government of Quezon City v BayanTel: With the reality that Bayantels
real properties were already levied upon on account of its nonpayment of
real estate taxes thereon, the Court agrees with Bayantel that an appeal to
the LBAA is not a speedy and adequate remedy within the context of the
aforequoted Section 2 of Rule 65. This is not to mention of the auction sale
of said properties already scheduled on July 30, 2002.
Moreover, one of the recognized exceptions to the exhaustion- ofadministrative remedies rule is when, as here, only legal issues are to be
resolved. In fact, the Court, cognizant of the nature of the questions
presently involved, gave due course to the instant petition. As the Court has
said in Ty vs. Trampe:
xxx. Although as a rule, administrative remedies must first be
exhausted before resort to judicial action can prosper, there is a
well-settled exception in cases where the controversy does not
involve questions of fact but only of law. xxx.
Lest it be overlooked, an appeal to the LBAA, to be properly considered,
required prior payment under protest of the amount of P43,878,208.18, a
figure which, in the light of the then prevailing Asian financial crisis, may
have been difficult to raise up. Given this reality, an appeal to the LBAA may
not be considered as a plain, speedy and adequate remedy. It is thus
understandable why Bayantel opted to withdraw its earlier appeal with the
LBAA and, instead, filed its petition for prohibition with urgent application
for injunctive relief in Civil Case No. Q-02-47292. The remedy availed of by
Bayantel under Section 2, Rule 65 of the Rules of Court must be upheld.

If the taxpayer is claiming that it is exempt from RPT LBAA. Payment under
protest is mandatory.

Republic v. Kidapawan: PNOC-EDC also claims that the real property tax
assessment is not yet final and executory. It avers that prior resort to
administrative remedies before seeking judicial remedies is not necessary
considering that the issue raised is purely a question of law. Consequently,
it need not appeal the assessment to the Local Board of Assessment
Appeals or to the Central Board of Assessment Appeals as provided under
Sections 226 and 229 of the LGC.
We disagree. It is well-settled in Systems Plus Computer College of Caloocan
City v. Local Government of Caloocan City that all administrative remedies
must be exhausted before availing of the judicial remedies. Thus:
The petitioner cannot bypass the authority of the concerned
administrative agencies and directly seek redress from the courts
even on the pretext of raising a supposedly pure question of law
without violating the doctrine of exhaustion of administrative
remedies. Hence, when the law provides for remedies against the
action of an administrative board, body, or officer, as in the case

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Prof. Baniqued
at bar, relief to the courts can be made only after exhausting all
remedies provided therein. 'Otherwise stated, before seeking the
intervention of the courts, it is a precondition that petitioner
should first avail of all the means afforded by the administrative
processes.
If PNOC-EDC was not satisfied with the assessment of its property, it should
have appealed to the Local Board of Assessment Appeals within 60 days
from receipt of the written notice of assessment. Instead, it waited until the
issuance of a warrant of levy before it filed a petition for injunction in the
regional trial court, which was not in accordance with the remedies
provided in the LGC.

Talento v. Escalada, Jr: The question posed in this petition, i.e., whether the
collection of taxes may be suspended by reason of the filing of an appeal
and posting of a surety bond, is undoubtedly a pure question of law.
Thus, petitioner resorted to the erroneous remedy when she filed a petition
for certiorari under Rule 65, when the proper mode should have been a
petition for review on certiorari under Rule 45. Moreover, under Section 2,
Rule 45 of the same Rules, the period to file a petition for review is 15 days
from notice of the order appealed from. In the instant case, petitioner
received the questioned order of the trial court on November 6, 2007,
hence, she had only up to November 21, 2007 to file the petition. However,
the same was filed only on January 4, 2008, or 43 days late. Consequently,
petitioner's failure to file an appeal within the reglementary period
rendered the order of the trial court final and executory.

Amount that should be paid Quimpo v. Mendoza: The next question now poses itself What is the basis
for the computation of the tax penalty in case of delinquency? The sixth paragraph of Section 42, R.A.
521 (supra), provides that the taxpayer is subject to " a penalty at the rate of two per centum for each
full month of delinquency that has expired, on the amount of theoriginal tax due ... ." There is no
corresponding or amendatory provision in R.A. 5447. This later law does not cover the aspect of penalty
in case of delinquency in the payment of the real estate tax. In the absence of such penalty provision,
respondent City Treasurer insists that the penalty of 2% be based on the original tax due whereas
petitioner maintains that it should be the amount of the installment due and not paid.
We rule for the petitioner, following the general rule in the interpretation of tax statutes that such
statutes are construed most strongly against the government and in favor of the taxpayer. Moreover,
simple logic fairness and reason cannot countenance an exaction or a penalty for an act faithfully done
in compliance with the law. Since petitioner is allowed by law to pay his real estate tax in four equal
installments due and payable on four specified dates and having paid the first three (3) installments
faithfully and religiously, it is manifest injustice, sheer arbitrariness and abuse of power to penalize him
for doing so when he fails to pay the fourth end last installment.

CLAIM FOR REFUND OR CREDIT (Sec. 253)

Assessment is illegal or erroneous
Tax is reduced or adjusted
File written claim with treasurer WITHIN 2YEARS from the date the taxpayer is entitled to such reduction
or adjustment Decision WITHIN 60DAYS from receipt
Payment under protest is NOT required
o Ramie Textiles, Inc v. Mathay: Petitioner claims that protest is not a sine qua non requirement
in order that taxes mistakenly paid may be refunded it alleges that Section 54 is not applicable
since it contemplates a situation where the taxpayer disagrees with an assessment because it
is illegal or erroneous.
We agree with petitioner. Protest is not a requirement in order that a taxpayer who paid under
a mistaken belief that it is required by law, may claim for a refund. Section 54 of

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Prof. Baniqued
Commonwealth Act No. 470 does not apply to petitioner which could conceivably not have
been expected to protest a payment it honestly believed to be due. The same refers only to
the case where the taxpayer, despite his knowledge of the erroneous or illegal assessment,
still pays and fails to make the proper protest, for in such case, he should manifest an
unwillingness to pay, and failing so, the taxpayer is deemed to have waived his right to claim a
refund.
In the case at bar, petitioner, therefore, cannot be said to have waived his right. He had no
knowledge of the fact that it was exempted from payment of the realty tax under
Commonwealth Act No. 470. Payment was made through error or mistake, in the honest belief
that petitioner was liable, and therefore could not have been made under protest, but with
complete voluntariness. In any case, a taxpayer should not be held to suffer loss by his good
intention to comply with what he believes is his legal obligation, where such obligation does
not really exist.
F If assessment is ERRONEOUS but you still paid Payment under protest is necessary
for you to claim refund
F If you honestly believe that the assessment was correct so you paid Payment
under protest in not necessary for you to claim refund

Role of the Bureau of Local Government Finance

d

PLDT v City of Davao: In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF)
that petitioners exemption from local taxes has been restored is a contemporaneous construction of 23 and, as
such, it is entitled to great weight.
The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, which is a special
court created for the purpose of reviewing tax cases, the BLGF was created merely to provide consultative
services and technical assistance to local governments and the general public on local taxation and other related
matters. Thus, the rule that the Court will not set aside conclusions rendered by the CTA, which is, by the very
nature of its function, dedicated exclusively to the study and consideration of tax problems and has necessarily
developed an expertise on the subject, unless there has been an abuse or improvident exercise of
authority cannot apply in the case of BLGF.

City of Iloilo v. Smart Communications: The settled rule is that good faith and honest belief that one is not subject
to tax on the basis of previous interpretation of government agencies tasked to implement the tax laws are
sufficient justification to delete the imposition of surcharges and interest. In refuting liability for the local
franchise and business taxes, we do not believe SMART relied in good faith in the findings and conclusion of the
Bureau of Local Government and Finance (BLGF).
In a letter dated August 13, 1998, the BLGF opined that SMART should be considered exempt from the franchise
tax that the local government may impose under Section 137 of the LGC. SMART, relying on the letter-opinion of
the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as
in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case
of PLDT v. City of Davao, we declared that we do not find BLGFs interpretation of local tax laws to be
authoritative and persuasive. The BLGFs function is merely to provide consultative services and technical
assistance to the local governments and the general public on local taxation, real property assessment, and other
related matters. Unlike the Commissioner of Internal Revenue who has been given the express power to
interpret the Tax Code and other national tax laws, no such power is given to the BLGF. SMARTs dependence on
BLGFs interpretation was thus misplaced.

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