Tax Rev Class Notes

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GENERAL PRINCIPLES
A. Definition and Concept of Taxation
- Taxes are the enforced proportional contribution from persons and property levied by the law-making
body of the State by virtue of its sovereignty for the support of the government and for public needs
B. Characteristics of Taxation
1. Enforced
- Not voluntary. It does not need consent of both parties to be applied
2. Proportionate contribution
- Taxes are based on ones ability to pay (as provided by the Constitution)
o This is consistent with the rule on progressivity and uniformity
3. Levied by the legislature
- Taxation is inherently legislative in nature
4. Within taxing jurisdiction (of the state or taxing authority)
a. Nationality
State can exert taxing powers over its nationals
E.g. US has a worldwide basis of taxation for its citizens. Thus, by virtue of the fact that
they are citizens, they are taxed
b. Residence
All foreign nationals who acquire tax certificate can be taxed by the BIR
Resident aliens are subject to tax in the Philippines the same manner as a citizen
c. Source (territoriality)
Where the economic activity took place or location of the real property
A non-resident foreign corporation not doing business may be taxed if it receives
dividend from a resident corporation
- If Congress passes a law seeking to assert taxing jurisdiction not based on the three source, there could
be a violation of international law.uh
5. Personal in nature
- It is personal to the subject or taxpayer
- A corporations tax liability cannot be enforced against its shareholders unless there is a ground for
piercing of corporate fiction
6. Primary purpose is to raise revenue
- State can assert power of taxation provided its purpose is to raise revenue
C. Purpose of Taxation
1. Primary
- To raise revenues for the support of the government
2. Secondary
a. Regulation
Taxation can be used as a mean to deter activity
Thus the state can impose tax on cigarettes, e.g. excise tax, to deter smoking
of the public
Tio v. Videogram Regulatory Board
30% tax in sale, lease, or disposition of videograms is for a public purpose.
Taxation could be a tool to implement the States police power. Tax was
imposed primarily to answer the need to regulate the video industry due in
part to rampant film piracy, violation of IP rights, and proliferation of porn
A tax does not cease to be valid merely because it regulates, discourages, or
even definitely deters the activities taxed.
The State can exercise its taxing powers even though its purpose is not for raising
revenue
b. General welfare
Luz v. Araneta
Tax collected on land devoted to cultivation of sugar case, which tax shall
accrue exclusively, and for the aid and support, of the sugar industry, is valid.
Tax levied with a regulatory purpose, to provide means for the rehabilitation
and stabilization of the threatened sugar industry. Since sugar production is
one of the greatest industries of the nation, its promotion, protection, and
advancement therefore redounds greatly to the general welfare
The protection of a large industry constituting one of the great sources of the
states wealth and therefore directly or indirectly affecting the welfare of so
Taxation Review Atty. Bello

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great a proportion of the population of the State is affected to such an extent

by public interests as to be within the police power of the sovereign.
c. Reduction of social inequality
It is made possible through progressive system of taxation
E.g. estate tax
d. Protectionism (e.g., special duties under the Tariff and Customs code and RA 8800 of the
Safeguard Measures Act)
Under our commitment in WTO, we cannot use taxation to protect domestic products
Use is very limited
D. Theory and Basis of Taxation

1. Lifeblood theory
- Without revenue raised from taxation, the government will not survive, resulting in detriment to society.
Without taxes, the government would be paralyzed for lack of motive power to activate and operate it
(Commissioner v. Algue)
2. Necessity theory
- Existence of a government is a necessity and cannot continue without any means to pay for expenses.
3. Benefits-Protection theory
- So-called Symbiotic Relationship theory
- Reciprocal duties of protection and support between State and inhabitants
- Inhabitants pay taxes and in return receive benefits and protection from the State
- Sounds good in theory but in reality, difficult to comprehend. Why? Because you pay a lot of taxes but
you dont feel the benefits from the government
o This is not an excuse to not pay taxes
o But you have the right to question where the government is spending the taxes
But you must be rightly paying your taxes first before you can question
If you are not paying or not a taxpayer, you cannot question the government
4. Jurisdiction over subject and object
- The person or property taxed must be within the competent authoritys taxing jurisdiction
o Situs, source of territoriality (location of economic activity, location of property, source of income)
o Citizenship
o Residence
E. Principles of Sound Tax System

1. Theoretical justice
- Principles mandate that taxes must be just, reasonable, and fair
- Tax burden should be in proportion to the taxpayers ability to pay
- Violation of this principle will result in unconstitutionality of the tax imposition (under the Constitution,
taxes shall be uniform and equitable)
2. Fiscal adequacy
- Sources of revenue should be sufficient to meet the demands of public expenditure
- Even if the tax law fails to observe this principle in that tax proceeds are insufficient to meet spending,
the tax law is still valid
- In practice, it is always short. Revenues generated from taxation are not enough to fund government
expenditures thus the government has to borrow money
3. Administrative feasibility
- The tax law must be capable of effective or efficient enforcement
o Least amount of effort in the part of government to collect taxes
- Tax laws should close loopholes for tax evasion and deter corruption of tax officials
- No law requiring compliance with this principle
F. Power of Taxation Compared with Other State Powers

1. As to purpose:
- Taxation to support government
o But it doesn't prohibit the government from using other purposes for imposing tax.
- Eminent domain for public use
- Police power promote general welfare, public health, public morals and public safety
2. As to compensation:
- Taxation protection and benefits received from government
o Symbiotic relationship theory
- Eminent domain just compensation
- Police power maintenance of public order

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3. As to persons affected:
- Taxation and police power operate upon a community or a class of individuals
o It is possible for the law to apply to a select group of subjects provided there is substantial
distinction
- Eminent domain operates in individual property owner
4. As to authority which exercises power:
- Taxation and police power exercised only by the government or its political subdivisions
o Essentially legislative in nature
- Eminent domain may be exercised by public services corporation or public utilities if granted by law
5. As to amount of imposition:
- Taxation generally no limit to the amount of tax that may be imposed
o But there are inherent limitations and constitutional limitations
- Eminent domain no imposition; rather it is the property owner who will be paid just compensation
- Police power limited to cost of regulation
o Example: application for drivers license. The fees collected must be commensurate to the cost
of the production of the license. If it is not proportional, it can cross to power of taxation
G. Inherent limitations of Taxation

Taxation has generally no limitation as to the amount and as to whom
1. Public purpose
- Legislature is without the power to appropriate revenues for anything but for public purposes
- Public money can only be spent for a public purpose
2. Inherently legislative
- General rule: power to tax is non-delegable
- Exceptions:
o Delegation to the President (very limited instances)
Congress may authorize, by law, the President to fix, within specified limits and subject
to such limitations and restrictions as Congress may provide:
Tariff rates
Import and export quotas
Tonnage and wharfage dues
Other duties and imposts within the development program of the government
Flexible tariff clause (Sec. 401 TCCP): in the interest of national economy, general
welfare and/or national security, the President upon the recommendation of the NEDA
is empowered:
To increase, reduce, or remove existing protective rates of import duty,
provided that the increase should not be higher than 100% ad valorem
To establish import quotas or to ban imports of any commodity
To impose additional duty on all imports not exceeding 10% ad valorem
Mactan Cebu Intl Airport Authority v. Marcos
The power to tax is primarily vested in Congress; however, in our jurisdiction,
it may be exercised by local legislative bodies, no longer by virtue of a valid
delegation as before, but pursuant to direct authority conferred by 5, art. X
of the Constitution. Under the latter, the exercise of the power may be subject
to such guidelines and limitations as the Congress may provide which,
however, must be consistent with the basic policy of local autonomy
o Currently, Titles I (Local Taxation) and II (RPT) of Book II, LGC of
1991 prescribe the guidelines and limitations of local taxing power
o Delegation to LGUs
Taxes that can be collected by LGUs
Local business tax
Real property tax
LGUs can raise its own source of revenue because it is provided by the 1987
Constitution
Before 1987, there was a law delegating revenue collection of LGUs
However, upon the enactment of the 1987 Constitution, the power of the LGU
to collect is no longer vested by law but by the Constitution
Each LGU has the power to create its own revenue and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide (Art. X Sec. 5,
1987 Constitution)
o Delegation to administrative agencies

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BIR does not have the power to tax. It can only collect revenue as provided by the laws
enacted by Congress
The issuances of BIR are only interpretative or implementing rules or
regulation. They are merely filling in the laws enacted by Congress
They are just exercising its rule-making power, not legislating
For the delegation to be valid, the law must be complete in itself and must set forth
sufficient standards
Examples of delegation to administrative agencies Section 244 of the NIRRC
authorizes the Sec. of Finance, upon recommendation from the CIR, to promulgate
needful rules and regulations for the effective enforcement of the NIRC
Manner in which returns, information and reports is prepared and reported
Manner of paying taxes
Etc.
3. Territorial; situs of taxation
- Situs place of taxation
- The State where the subject to be taxed has a situs may rightfully levy and collect the tax
- Exceptions to the territoriality rule
o Where tax laws operate outside the territorial jurisdiction of the taxing estate e.g. taxation of
resident citizens on their foreign source income
o Where tax laws do not operate within the territorial jurisdiction e.g. waiver of taxing jurisdiction
via treaty or international comity
- Situs of income tax
o Domiciliary theory based on residence
o Nationality theory based on citizenship
o Source rule where the activity that produced the income took place
- Situs of property taxes
o Real property lex rei situs or where the property is located
o Personal property mobilia sequntur personam or where movable follows owner; movables
follow domicile of owner
4. Exemption of government
- Government cannot tax itself
o Because it's one pocket to another
o There is a provision in NIRC about this
o The City of Makati collects processing fees for business permits. This is income on the part of
the LGU. But the State cannot collect tax (any tax) on this because it is essential for its
governmental function
If it is not essential for governmental function, but is for its proprietary function, this can
be taxed by the government
There is a dispute between BIR and PDIC about the premiums collected by the PDIC,
whether it is essential for governmental function or proprietary
- Sec. 32(B)(7)(b): income derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political subdivision thereof
H. Constitutional Limitations of Taxation

1. Constitutional provisions directly affecting taxation
- Prohibition against imprisonment for non-payment of poll tax
- Uniformity and equality of taxation
- Grant by Congress of authority to the President to impose tariff rates
- Prohibition against taxation of religious, charitable entities, and educational entities
- Prohibition against taxation of non-stock, non-profit institutions
- Majority vote of Congress for grant of tax exemption
- Prohibition on use of tax levied for special purpose
- Presidents veto power on appropriation, revenue, tariff bills
- Non-impairment of jurisdiction of the Supreme Court
- Grant of power to the local government units to create its own sources of revenue
- Flexible tariff clause
- Exemption from real property taxes
- No appropriation or use of public money for religious purposes
2. Constitutional provisions indirectly affecting taxation
- Due process
o Can be used to invalidate tax laws

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o Taxation necessarily involves deprivation of property therefore it must comply with due process
law
If the taxes collected by BIR is so confiscatory or oppressive without due process, the
law may be challenged. However, there is no case where the court struck down a tax
law on the ground that it is confiscatory or oppressive.
There are local tax laws however that were struck down for being oppressive.
o SC: The sale of petroleum product and the entity selling the petroleum product are exempt from
tax. However, the city treasurer of Taguig insist that the entity is not petroleum product, hence,
taxable
- Equal protection
- Religious freedom
- Non-impairment of obligations of contracts
o E.g. VAT Ruling No. 7-2006
o Could indirectly affect power of taxation or exercise of the power of taxation
o Because exploration of natural resources is expensive, the government entices petroleum
service contractor tax exemption, except for income tax, in order to invest in exploration of oil.
There will be a contract between the government and the service contract regarding the tax
exemption. The Congress cannot pass a law impairing that contract
o When Congress grants an exemption, the exemption is a mere privilege and the government
can withdraw that
Exception: if a taxpayer was able to get a valid contractual tax exemption from the
government, it becomes a property right thus cannot be revoked by the government
without due process of law. It is a property right because the taxpayer was able to get
is for a valid and valuable consideration
I. Double Taxation
- Taxing the same property twice when it should be taxed but one. Taxing the same person twice by the
same jurisdiction over the same thing
o If it is obnoxious, it is oppressive and deprives right to property without due process
o Double taxation is bad for international trade because it will discourage investors or businesses
in setting up business in the country
- There is no constitutional prohibition against double taxation in the Philippines. It is something not favored,
but not altogether prohibited, provided constitutional mandates are not violated
o There are a lot of instances where there is double taxation
o Economically, it is not good, thats why it is discouraged
- Requisites for double taxation in the obnoxious sense (hence, may be invalidated under the due process
clause): (all must be satisfied)
o Same property is taxed twice
o Both taxes are imposed on the same property or same subject matter for the same purpose
o Imposed by the same taxing authority
o Within the same jurisdiction
o During the same period
o Covering the same kind and character of tax
- Examples of permissible double taxation
o Warehousing business although carried on in relation to operation of sugar refinery is a distinct
and separate taxable business
o License tax may be levied upon a business or occupation although the land or property used in
connection therewith is subject to property tax
o Excise tax on cigarette is distinct from income tax paid by manufacture/ importer of cigarettes
o Petroleum company pays excise tax on petroleum products. They also pay income tax on sale
of petroleum products
Subject matter is different: excise tax product; income tax entity
Different purpose
- Means employed to avoid/ mitigate double taxation
o Unilateral: tax deduction, tax credit (peso for peso credit), exemption, allowance on the principle
of reciprocity
o Bilateral: tax treaty

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-
- Treaty override: Sec. 32(B)(5)
- Treaty provision mitigates, if not entirely avoids, double taxation
- Purpose of treaty: facilitate international trade and investment by lowering tax barriers
J. Exemptions
- Exemption from taxation; defined
o Grant of immunity to particular class of persons from a tax which persons generally within the
same state or taxing district are obliged to pay
o It is an immunity or privilege; it is freedom from a financial charge or burden to which others are
subjected
o Exemption allowed only if the law clearly provides for it; not presumed
o Not violative of the equal protection clause so long as there is a substantial distinction
o Exemption from tax presupposes that the person is subject to tax in the first place, except that
there is a law exempting them from such tax. Without that law, the person is taxed
This is different from a person that is not subject to tax in the first place.
E.g., there is no law imposing a tax to such person
It is important to distinguish between an exemption and not being subject to tax in the
first place because it has something to do with statutory construction
- Rationale and Grounds
o Rationale for granting exemption:
Among others, to confer a benefit to a particular class which the legislature feels
outweighs the foregone revenue
E.g., senior citizens
o Grounds for granting exemption
May be based on a contract, e.g., petroleum service contract under PD 87
May be based on public policy, e.g., to encourage new industries (e.g., MCIT ex
exemption for first 4 years of operation) or to foster charitable institutions
May be based on international reciprocity (e.g., exemption of foreign vessels from
excise tax on petroleum products destined for consumption outside PH)
Treaties always override local laws. Thus if one is exempt under a treaty, a
local law cannot remove such exemption
- Nature
o Personal to the grantee
o Generally revocable by government (unless exemption founded on a contractual tax exemption)
Because tax exemption is just a mere privilege
o Considered a waiver by the government of sovereign right to collect taxes
o Not necessarily discriminatory (e.g., class legislation) so long as exemption has reasonable
foundation or rational basis
o Non-transferable
- Kinds
o Express when certain persons, property or transactions are, by express provision of law,
exempted from certain taxes, in whole or in part
Laws always expressly provide who are exempt from tax
o Implied* when a tax is levied on certain classes without mentioning other classes
*misnomer because there is no tax exemption by implication; exemption must be
expressed in clear and unmistakeable language; what is involved here is the rule on
strict construction of tax imposition in favor of taxpayer
There is no such thing as implied exemption
- Revocation
o General rule: a tax exemption may be revoked by the government anytime

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Since taxation is the rule and exemption therefrom the exception, the exemption thus
may be withdraws at the pleasure of the taxing authority (Mactan Cebu Intl Airport
Authority v. Marcos)
o Exception: a contractual tax exemption cannot be revoked anytime without impairing the
obligation of contracts
The only exception to this is where the exemption was granted to private parties based
in material consideration of a mutual nature, which then becomes contractual and is
thus covered by the non-impairment clause of the Constitution
K. Construction of Tax Statutes

- Construction and interpretation of tax laws
o Strictly construed against government
o In every case of doubt, tax statutes are construed most strongly against the Government and in
favor of the citizen because burdens are not to be imposed, not presumed to be imposed, beyond
what the statutes expressly and clearly import (Manila Railroad v. Collector of Customs)
o Commissioner of Internal Revenue v. Firemens Fund Ins. Co.
This involves DST on insurance premiums.
Impositions are strictly construed against the government
- Construction and interpretation of tax exemptions
o Strictly construed against taxpayer
o Exemptions are not favored and are construed strictissimi juris against the tax payer
o He who claims an exemption must be able to justify his claim or right thereto by a grant express
in terms too plain to be mistaken and too categorical to be misinterpreted
o Deductions, exclusions, condonations and claims for refund are akin to exemptions, hence,
strictly construed as well against taxpayers
o DST is due in all conveyances, deeds, instruments, or writings whereby any land, tenement or
other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser,
or purchasers, or to any other person or persons designated by such purchaser or purchasers
o Sea-Land Services, Inc. v. Commissioner of Internal Revenue
Sea-land is not exempt because the contract of Sea-land with the US is not connected
with the construction, maintenance, and defense of US base in the Philippines.
Exemptions are strictly construed against tax payers.
o Commissioner of Internal Revenue v. PSPC
It is about transfer of real properties in merger of two companies from the absolved
company to the surviving company. Is the transfer subject to DST?
BIR: exemption is strictly construed against taxpayer
When the land was transferred from the absolved company or surviving company, the
surviving company merely steps in the shoes of the absolved company. There was no
sale of real property. Thus DST is not applicable
This case does not involve an exemption but whether or not the taxpayer was subject
to the tax. Therefore, the principle will be used is that imposition is strictly construed
against government.
The BIR used the wrong principle because the corporation was not subject to
tax in the first place
- Exception to strict construction of tax exemption
o When the law itself provides for a liberal construction (e.g., laws granting fiscal incentives for
foreign investments)
o In the case of exemptions granted to religious, charitable and educational institutions or to the
government, it' agencies or to public property because they are generally exempt from taxation
o The rule on strict construction cannot be applied with respect to the interpretation of laws
granting exemptions to NPC. The rule on strict interpretation does not apply in the case of
exemptions granted to political subdivisions or instrumentalities of the government (Maceda v.
Macaraig)
- Construction and interpretation of IRRs
o Authority of the Sec. of Finance, in conjunction with the CIR, to promulgate rules and regulations
beyond question, such rules and regulation, as well as administrative opinions and rulings,
ordinarily should deserve weight and respect by the courts
o However, IRRs, rulings and other issuances must not override, but must remain consistent with,
the law they seek to apply and implement. They are intended to carry out, neither to supplant
nor to modify, the law (CIR v. CA)
L. Escape from Taxation

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- Escape from taxation; shifting

o Shifting: transfer of tax burden from the person directly liable for the tax to someone else (e.g.,
the buyer)
Ex. VAT. It is the seller who is liable for VAT but it is the buyer who shouldered the cost
of VAT
o Shifting of tax burden is generally not prohibited under the law
o What is shifted is the tax burden, not the liability for the tax (i.e., person directly liable for the tax
remains liable whether or not the tax burden is shifted)
o Only indirect taxes are shifted (e.g., VAT, excise tax, percentage tax)
- Impact and incidence
o Impact of taxation is the point on which a tax is originally imposed. From governments
perspective, the statutory tax payer (i.e., the person directly liable to pay the tax) is the person
who must pay the tax to the government
o Incidence of taxation is that point on which the tax burden finally settles (e.g., final consumer in
transactions subject to VAT)
- Tax avoidance vs. tax evasion
o Tax avoidance is permissible; tax evasion is illegal
Tax avoidance will not give rise to criminal liability. But it doesnt mean that tax
avoidance is permissible
Tax evasion is ALWAYS illegal and could give rise to a criminal liability
There could be criminal liability but if the evidence (beyond reasonable doubt)
against the accused is not enough, the accused cannot be convicted. But
there will always be civil liability (preponderance of evidence)
o Tax avoidance occurs when taxpayers take advantage of legally permissible alternative tax rates
or methods of assessing taxable property/ income/ transactions in order to avoid or minimize tax
liability
o CIR v. Estate of Toda
Factors considered in disregarding intermediate sale to Altonaga:

Sale to A and Sale RMI executed on the same day (first sale was even
notarized ahead of the second sale)
As early as May 1989, CIC received P40 partial payment from RMI (sale
occurred in Aug. 1989), indicating that the true buyer was RMI, not A
A was a close associate of Toda (majority shareholder of CIC)
o Tax evasion
Tax evasion: use by the taxpayer of illegal or fraudulent means to defeat or lessen the
payment of tax
In tax avoidance, the end goal is also to lessen tax but with the use of
legitimate means
Tax evasion is a term that connotes fraud though the use of pretended or forbidden
devices to lessen or defeat taxes
o Elements of tax evasion
The end to be achieved, i.e., payment of less than known by the taxpayer to be legally
due, or paying no tax when it is shown that tax is due
An accompanying state of mind which is described as being evil, in bad faith, willful,
deliberate, and not accidental

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How do you prove state of mind? Look at the facts accompanying the
circumstances
A course of action (or omission) that is unlawful
o SC findings
All elements of tax evasion present
First sale was a tax ploy, a sham, and without business purpose and economic
substance
First sale was entered into for no other purpose than to evade taxes
Schedule was entered into to convert P100M gain from ordinary gain (subject to 35%)
to a capital gain (subject to 5% tax)
- Examples of tax evasion
o Under-declaration of taxable value
o Mis-declaration of dutiable goods
o Substantial under-declaration of taxable income for consecutive years coupled with substantial
overstatement of deductions
o Simulated sales
o Keeping of two or more books of accounts
- Example of tax avoidance
o Estate planning scheme resorted by taxpayers in converting their property to shares of stock in
a corporation which they themselves owned and controlled valid. By virtue of the deed of
exchange, the taxpayer saved on estate tax. The legal right of taxpayers to decrease the amount
of what otherwise could be his taxes or altogether avoid them by means which the law permits
cannot be doubted (Delpher Trades Corp. v. IAC)
o Postponing sale of capital asset to take advantage of the holding period rule which reduces
capital gain by 50%
o Taking advantage of the tax rate scheme
E.g., if you want to donate 200k, you can stagger the donation and donate 100k on
December and another 100k on January the next year because donors tax starts at
donation worth 200k
MEANING OF INCOME AND REALIZATION PRINCIPLE

A. What is Income?
Gross Income Inclusions (32(A)) and exclsions (32(B)) 2,500,000
Less: Deductions (34 and 35) (1,500,000)
Equals: Taxable Income (31) 1,000,000
Multiplied by: Income Tax Rate (e.g. 32%) 32%
Income Tax Due 320,000
Less Tax Credits (100,000)
Income Tax Payable 220,000
- Gross Income: starting point to determine income tax liability

o 32(A): all income derived from whatever source
o 32(A)(1) to (11): type of gross income
o The law does not give a good definition of income because it says income is income
- 32(A): a tautological definition . . . gross income means all income . . .
o In short, definition does not answer whether a particular item is, or is not, income
- Early jurisprudential attempts to define gross income
o Eisner v. Macomber the capital labor formulation
32(A): All income derived from whatever source
Macomber definition of income: Gain derived from capital. From labor, or from both
combined
While taxpayer derived gain from capital, she received nothing out of companys assets
for her separate use and benefit

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Gain constituting income must have been derived from capital, from labor, or from both
combined; and
The gain constituting income must have been severed from capital for the taxpayers
separate use, benefit, and disposal
Macomber text applied
Example 1: the stock playa (unrealized gains from appreciated property)
Example 2: Ang swerte mo naman! (prizes and winnings)
Example 3: Balasubas! (discharge of indebtedness income)
Example 4: Head or tail (gains derived from dealings in property)
Practical application of Macomber
o In this case, you only have a paper gain, thus cannot be taxed
o Not income based on Macomber because it is not derived from

capital or labor but there is gain
o Not an income under Macomber because it is neither derived from

capital or labor but under NIRC, it is a taxable income
Macomber test is problematic (too narrow; does not cover items that are clearly income)
o U.S. v. Kirby Lumber
Buy-back by issuer of bonds at less than par
Taxpayers contention: relying on the definition of Eisner v. Macomber, the taxpayer
argues that while the transaction improved its balance sheet, it did not produce any
gain that was severed from its capital
Held: we see nothing to be gained from the discussion of judicial definition. The
(taxpayer) has realized within the year an occasion to income, if we take words in their
plain popular meaning, as they should be taken here
o Helvering v. Bruun
Taxpayer cancelled a lease and forfeited a leasehold improvement for nonpayment of
rentals, the tenant having erected a building that added about $50,000 to the value of
the property
Contention of taxpayer: the increase in value (represented by the forfeited leasehold)
was not severed from his investment or received for his separate use, benefit and
disposal (citing Eisner v. Macomber)
Held: while economic gain is not always taxable, realization of gain need not be in
cash derived from sale of an asset. Gain may occur as a result of exchange of property,
payment of the taxpayers indebtedness, relief from liability, or other profit realized from
the completion of a transaction
If income will be limited to cash only, there will be avoidance of tax by paying
in kind instead of cash
Taxpayer received back his land with a new building on it, which added an
ascertainable amount to its value. It is not necessary to recognition of taxable gain from

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his original capital. If that were necessary, no income could arise from exchange or
property; whereas such gain has always been recognized as realized taxable gain
o CIR v. Glenshaw Glass Co.: all realized gains unless specifically exempted
Taxpayers contention: 2/3 of the damage awards (punitive portion) constituted

punishment of the wrongdoer and, under the gross income definition in Macomber, this
punitive portion of the damages could not be treated as income derived from either
capital or labor; only the 1/3 portion which compensated for loss of profits could be
treated as derived from capital or from labor
Issue: whether money received as exemplary damages for fraud or as the punitive 2/3
portion of a treble damage antitrust recovery must be reported by a taxpayer as gross
income
Held: damage award taxable in their entirety
Court cast aside Macomber definition of income stating that it was not meant to provide
a touchstone to all future gross income question
Instead, court stated that Congress had applied no limitation as to the source of taxable
receipts, nor restrictive labels as to their nature
Congress intended to tax all gains, which court described as all accessions to wealth,
clearly realized, and over which the taxpayer have complete dominion
3 elements
o Accession to wealth
What is taxed here is the accession, which is something that
is adjunct the principal
The wealth itself is not taxed, it is only the accession, or
gain, which is subject to tax
o Clearly realized
o Taxpayer has complete dominion
The source is irrelevant. It is not limited to capital oral or. It extends to
enrichment or mere good fortune
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
Glenshaw Glass Co. restated:
Congress intended to tax all gains, except those specifically exempted
o The catch-all provision of IRC 22(a) (similar to our NIRC 23(A))
(from whatever source derived) is broad/ sweeping
Source is irrelevant (income tax is source-blind)
The touchstone to all income questions becomes simple enrichment
(accession to wealth) all gains are taxable (at least if clearly realized),
whether traceanle to labor, to capital, or to mere good fortune
- What is the income of a government official?
o Salary
o They also have Supplemental income
Is a bribe taxable income?
Gross income includes gains from illegal sources (James v. U.S.) (embezzled
money is taxable income of the embezzler in the year of embezzlement)
o If legal income is taxable, why should the illegal income be exempt?
o Most likely, people who receive bribe will not declare it, thus they
willfully hide this, and therefore, they are committing tax evasion
Unlawful, as well as lawful, gains are comprehended within the term gross
income
A gain constitutes taxable income when its recipient has control over it that,
as a practical matter, he derives readily realizable economic value from it
When a taxpayer acquires earnings, lawfully or unlawfully, and has actual
command over it, he has received income which he is required to report, even

Marion Nerisse Kho
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though it may still be claimed that he is not entitled to retain the money and
may be required to return the same
Rep. Randy Duke Cunningham
Conspiracy to commit bribery, mail fraud, wire fraud, and tax evasion
Rep. James Jimbo Traficant
Convicted of racketeering, bribery, fraud and tax evasion
Jack Abramoff (lobbyist)
Pleaded guilty to fraud, conspiracy, and tax evasion
Sen. Ted Stevens
Convicted of bribery and tax evasion
Alfons Capone
Convicted of tax evasion
- Non-reporting of income from illegal activities
B. Realization Requirement
- Taxability presupposes realization
o You will not find in the tax code that realization is a requirement, but you can imply from the law
that the law itself requires realization
o Sale is the clearest example of realization
-
o Glenshaw Glass: accessions to wealth, clearly realized and over which taxpayers have
complete dominion
o Income not taxable until realized
o Why is A taxable, while B is not? (Because of the realization requirement)
- Cottage Savings Association v. CIR
o Rationale of realization requirements:
Avoid annual valuation
To avoid the cumbersome, abrasive, and unpredictable administrative task of
valuing assets annuallt to determine whether their value has appreciated or
depreciated, 1001(a) of the Code (similar to NIRC 40(A)) defers the tax
consequences of a gain or loss in property until it is realized through the sale
or disposition of [the] property
Serves administrative convenience
This rule serves administrative convenience because in contrast a change in
the investments form or extent can be easily detected by a taxpayer or an
administrative officer
- Problems that would arise in the absence of the realization requirement
o Problem of annual property appraisals
o Problem of liquidity
o Forced liquidation
- When does realization occur? When the taxpayer has enjoyed the benefits of the economic gain
- When is the taxpayer deemed to have enjoyed the benefit of the economic gain?
o B.I.G; paper profits
o Sale, exchange or other disposition
Benta, puhunan, tubo
Head or tail?
Sunog!!!
- Helvering v. Horst
o Horst, Sr. detached interest coupons and donated same to Horst, Jr. prior to due date
Coupon bonds are like bonded indebtedness
o Horst, Jr. presented coupons and collected interest payment at maturity
o Issue: whether gift of coupons to Jr. is realization of taxable income to Sr.
o The gift, during the donors taxable year, of interest coupons detached from the bonds, delivered
to the donee and later in the year paid at maturity, is taxable income in the hands of the donor

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o The power to dispose of income is the equivalent of ownership of it. The exercise of that power
to procure the payment of income to another is the enjoyment and hence the realization of the
income by him who exercises it
o The realization rule, which is founded on administrative convenience, GENERALLY postpones
taxability until final enjoyment of the income which is usually receipt of it by the taxpayer
o HOWEVER, [the enjoyment of income] may occur when taxpayer has made such use or
disposition of his power to receive or control the income as to procure in its place other
satisfactions which are of economic worth
Because the taxpayer here has control and dominion. The mere fact that he did not
receive the income does not mean that he did not receive any economic satisfaction or
benefit.
In this case, the dad realized economic benefit when he gave the coupons to his son
because he was able to give something to his favorite son
He could have given the coupons to the son to obtain a lower tax rate
The father should be taxed because he owns the income. If he gave the bonds itself,
not the interest, to the son, the tax would have been the liability of the son
C. Imputed Income vs. Taxable Barter

- Imputed income is the accession to wealth that can be attributed, or imputed, to a person when they avoid
paying for services by providing the services to themselves (e.g., house painter who repaints own home)
o There is an economic gain in the case of the house painter because he was able to save money.
Instead of paying another painter to paint his house, he saved money by doing the job himself
- Imputed income is excludable from gross income, not on the basis of a specific Code provision, but results
from long-standing administrative practice
- House painting example
- Rationale for exemption (administrative convenience, e.g., difficulty of valuing imputed income)
- Differentiate tax-free imputed income from taxable barter
o In imputed income there is no exchange of cash; in taxable barter, there is exchange of service
with a valuable consideration for another service with a valuable consideration
o Ex. Lap dance in exchange for legal service; see Rev. Regs. 241: where services are paid for
with something other than money, the [FMV] of the thing taken in payment is the amount to be
included as income
o Endorsement in exchange for cosmetic surgery example
There is taxable barter because there are two services her:
The services of the model to the cosmetic company
The services of the cosmetic company to the model (e.g., liposuction)
There is an exchange of value for value. Its just that it is in kind instead of in cash
o See e.g., Rev. Rul. 79-24 (lawyer and housepainter exchanging services; landlord and artist
exchanging apartment usage and a painting)
- CIR v. Minzer
o Commission derived by an insurance broker on life insurance policies procured in his own life
are taxable income
D. Return of Capital
- Not all receipts of money are income; to arrive at income, there must be excluded therefrom an amount
representing return of capital (see Rev. Reg. 2 6: Income, in the broad sense, [means] all wealth which
flows into the taxpayer other than as a mere return of capital)
o The return of capital is not taxed because it could have been possibly taxed already
o It is not an inflow of wealth
- Basis recovery
o Basis in law is acquisition cost
- Sale or exchange of property is typical example
- Examples of return of capital/ basis recovery:
o Sale or exchange of property
o Gradual basis recovery through depreciation
o Certain indemnities
o Damages under certain instances
- Other instances
o Return of employees of their contributions to a qualified retirement plan (BIR Rul. 51.00)
o Reimbursement by tax adviser to client for erroneous tax advice resulting to payment of taxes
client neednt have paid; held to be compensation for a loss which impaired the taxpayer-clients
capital (Clark v. CIR)

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o Payment by a contractor of a sum of money to a buyer in exchange for release of the buyers
claims against the contractor for failure to fulfill the contract for construction of a plant (Rev. Rul.
81-277)
o Damages in lieu of lost profits damages, however, that compensate the taxpayer for lost profits
are includable in gross income. See BIR Rul. 184-90 (damages for breach of contract constitute
taxable income to the extent that such damages compensate loss of anticipated profits and non-
taxable to the extent that the same represent a return of capital or investment)
E. Windfall Receipts
- Gain without pain is taxable income (effectively settles by Glenshaw Glass)
- Examples of windfall receipts:
o Lost and found property
o Unclaimed deposits or uncashed checks
o Prizes and winnings
- Cesarini v. US
o Windfalls, including found monies, are includable in gross income
o Finder of treasure trove (i.e., property found by the taxpayer) is in receipt of taxable income, for
income tax purposes, to the extent of its value in US currency, for the taxable year in which it is
reduced to undisputed possession
o Steinway No. 1 example
- Hornung v. CIR
o Involving a professional football player taxed (1) on value of a Corvette received from a sports
magazine as MVP of the Super Bowl and (2) on the rental value of two other automobiles made
available by a car manufacturer
o Tax Court held that the use of the cars was an accession to wealth under Glenshaw Glass and
was not a tax-free gift, since the manufacturer had a commercial motive
o Court further held that the award did not fall under the exceptons for educational, artistic,
scientific, and/or civiv achievement (IRC 74(b); similar to NIRC 32(B)(7)(c) court said that
the taxpayers achievement purely athletic
F. Tax Benefit Principle

- Recovery of deducted item includable as taxable income
o E.g., subsequent recovery of bad debt deducted before
- Rationale for inclusion:
o Taxpayer enjoyed an undeserved tax benefit
o Conversely, if taxpayer derived no tax benefit from the deduction, the recovery in later years of
the deducted item would not be includable in gross income
- Examples of recovered deductions:
o Collection of debt previously deducted as worthless (see NIRC 34(E)(1), provisio)
o Refund of previously deducted taxes
o Reimbursements of previously deducted lossess (e.g., payment by a tortfeasor)
o Business expense paid by check that is never cashed by the payee
- BIR Rul. 102-95 an example of the tax benefit principle
o Contributions made by the employer to the employee retirement plans are claimed by the
employer as a deductible business expense
o If it turns out later that the company contributed more than it should have, the excess funds in
the retirement plan revert to the employer
o Reversion is a recovered deduction because the employer previously benefitted from the
business expense deduction
G. Indirect Receipts
- Indirect receipt: cancellation of indebtedness
o Rev. Regs. 2 50: cancellation of a debt could amount to payment of income, a gift or a capital
transaction
o Ex. A Corp. owes B Corp. P5M; due to cash flow problems A was only able to repay B P3m, with
B condoning the balance of P2M
Assuming that the transaction is not otherwise a gift or a capital transaction, A realizes
income to the extent to P2M as its economic position or net worth improved
See, however, BIR Rul. 76-89 where it was held that the debtor did not realize income
from the forgiveness of indebtedness because even after the condonation it remain
insolvent (although the debtors net worth improved)
- Indirect receipt: discharge by third parties

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Old Colony Trust case (employer pays the income taxes of a keyman; discharge by a third
o
person of an obligation to him is equivalent to receipt by the person taxed)
o Note: Old Colony Trust applied in BIR Rul. 85-95 (holding that the 5% final withholding tax on
interest assumed by the borrower constitutes additional income of the nonresident bondholders)
Guaranteed take home pay 1,000,000
Tax gross up: +68% 68%
Taxable income 1,470,588
Income tax (32%) (470,588)
Take home pay 1,000,000
GROSS INCOME
- All income derived from whatever source
A. Inclusions
- In-Kind Compensation
o Taxability of in-kind benefits (i.e., receipts in a form other than conventional cash payment):
Generally includable; 32 embraces cash and non-cash benefits alike (see e.g.,
32(A)(1): compensation for services in whatever form paid . . .)
Receipt of in-kind benefits often presents valuation difficulties not encountered when
cash is received
That is why, the BIR does not tax some in-kind compensation
o Limited choice and restricted property
US v. Drescher
An annuity purchased by the employer for the employee is taxable income to
the employee in the year of purchase by the employer (and not in the year of
pay-out to the employee) despite the fact that the policies were non-
assignable and were retained in the possession of the employer
Non-assignability and retention by employer do not affect immediate taxability,
although they may affect the valuation of the includable income
Amount includable is value greater than zero although less than the premium
cost of $5,000
The stakes: tax now or tax later (time value of money)
A loose end:
o Suppose that B&L had simply given Drescher $5,000 in 1939 as a
cash bonus and that Drescher had then purchased the annuity on
his own. In that case, Drescher clearly would have to report as
income the $5,000. Should the result be different if the employer bus
the annuity and delivers it to Drescher?
o Note that taxing income in kind is equivalent to treating employees
as if he or she received income in cash and then used the cash to
buy an item in question
o Forced consumption: convenience of the employer rule
Benaglia v. CIR
Whether meals and lodging provided to a hotel manager for the proper
performance of his duties becase he was on call taxable income
No. Benefits merely incidental; imposed upon taxpayer as a working condition
for the convenience of the employer
Convenience of the employer rule idea behind doctrine is that in-kind benefits should
not be taxed if furnished by the employer to enable the employee to perform the job
satisfactorily (such benefits are known as working conditions)
Other examples of working conditions: spacious office of the successful law firm
partner, tastefully decorated with modern art; trips to France, enjoyed by airline pilot
who works the NY to Paris route; plays attended by theatre critic and with tickets
supplied by producers
Kleinwatchers conundrum
Benaglia codified (see Rev. Regs. 2-98 2.78.1(A)(2); and RAMO 1-87 2)
o De minimis benefits:
Exempt
Facilities and privileges of relatively small value
Furnished to employees as a means of promoting their health, goodwill, contentment
and efficiency

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They are compensation but by administrative practice before, and now

codified, they are exempt.
They are of small value that it is tedious if it be taxed
De minimis under the Regs.: (list is exclusive)
Monetized unused vacation leave credits of employees not exceeding 10 days
during the year and the monetized value of leave credits paid to government
officials and employees, (Rev. regs. 2-98 2.78.1(A)(3), as amended by Rev.
Regs. Nos. 8-2000 and 10-2000);
o If the benefit is received by the government official, there is no cap
as to the number of days
Medical cash allowance to dependents of employees not exceeding P750 per
employee per semester or P125 per month;
Rice subsidy of P1,500 or one sack of 50-kg rice per month amounting to not
more than P1,500;
Uniform and clothing allowance not exceeding P3,000 per annum;
Actual yearly medical benefits not exceeding P10,000 per annum;
Laundry allowance not exceeding P300 per month;
Employees achievement awards; e.g., length of service or safety
achievement, which must be in the form of tangible personal property other
than cash or gift certificate, with an annual monetary value not exceeding
P10,000 received by the employee under an established written plan which
does not discriminate in favor of highly paid employees;
Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
Flowers, fruits, books or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and
Daily meal allowance for overtime work not exceeding 25% of the basic
minimum wage
Travel and entertainment
Rudolph v. US
o Whether all-expenses paid trip to attend a convention (spouses
included in NYC) taxable income to the attendees
o One morning out of the entire week devoted to business meetings;
the rest of the week devoted to travel, sight-seeing, entertainment,
fellowship, or free time
o Value of trip income to the Rudolphs, the trip being in the nature of
a bonus, reward, and compensation for a job well done
o Test to determine whether cost of travel is income: dominant motive
and purpose (whether business or pleasure)
If purpose of the trip is mostly for business and leisure is
only incidental, it is excluded from taxable income
If the trip is a reward for a job well done, then it is
considered as taxable income
If the trip is mixed for business or pleasure, the dominant
purpose will prevail
If the trip is mostly for pleasure, the whole cost of
the trip will be taxable
o You cannot allocate a value for the
business part and the pleasure part
because it is not administratively feasible
- Dividends
o Ordinary dividend (cash or property)
Incurring payment based on the stock owned by the stockholder
o Liquidating dividend
The shareholder receives proportionate assets of the corporation undergoing
liquidation based on his stocks
The entire portion will not be taxed. Only a portion of it.
It is likened to a sale of shares
But instead of applying the rate on gains in sale of stock, the liquidating
dividend is taxed like an income
Only the gain is taxable

Marion Nerisse Kho
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o Stock dividend
If the stockholder receives stock dividends, it will be excluded from the taxable income
In the Marcomber case, the SC said that in issuing a stock dividend, the corporation
did not lose any assets
o Wise & Co. v. Meer: ordinary v. liquidating dividend
Determining element is whether the distribution was in the ordinary course of business
and with intent to maintain the business as a going concern, or after deciding to quit
with intent to liquidate
Ordinary dividend: if the distribution is the nature of a recurring return on stock
It is a periodic return on the shareholders capital
This is taxable
Liquidating dividend: if the corporation is really winding up its business or recapitalizing
or narrowing its activities, the distribution is treated as in complete or partial liquidation
and as payment by the corporation to the stockholder for his stock
What is at stake?
If ordinary dividend receipt of ordinary dividend then was not subject to
income tax (subject to income tax now at 10%)
If liquidating dividend amount in excess of the taxpayers cost basis is
taxable gain; if taxpayers cost basis exceeds the amount distributed, taxpayer
realizes a deductible loss
o Only the excess is taxable gain (or loss) because a liquidating
dividend is treated as a sale or exchange of stock
o Where a corporation distributes all of its assets in complete
liquidation in exchange for the surrender by shareholder of their
shares, a transaction takes place which is no different in essence
from a sale of the same stock to third persons
o CIR v. CA
Illustration of dividend equivalence rule (cancellation or redemption of previously
issued non-taxable stock dividends at such time and in such manner as to make the
distribution and cancellation or redemption essentially equivalent to a taxable dividend)
Tax-free classification of shares
Tax-free exchange of commons for pref under certain conditions
o CIR v. Manning
A stock dividend cannot be declared out of outstanding corporate stock, but only from
retained earnings
A case of constructive distribution of taxable dividends in the guise of a non-taxable
stock dividend distribution
The series of transaction was equivalent to a distribution of E&P to the stockholders,
who turned around and used the proceeds to purchase the shareholdings of the
deceased shareholder
B. Exclusions
- Life Insurance and Return of Premium
o Life insurance
Proceeds of life insurance paid to heirs of beneficiaries of insured exempt
Interest, however, on the proceeds taxable
Life insurance is the simplest form of estate planning
o Amounts received by insured as return of premium exempt
- Gifts, Bequests & Devices
o CIR v. Duberstein
Illustration of a non-taxable gift vs. taxable compensation for services rendered
Court found that the Cadillac was a recompense for Dubersteins past services, or an
inducement for him to be further service in the future
When is a payment a non-taxable gift and when is a payment a taxable compensation
for services rendered?
Mere absence of a legal or moral obligation to make such a payment does not
mean it is a gift
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

Marion Nerisse Kho
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o At any time there is a factor that the giver is obliged to give something
or anticipates economic benefit from giving, it is not considered as
gift
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
Look at the facts and circumstances to consider whether or not it is considered
as a gift
An illustration
Special bonuses or gratuities awarded by employer after evaluating
performance of previous year; usually payable by March of following year
Is this an amount given in recognition of, or in payment for, past services? (In
recognition of )
Is there a legal obligation to make the payment? Of is it purely discretionary
on management? (Purely discretionary; out of generosity)
Is the special bonus taxable? (Yes; would have been exempt if the taxpayer
prevailed in Dauberstein)
- Compensation for Injuries or Sickness
o Elements: (32(B)(4)):
Damages received;
Whether by suit or agreement;
On account of; and
Personal injuries or sickness
o Physical vs. Non-physical injury
Damages from physical injury example: the damages that the train company will pay
you when the train ran over your leg and your leg was amputated
Damages from non-physical injury example: moral damages
Damages from physical and non-physical injury are excluded from taxable income
In US, only physical injury are excluded
o Damages
Actual exclude
Moral exclude
Exemplary include
Because it is not on account of a personal injury or sickness but is on account
of bad behavior
Attorneys fees include
There is no return on human capital upon the payment of attorneys fees
Loss of earnings include
To compensate for what you should have earned
Taxed because the thing which was substituted is going to be taxed (in lieu
doctrine)
o OGilvie v. US: an interpretation of on account of (authority to say that exemplary damages
should be included in taxable income)
Whether the gross income exclusion provision applies to punitive damages receive by
a plaintiff in a tort suit for personal injuries
Held: Taxpayers punitive damages were not received on account of personal injuries;
hence gross-income-exclusion provision does not apply and the damages are taxable
Exclusionary provision applies only to those personal injury lawsuit damages that were
awarded by reason of, or because of, the personal injuries, and not to punitive damages
that do not compensate injury, but are private fines levied by civil juries to punish
reprehensible conduct to deter its future occurrence
o Compensation for emotional distress: non-taxable return of human capital theory
US v. Murphy
Whether compensation for emotional distress and injury to professional
reputation is taxable income (note: none of the award was for lost wages or
diminished earning capacity)
Held: not excludable because damages were not awarded on account of
personal physical injuries (she received the award on account of her mental
distress and reputation all loss, not her bruxism or other physical symptoms)
o If decided using Philippine law, it will be excluded by express
provision by the NIRC

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Application of in lieu of doctrine: in lieu of what were the damages awarded?

Was Murphys award of compensatory damages a substitute for normally
untaxed personal quality, good, or asset?
The damages were awarded to make Murphy emotionally and reputationally
whole and not to compensate her for lost wages or taxable earnings of any
kind. The emotional well-being and good reputation she enjoyed before they
were diminished by her former employer were not taxable as income
Compensation she received in lieu of what she lost cannot be considered
income
Not all receipts of money are income. Murphys compensatory award was not
received in lieu of something normally taxed as income
US v. Murphy (upon re-hearing): involuntary conversion theory; zero basis in human
capital
Award not excludable under IRC 104(a)(2)
Award is part of gross income as defined by IRC 61 (although Congress
cannot make a thing income which is not so in fact, it can label a thing income
and tax it, so long as it acts within its constitutional authority)
The tax upon the award is an exercise and not a direct tax subject to the
apportionment requirement of Article I, Section 9 of the Constitution. The tax
is uniform throughout the US and therefore passed constitutional muster
Murphys situation seems akin to an involuntary conversion of assets; she
was forced to surrender some part of her mental health and reputation in
return for monetary damages. Cf. 26 U.S.C. 1033 (property involuntary
converted into money is taxed to extent of gain recognized)
AR ($70k) basis (zero) = gain ($70k)
- Retirement Benefits, etc.
o Retirement benefits that are excluded
Retirement benefits based on the labor code
Retirement benefits based on a qualified retirement plan
o Retirement under the Labor Code (Art. 287) in the absence of a qualified retirement plan
Retirement upon reaching the retirement age established in the CBA or other applicable
employment contract
Upon reaching 60 years, but not beyond 65 years, which is the compulsory retirement
age
Has served at least 5 years
o Retirement benefits from a qualified retirement plan (32(B)(6)(a)): conditions for exemption
There is a reasonable private benefit plan
Retiring official or employee has been in the service of the same employer for at least
10 years
Retiring official or employee is not less than 50 years old at the time of retirement
Exemption benefit is availed only once
o If the person did not qualify for the qualified retirement benefit but qualified under the retirement
benefits under the labor code, the retirement benefit will be excluded even though the employer
is keeping a private retirement benefit plan and not the one under the labor code
o The qualified retirement benefit plan must be registered with the BIR
o Separation benefits from involuntary separation (always excluded) (32(B)(6)(b)): conditions for
exemption
Official, employee or their heirs received separation pay from employer
Separation is because of death, sickness, other physical disability, or for any cause
beyond the control of the official or employee
o Other exempt retirement benefits:
Those received by resident and nonresident citizens and aliens who come to reside in
the Philippines form foreign government agencies and other institutions, private or
public
Benefits from the USVA
SSS benefits
GSIS benefits including retirement gratuity received by government officials and
employees
o CIR v. CA
Terminal leave pay received by a government official or employee on the occasion of
his compulsory retirement from government service is exempt from income tax (and
consequently withholding tax compensation)

Marion Nerisse Kho
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In the exercise of sound personnel policy, the Government encourages unused leaves
to be accumulated. The Government recognizes that for most public servants,
retirement pay is always less than generous if not meager and scrimpy. A modest nest
egg which the senior citizen may look forward to is thus avoided. Terminal leave
payments are given not only at the same time but also for the same policy
considerations governing retirement benefits
o In Re: Bernardo Zialcita
Commutation or money value of accumulated leave credits is covered by exclusions
under 32(B)(6)(b) and (f) (i.e., separation beyond the control and/or retirement gratuity
received by government officials and employees)
Compulsory retirement is considered separation beyond the control of the employee,
hence, any amount review by reason of such involuntary separation (e.g., terminal
leave pay) is exempt
o IBC v. Amarilla
Taxpayers opted to retire pursuant to 1993 CBA (mandatory retirement age in CBA
was 60 years)
Received retirement benefits on a staggered basis (no taxes withheld)
After retirement, retroactive salary differential or employees not given to taxpayers but
instead was applied against the withholding tax liability of the taxpayers upon retirement
W/N retirement benefits received under the CBA exempt
No. No showing that CBA presented to the BIR for registration/ approval
- Miscellaneous
o Income derived foreign government
By virtue of reciprocity, they are exempt from income tax
CIR v. Mitsubishi Metal Corp.
Mitsubishi Metal not an agent/ conduit of Eximbank
Loan from Eximbank was made on its own independent capacity
Therefore, exclusion under 32(B)(7)(a) does not apply
o Income derived by the government or its political subdivisions to be exempt, income must be
from:
Public utility or
The exercise of any essential governmental function
If they exercise acts proprietary nature, it is subject to income tax
o Prizes and awards (in general subject to 20% tax) in recognition of religious, charitable,
scientific, educational, artistic, literary or civic achievement, provided:
Selection
Substantial future services
The cash prize of Pia Wurstback in Ms. Universe is not exempt because it does not fall
under the exemptions
o Prizes and awards in sports competition
The sport competition or tournament must be sanctioned by the relevant NSA
E.g., prizes and awards won by Olympians are exempt. But the prize and award by
Pacquiao in his fight is not exempt
Usually, professional competition are not exempt, only amateur competition (because
the NSA only sanctions amateur competition)
o 13th month pay and other benefits
Exclusion capped at P30,000 (now P82,000)
Excess is taxable
o Gains from redemption of shares in mutual fund
o Gains from sale of long-term bonds, debentures and other certificates of indebtedness
Nippon Life Ins. Co., Inc. v. CIR
Gains as the term is used therein in 32(B)(7)(g) does not include interest
since it clearly refers to gains from the sale of bonds, debentures, and other
certificates of indebtedness
NB: interest is periodic income derived from the forbearance of money; gain
from the sale of bonds is income derived from the conversion of an asset
NB: interest is income derived from the continuance of the bond investment;
gain from sale of bond is income derived from the termination of the bond
investment
DEDUCTIONS
A. In general

Marion Nerisse Kho
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-The rule is that the expense must be related to the business or trade or profession
o One notable exception to the rule that expenses must be related to business or trade are
donations to charitable institutions (by policy, they are exempt)
- The following are not deductible from gross income:
o Personal, living or family expenses
o Any amount paid out for new buildings or for permanent improvements, or betterment so, made
to increase the value of any property or estate
o Any amount expended in restoring property or in making good the exhaustion thereof for which
an allowance is or has been made
o Premiums on key-man insurance (36(A))
Keyman insurance is an insurance taken on the life of a keyman (e.g., the President,
CEO). The proceeds are given to the corporation not the heirs of they keyman
If the proceeds are given to the heirs, then it is not considered as a keyman insurance
(even though the insurance is taken on the life of a keyman). The premiums paid are
deductible
- The following are deductions from gross income
o For individuals with gross compensation income only:
PPHHI (34(M))
Personal exemptions (35)
The reason why they cannot claim itemized deductions because they do not incur
expenses in order to gain their compensation unlike a person who practices his
profession, such as a lawyer, who has to spend for his legal secretary, utility bills for
his firm, etc.
o For individuals with gross income from business or practice of profession
OSD (34(L))
Itemized deductions (34(A)-(J))
PPHHI (34(M))
Personal exemptions (35)
o For corporation
Itemized deductions (34(A)-(J))
OSD (34(L))
B. Expenses
- Personal v. Business
o Business expenses normally involved the following issues:
W/N the particular expense was ordinary and necessary
Whether the expenditure was a current expense or a capital investment
Whether the expense was incurred in business or for personal reasons
Almost all cases of business expense can be assigned to one or another of
these 3 categories
o Smith v. CIR
Taxpayers argues that since Mrs. Smith would have been unable to leave her child and
take a job but for the services of a nursemaid, the latters fee should be regarded as
a necessary business expense
If the nursemaids fee were allowed because essential to the taxpayers employment,
then by extension all consumption expenditures food, shelter, clothing, recreation
which enable taxpayers to carry on the days activities must become deductible as well
Yet these are the very essence of those personal expenses the deductibility of which
is expressly denied
The danger if the court accepts the argument will be the allowance of personal
consumption expenses as a deduction. The tax will not be based on income but
savings.
o Pevsner v. CIR
Test of deductibility: cost of clothing is deductible as a business expense only if:
The clothing is of a type specifically required as a condition of employment
It is not adaptable to general usage as ordinary clothing, and
It is not so worn
The clothing worn by entertainers, are they deductible?
In theory, they are. But from a conservative point of view, only deduct 50%
How about the body enhancements of actresses?
Arguably, it is related to the business of the person thus can be argued to be
deducted

Marion Nerisse Kho
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Why is it in the case of Benaglia, the court allowed the deduction of Benaglias lodging?
In that case, Benaglia was required to stay in the premises as a condition of his
employment
Technically, Benaglia and Pevsner have the same economic standing, but the
court decided differently because of statutory construction
o In the case of Benaglia, what is involved is taxability, thus
construction is against the government
o In the case of Pevsner, it involves deduction which is akin to
exemption thus construction is construed against the taxpayer
o Rudolph v. US
Deductibility of a combined business-pleasure trip depends on a subjective standard:
whether the taxpayers primary purpose was business or personal
o Schultz v. CIR
Entertainment expenses are deductible only if they are in fact ordinary and necessary
expenses for carrying on a trade or business and to the extent that they are primarily
social and personal in nature and bear no direct relation to the operation of a business,
such expenditures may not be deducted
Example of deductible entertainment expense: renting of a function room in a hotel as
a venue for negotiation with a client
This is very subjective
o NIRC 34(A)(1)(a)(iv): cap on entertainment expenses; non-deductibility of entertainment
expenses that are contrary to law, public morals, public policy or public order
1% for service oriented businesses
o NIRC 34(A)(1)(b): non-deductibility of bribes, kickbacks, and other similar payments
- Travel Expenses
o From the perspective of the employee, if the travel is for a job well done, it is included as part of
the gross income of the employee
o From the perspective of the employer, if the travel is necessary for its business, it is deductible
from its gross income
o Conditions for deductibility of travelling expenses:
Reasonable and necessary
Expense incurred while away from home
This will determine if the expense will be deductible
Expense must be incurred in pursuit of business; there must be a direct connection
between the expense and the carrying on of the trade or business of the taxpayer or of
his employer expense must be necessary or appropriate to the development and
pursuit of the business or trade
o CIR v. Flowers
Contention of CIR:
The word home must be understood to refer to the taxpayers place of
business (as opposed to taxpayers actual residence)
Held: although SC did not decide upon the meaning of home, it sustained the
disallowance in the ground that the expense in question had been incurred by the
taxpayer for his own convenience rather than for business reasons
Appropriate test for deductibility was whether the travel had been motivated by the
exigencies of business or by considerations of personal preference
Because the taxpayer could have chosen to live in Mobile, thereby avoiding
the need for travel, the expenses were found to be self-imposed and
personal
What is the bottom line of this case?
Commuting expenses, while certainly a matter of business exigency, have
never been deductible
o Commuting expense is the expense incurred in going to the place of
business
Daily commuting expenses is personal and not deductible
o Hantzis v. CIR
Held: deduction disallowed; Ms. Hantzis had no business home in Boston to be away
from
Taxpayer who pursues temporary employment away from location of his usual
residence but has no business connection with that location is not away from home
for purposes of travel expense deduction

Marion Nerisse Kho
Page 23
While Ms. Hantzis plainly occupied two homes during the summer months, the home
in Boston was maintained as a matter of personal choice rather than business necessity
it followed that her transportation and added living costs in NYC were not deductible as
travel expense
Hantzis merely confirms the holding in Flowers that long-distance commuting even
when combined with meals and lodging expense does not qualify as travel
- Current v. CAPEX
o Important to distinguish current and capital expense
Current expenses are fully deductible on the year in which it was incurred
Capital expenditures cannot be deducted on the year it was paid but must be distributed
to the life of the capital
If capital expenditure is incurred, the taxpayer must capitalize on its expense
and not expense it outright
o Statutory basis: non-deductible CAPEX: 36(A)(2)
Expenditures whose benefit extends beyond current taxable year not deductible
E.g. land and buildings, machinery and equipment, patents and trademarks
Present payment for future economic benefit should be capitalized rather than
deducted as a current expenses
CAPEX recovered by way of depreciation or amortization
Whether deductible current expense or non-deductible CAPEX is a question of timing:
deduct now or spread out
o Mt. Morris Drive-In Theatre Co. v. CIR:
Taxpayer constructed an open-air theatre on sloping land without including in the
construction any drainage system
Taxpayer spend $$8,224 to construct a drainage system extending into and over
adjacent land belonging to another in compromise of a pending lawsuit against it based
upon allegations that taxpayers use of its own property had caused accelerated and
concentrated drainage onto the adjacent land
Held: the cost of the drainage system was CAPEX and was not deductible either as an
ordinary and necessary business expense or as a loss
o Midland Empire Packing Co. v. CIR:
Issue was whether the cost of lining basement walls with concrete to prevent oil
seepage created by a neighboring refinery should be treated as a deductible repair or
a CAPEX
Held: deductible repair thus is considered current expense
The expense was unforeseen. Because of external factors, the taxpayer has to incur
expenses which is considered as current expense
o Mt. Morris and Midland Empire: distinguished
A case of replacement or addition
Cost incurred in response to an event somehow resembling a natural disaster (e.g. oil
seepage)
Need for drainage system foreseeable and obvious
Oil seepage unforeseeable
o INDOPCO, Inc. v. CIR
Whether certain professional expenses incurred by a target corporation in the course
of a friendly takeover are deductible by that corporation as ordinary and necessary
business expenses or CAPEX
Taxpayer: the capital expenditure must create to a separate and distinct asset for the
expense to be capitalized. In this case, there is no separate asset
Court: factor that the expense will result to a separate and distinct asset is usually
indicative of capital asset but not always
In this case, since the professional expenses will benefit the future of the corporation,
it must be capitalized
o CIR v. General Foods
Advertising to simulate the current sale of merchandise or use of services deductible
current expense
Advertising designated to stimulate the future sale of merchandise or use of services
CAPEX
- Ordinary and Necessary
o To be deductible under 34(A) and expenditure must not only be incurred in carrying on of . . .
[a] trade, business, or exercise of profession, but also must qualify as ordinary and necessary
o Welch v. Helvering

Marion Nerisse Kho
Page 24
Payment of anothers debt (restore the taxpayers credit and to reestablish his
reputation with other firms) is not ordinary, hence, not deductible currently
Efforts to establish reputation are akin to acquisition of capital assets and, therefore,
expenses related thereto are not business expense but CAPEX
o Atlas Consolidated Mining & Devt Corp. v. CIR
Fees paid to a P.R. firm to create a favorable image of the corporation in order to gain
or maintain the publics and the stockholders patronage CAPEX
Recurring stock listing fee paid to the stock exchange (not one-off) ordinary and
necessary
Litigation expenses incurred in defense or protection of title CAPEX
- Reasonable Compensation
o 344(A)(1)(a)(i) provides that the taxpayers business expenses include a reasonable
allowance for salaries, wages, and other forms of compensation for personal services actually
rendered
o C.M. Hoskins & Co., Inc. v. CIR
A case of disguised dividends
Reduction of corporate-level tax through deductible excessive compensation instead
of non-deductible dividends
The stakes
Illustration: BB owns all of the shares of Adult Entertainment Co. and also
serve as its president
The corporation usually earns about P5M a year before BBs salary
But since BB normally takes a reasonable salary of precisely the same
amount, the companys annual taxable income is customarily zero and it pays
no corporate income tax whatever
BB, of course, pays an individual tax on the salary he receives
Suppose, however, that 2005 was a specially good year and the corporations
pre-salary earnings balloon to P15M
BB is eager to get his greedy hands on the entire P15M for his personal use
BB has 2 options
o Pay himself the customary reasonable salary of P5M, then declare
the after-tax net income as dividends
o Pay himself the customary reasonable salary of P5M, then pay
himself an excessive bonus of P10M
Option 1 Option 2
Pre-salary Income 15,000,000 15,000,000
Less: regular salary 5,000,000 5,000,000
Less: bonus -NIL- 10,000,000
Taxable Income 10,000,000 -NIL-
Tax payments:
Corporate income tax 3,000,000 -NIL-
(P10Mx30%)
Tax on dividends 700,000 -NIL-
(P7Mx10%)
Tax on regular salary 1,600,000 1,600,000
(P5Mx32%)
Tax on bonus -NIL- 3,200,000
(P10Mx32%)
Total taxes paid 5,300,000 4,800,000
BBs Take Home (P15M 9,700,000 10,200,000
less taxes)
o Kuenzle & Streiff, Inc. v. Collector

Measure of reasonableness: facts and circumstances
- Year When Deduction Taken
o Can the taxpayer claim the expense in a different year? No
If the taxpayer is operating under cash basis accounting, the expense will be deducted
on the year it was paid

Marion Nerisse Kho
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If under accrual basis of accounting, the taxpayer will claim the deduction on the year
the expense was incurred
Even if the expense was not yet paid, as long as it is incurred, it can be
deducted
o Year in which deduction taken: paid or incurred during the taxable year
The taxpayer is required to claim the expense on the year it was paid or incurred
because it is possible that the taxpayer will just collect expenses to benefit him more
o Isabela Cultural Corp. v. CIR
Taxpayer may not claim as deduction in 1986 the cost of legal and auditing services
rendered in 1984 and 1985, although billed only and paid in 1986
All events test: expense must be claimed as a deduction when liability is (1) fixed and
(2) the amount can be determined with reasonable accuracy
C. Interest
- Requisites for deductibility:
o Paid or incurred within the taxable year
o Underlying indebtedness must be in connection with the trade or business or exercise of
profession
If not related to trade or business or profession, it cannot be deductible
If A , a sole law practitioner, took out a loan to buy a car for his family but incidentally
is used in his office, can the interest on the loan be deducted as interest expense?
No because the loan was taken out for personal reasons (family car)
The interest in the loan taken to buy machineries necessary for the business can be
deducted as interest expense
- PICOP v. CA
o The Tax Code does not prohibit the deduction of interest on a loan incurred for acquiring
machinery and equipment. Neither does the Tax Code compel the capitalization of interest
payments on such a loan
o NB: 34(B)(3) now gives the taxpayer the option to deduct currently or capitalized interest
incurred to acquire property used in trade, business or exercise of a profession
Claiming as current expense is beneficial only if there is an income that will be offset
by the expense. If no income, better to capitalize the expense
- Anti-tax arbitrage provision: interest otherwise deductible reduced by 38% of interest income subject to
final tax
o This was inserted because prior to the 1997 Tax Code, a lot of financing companies came up
with an arrangement that will maximize the tax benefit of the taxpayer through a back-to-back
loan
o Back-to-back loans: taxpayer takes out loan; uses proceeds to purchase government securities;
interest income from government securities subject to 20% FWT; interest expense on loans
deductible from gross income (tax benefit is 32%/35%); tax advantage is 15%
o Tax arbitrage avoided by imposing limit on deductible business expense
o Applies when taxpayer has interest income subject to final tax
- BIR Rul. 6-00 Limitation applies regardless of whether or not a tax arbitrage scheme was entered into
by the taxpayer or regardless of the date of the interest bearing loan and the date when the investment
was made, for as long as, during the taxable year, there is an interest expense incurred on one side and
an interest income earned on the other side, which interest income had been subjected to final withholding
tax
- Anti-tax arbitrage provision: illustration
o Interest income from time deposit in BPI in 2007: P100,000 (subject to 20%FWT)
Interest expense from business loan: P120,000
Formula: interest expense - 38% of intrest income subject to final tax = allowable
interest expense
P120,000 P38,000 = P82,000
o Taxpayer took out a loan for P1M; interest at 10%p/a
Uses P1M loan proceeds to purchase T-bills paying interest at 10% p/a, subject to 20%
final tax
For every P1.00 of interest income earned from T-bills, taxpayer pays tax of P0.20
For every P1.00 of interest expense claimed as a deduction, income tax liability is
reduced by P0.30
P0.30 tax benefit v. P0.20 tax paid = P0.10 tax advantage/ revenue leak
o With anti-tax arbitrage provision in place, taxpayer can deduct only P0.62 (P1.00 interest
expense less 38% of P1.00 interest income)

Marion Nerisse Kho
Page 26
Tax benefit of P0.62 interest expense is P0.186

Tax paid on P1.00 interest income is P.020
Tax loop hole is plugged by anti-arbitrage provision
- Non-deductible interest
o Prepaid/ advance interest of cash-basis individual
o Taxpayer and recipient of interest are related parties under 36(B)
Between family members
Between an individual and a corporation more than 50% in value of outstanding stock
is owned by or for such individual
Between 2 corporations more than 50% in value of outstanding stock is owned by or
for the same individual
Between grantor and fiduciary of a trust
Between fiduciary of a trust and fiduciary of another trust if the same person is a grantor
with respect to each trust
Between fiduciary of trust and beneficiary of such trust
o Interest to finance petroleum exploration (capitalized under special rules)
D. Taxes
- General rule: taxes paid or incurred in connection with the taxpayers trade, business or profession are
deductible
o E.g., real property tax, business tax, excise tax
- Exception: the following taxes are not deductible
o Income tax
o Foreign taxes, if taxpayer elects FTC (foreign tax credit)
o Donors and estate tax
o Special assessments
It is typically the LGU that imposes this but sir has not seen any special assessment
tax imposed by LGU
- Foreign Tax Credits
o Tax paid with another taxing jurisdiction with respect to income derive in foreign sources
Only two kinds of tax payer can claim this (resident citizen and domestic corporation)
o Resident citizens and domestic corporations are taxed on income from within and without the
Philippines (23(A) & (E))
o If a resident citizen or a domestic corporation derive both Philippine source and foreign source
income, it is possible that they may be subject to tax in more than one country
The right of a foreign country to tax income derived from any activity of a taxpayer within
its territorial boundary may coincide with the Philippines right to tax the same taxpayer
on the basis of citizenship or residence
Ex. fight purse of Manny Pacquiao earned in a boxing match in the US
The tax paid by Manny Pacquiao in US can be credited in his eventual tax
liability in the PH
o Result:
International double taxation exists when a single item of income is subject to income
tax by more than one country
o Remedies to eliminate or mitigate effects of double taxation:
Granting a credit for foreign tax paid (unilateral mechanism) - 34(C)(3), subject to the
limitation set forth in subsection (C)(4)
Allowing foreign taxes paid as a deduction against income (unilateral mechanism) -
34(C)(1)(b)
Income tax treaties (bilateral mechanism) - 34(B)(5)
o Foreign tax credit available only to resident citizens and domestic corporations (not available to
non-resident citizens, aliens and foreign corporation because they are not taxable on foreign
source income)
o FTC applies only if foreign source income and income tax on the foreign source income is paid
to another jurisdiction
o CIR v. Lednicky
An alien resident who derives income wholly from sources within the Philippines may
not deduct from gross income the income taxes he paid to his home country for the
taxable year
An alien residents right to deduct from gross income the income taxes he paid to a
foreign government is given only as an alternative to his right to claim a tax credit for

Marion Nerisse Kho
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such foreign income taxes; so that unless he has a right to claim such tax credit if he
chooses, he is precluded from said deduction
An alien resident is not entitled to tax credit for foreign income taxes paid when his
income is derived wholly from sources within the Philippines
E. Losses
- In General
o NIRC uses the term loss in three distinct ways: (all can be deducted from income)
1. Taxpayer parting of something of value (money or property) as a result of an identifiable
event e.g., abandonment of property (34(D)(7)), expenditure of funds or a casualty
(34(D)(1))
2. Excess of deductions over items of income e.g., NOL under 34(D)(3); such loss could
be composed of hundreds or even thousands of distinct items of income and deduction
3. Sale, exchange or other disposition of property Gain/ loss = AR AB (40)
o Types of deductible losses under 34(D):
Losses incurred in trade, business or profession (34(D)(1))
Casualty losses and losses from robbery, theft & embezzlement (34(D)(1))
NOL law allows carry-over of NOLs under certain conditions (34(D)(3))
Capital losses governed by 39
Losses from wash sales - 38
Wagering losses deductible only to the extent of wagering gains
Abandonment losses covered by special laws (e.g., PD 87)
- Casualty and Other Losses
o Losses under 34(D)(1): conditions for deductibility
Actually sustained in the year claimed
There must be a specific identifiable event that gave rise of the loss
Not compensated for insurance or other forms of indemnity
If there is compensation from insurance, there is loss on the amount not
covered by the compensation (e.g., loss is 100k, insurance is only 70k. 30k
can be considered as loss)
Property is connected with a trade, business or profession and loss arises from fire,
storm, shipwreck, or other casualty or from theft
Sworn declaration of loss filed within 45 days (Rev. Regs. 12-77); failure to file results
in disallowance
- NOLCO
o Net operating loss (NOL): excess of allowable deductions over gross income of the business in
a taxable year
o NOLs may be carried over as a deduction from gross income for the next three consecutive
taxable years immediately following the year of loss
If it cannot be utilized in three consecutive taxable year, it will expire at the end of the
third taxable year
o Provided, there has been no substantial change in ownership of the business or enterprise
o PICOP v. CA

Marion Nerisse Kho
Page 28
To grant PICOs claimed deduction would be to permit PICO to purchase a tax

deduction and RPPM to peddle its accumulated operating losses
PICOP established the rule that NOLCO is available only to the taxpayer which directly
sustained and accumulated the NOLs
o 34(D)(3) NOLCO Important rules (PICOP codified):
NOL is always available as a deduction in the hands of the taxpayer who sustained and
accumulated the NOL, regardless of the change in ownership (Rev. Regs. 14-01 2.2)
NOL is retained also if the taxpayer who sustained and accumulated the NOL is
involved in a merger and the same taxpayer is the surviving entity
If NOL transfers from the taxpayer who sustained and accumulated the same to another
taxpayer via a merger, consolidation, or business combination, and there is no
substantial change in owner ship (75% rule), NOL deductible in the hands of the
transferee
If NOL transfers from the taxpayer who sustained and accumulated the same to another
taxpayer via a merger, consolidation, or business combination, and there is substantial
change in ownership, NOL is lost
o NOLCO allowed only if there has been no substantial change in the ownership of the business
or enterprise . . .
o Illustration of substantial change in ownership rule (see NOLCO charts)
F. Bad Debts
- The taxpayer has a receivable from another person which he cannot collect anymore
- Requisites for deductibility
o There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable
o The same must be connected with the taxpayers trade business or practice of profession
o The same must not be sustained in a transaction entered into between related parties
enumerated under NIRC 36(B)
o The same must be actually charged off the books of accounts of the taxpayers as of the end of
the taxable year; and
o The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year
This is subjective. This is according to facts and circumstances
The taxpayer has to establish this with competent evidence
- When is an indebtedness actually ascertained to be worthless?
o No hard and fast rule; facts and circumstances
o Debt not worthless simply because it is of doubtful value or difficult to collect
o Deduction may not be postponed on the basis of a mere hope of ultimate collection
- Phil. Refining Co. v. CA
o Mere testimony of the accountant of the taxpayer explaining the worthlessness of the debt is
self-serving; worthlessness of debts sought to be deducted must be substantiated
o Mere allegations cannot prove the worthlessness of debts sought to be deducted; no
documentary evidence presented (e.g., collection letters, field reports, referral of letter to
lawyers, police report that owners bankrupt due to fire that engulf store or that the owner was
murdered, etc.)
o Steps to be undertaken generally by the taxpayer to prove that he exerted diligent efforts to
collect the debts
Sending statement of accounts
Sending of collection letters
Giving the account to a lawyer for collection
Filing a collection case in court
- Fernandez Hermanos, Inc. v. CIR
o No bad debt could arise where there is valid and subsisting debt
o Case involved advances made by one company to an affiliate
o Lender-taxpayer did not expect to be repaid
o In consideration for the advances, taxpayer entitled to 15% of net profits
o Thus, if there were no profits, there was no obligation to repay the advances
G. Depreciation
- What is depreciation?
o From a valuation standpoint: decrease in value of assets through the passage of time, wear
and tear or obsolescence

Marion Nerisse Kho
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o From financial reporting/ tax standpoint: allocation of the cost of an asset to period in which
the asset expected to be used
- Basilan Estates, Inc. v. CIR
o Basilan Estates, Inc. claimed deductions for the depreciation of its assets up to 1949 on the
basis of their acquisition cost
o As of 1/1/50 it changed the depreciable value of said assets by increasing it to conform with the
increase in cost for their replacement
o Accordingly, from 1950 to 1953 it deducted from gross income the value of depreciation
computed on the reappraised value
o Issue: Whether depreciation shall be determined on the acquisition cost or on the reappraised
value of the estate
o Held: Income tax law does not authorize the depreciation of an asset beyond its acquisition cost
o Rationale: The recovery, free of income tax, of an amount more than the invested capital in an
asset will transgress the underlying purpose of a depreciation allowance. For then what the
taxpayer would recover will be, not only the acquisition cost, but also some profit
- Limpan Investment Corp. v. CIR
o Depreciation is a question of fact (e.g., appropriate useful life to adopt)
Depreciation expense must be justifiable
o Bulletin F of the IRS has persuasive effect in Philippine jurisdiction
The BIR has adopted Bulletin F under a revenue issuance
o Taxpayer cannot accelerate precaution expense. It must correlate to the life of the asset
H. Charitable and other Contributions

- When are charitable and other contributions deductible? (Donations to other than the foregoing not
deductible)
o Donations to the government (including fully-owned GOCCs)
If not compliant with 2 requirements for full deductibility, still deductible but with
limitation (10%/5% cap)
PARTIAL FULL
Donation exclusively for public purpose Donation for exclusive use in undertaking
priority activities in: (i) education, (ii)
health, (iii) youth and sports
development, (iv) human settlements, (v)
science and culture, and (vi) economic
development
In accordance with NPP of NEDA
o Donations to (i) certain accredited domestic corporation or associations, (ii) social welfare
institution, and (iii) NGOs
PARTIAL FULL
Donations to (1) accredited domestic Donations to accredited NGOs
corporations or associations organized organized and operated exclusively for
operated and exclusively for (i) (i) scientific, (ii) research, (iii)
religious, (ii) charitable, (iii) scientific, educational, (iv) character-building and
(iv) youth and sports development, (v) youth and sports development, (v)
cultural or educational purposes, or (vi) health, (vi) social welfare, (vii) cultural or
rehabilitation of veterans; (2) social charitable purposes, or a combination
welfare institution; (3) NGOs thereof, no part of the net income of
which inures to the benefit of any private
individual
Direct utilization of the donation on or
before the 15th day of the 3rd month
following the close of the taxable year
Annual administrative expense must not
exceed 30%
Distribution of assets in case of
dissolution to a similar institution, to the
state for public purposes, and by the
court to another organization to be used
in manner than would best accomplish

Marion Nerisse Kho
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the general purpose of the dissolved

organization
o Donation to certain foreign institutions or internal organizations

- When is a donation deductible in full?
- When is a donation partially deductible?
o Up to 10%, if individual, and 5%, if corporation, of taxable income without the benefit of the
charitable contribution
- Donations to foreign institution or international organization which are fully deductible in compliance with
existing treaties or special law
- If donation is other than money, amount deductible is the acquisition cost of the property donated
I. R&D
- In general deductible as ordinary and necessary expenses during the year when R&D expenses paid
or incurred, provided
o In connection with the trade, business or profession
o Not chargeable to a capital account
- Election to defer deduction taxpayer may defer outright deduction and elect to spread out deduction
over a period not less than 60 months (beginning with the month in which taxpayer first realizes benefits
from such expenditure)
o In connection with the trade, business or profession
o Chargeable to a capital account, but not to property of a character which is subject to
depreciation or depletion
o Not treated as outright expense
- 34(l) and election to defer not applicable to the following
o Expenditure for acquisition or improvement of land (expense is capitalized as part of the cost of
the land)
o Improvement of property to be used in connection with R&D of a character subject to
depreciation or depletion
o Expenditure for exploration activities (minerals, oil & gas, etc.)
J. Pension Trust
- Reasonable private benefit plan:
o Defined benefit plan:
Benefits to be received by retiring employees are defined or fixed upon retirement
(e.g., 2 months salary for every year of service)
Employer bears investment risk, but will benefit from surpluses
Employer is required to pay the employee the amount of the retirement benefit
o Defined contribution plan:
Employers annual contribution to the pension plan is fixed
The amount of contribution is usually determined by actuaries
Individual accounts are set up for participants and retirement benefits consist of
aggregate contributions credited to individual accounts plus investment earnings
What the employee receives will depend on the performance of the fund
Employee bears investment risk and reward
- Normal cost annual employer contributions to the plan (whether defined benefit or defined
contribution)
o Deductible as ordinary and necessary business expense under 34(A)(1)
- Past service cost
o Deduction is spread out over a 10-year period
o Applicable under defined contribution plan
K. Additional Requirements for Deductibility

- 34(A)(1)(b) ordinary and necessary business expense must be substantiated by sufficient evidence
(e.g., O/Rs and other adequate business records); amount of expense and connection with trade,
business or profession
- 34(K) deduction will be disallowed if taxpayer fails to withhold taxes, as may be required by law or
regulations, and remit such withheld taxes to the BIR
L. Optional Standard Deduction

- In lieu of itemized deductions under 34, an individual subject to tax under 24 (except a nonresident
alien) may elect a standard deduction of 40% of gross sales/ receipt

Marion Nerisse Kho
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- In the case of a domestic corporation subject to tax under 24(A) and a resident foreign corporation
subject to tax under 28(A)(1), it may elect a standard deduction of 40% of gross income
- Intention to elect OSD must be made in the return (otherwise taxpayer will be considered to have elected
to claim itemized deductions)
- Advantages of OSD
o Simple
o Taxpayer need not submit financial statements
- If your itemized deductions are greater than 40% of your gross receipts, choose itemized deductions. But
if it is less than 40%, choose OSD
o Usually rental businesses are better off if they pick OSD
M. Premium Payments
- P2,400 per family, per year (or P200/month) for health and hospitalization insurance
- PPHHI may be claimed as a deduction, provided gross income of family does not exceed P250,000 for
the taxable year
TAXABLE INCOME
Gross Income (32(A)) P xxx
Less: Deductions (34; Itemized or OSD) and/or P (xxx)
Personal Exemptions (35)
Equals: Taxable Income (31) P xxx
- Individuals earning compensation income under an employer-employee relationship:

o Not entitled to itemized deductions or OSD
Gross compensation income (32(A)(1))
Less: PPHI (34(M))
Less: Personal and additional exemptions (35)
Equals: Taxable income (31)
- Resident citizens, resident aliens and nonresident citizens ETB or exercising a profession:
Gross income (32)
Less: Personal and additional exemptions (35)
Less: Itemized deductions or OSD (34)
Equals: Taxable Income (31)
- Domestic corporations; in general

Gross income (32)
- Resident foreign corporations; in general

Gross income (32)
- Nonresident aliens not ETB and NRFCs generally subject to 25%/ 30% flat tax on Philippine source
gross income
GENERAL PRINCIPLES OF INCOME TAXATION (23 memorize!)

- Resident citizens taxable on income derived from sources within and without the Philippines
- Nonresident citizens taxable only on Philippine source income
- OCWs/ OFWs taxable only on Philippine source income
- Aliens (whether resident or non-residents) taxable only on Philippine source income
- Domestic corporations taxable income derived from sources within and without the Philippines
- Foreign corporations (whether residents or nonresidents) taxable only on Philippine source income
INCOME ON INDIVIDUALS
A. Citizens and Resident Aliens
- Resident citizen a Filipino individual whose residence is in the Philippines
- Resident alien an individual whose residence is in the Philippines but who is not a citizen thereof
(22(F))

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- Nonresident citizen (22(E))

o Physically present abroad with intention to reside therein
o Leaves the Philippines to reside abroad as immigrant or permanent employee
o Works and derives income abroad; physically present abroad most of the time (i.e. at least 183
days in a taxable year)
o Arriving and departing nonresident citizens
o OCWs (23(C)) a special class (OFWs)
- BIR Rul. 33-00
o Distinguished between a nonresident citizen and an OCW for purposes of applying the most of
the time rule
o For the exemption on foreign source income to apply, an individual to be considered a
nonresident citizen must be physically abroad for at least 183 days
o As regards OCWs, the time spent abroad is not material for tax exemption purposes all that is
required is for the contract to be registered with the POEA
Always exempt on their foreign source income as long as contract is registered with the
POEA
The foreign source income of the OCW need not be from the employment contract. The
income can be from a sideline. It is still not taxed
- Garrison v. CA
o Taxpayers were born in the Philippines, repatriated temporarily to the US, returned to the
Philippines and presently residing herein by virtue of their employment in the US Naval Base in
Subic
o Some have married Philippine citizens, have children, and have purchased income producing
properties in the Philippines
o Taxpayers are resident aliens, not nonresident aliens
o The fact that all the taxpayers were born here, repatriated to the US and to come back, in the
latest 1967, and to stay in the Philippines up to the present time, makes the taxpayers resident
aliens not merely transient or sojourners
o The taxpayers intention to return to their domicile abroad is immaterial because they have
resided in the Philippines for quite a long time
- An alien who is physically present in the Philippines, who is not otherwise a transient or sojourner, is a
resident, even though he may have an intention to return to his domicile
- Who is a transient or sojourner?
o Transient or sojourner status determined by intention with regard to nature and length of stay
Length of stay if no definite intention as to length of stay or when to return to domicile
resident
Nature of stay
Does he have a definite purpose for his PH stay which can be promptly
accomplished? nonresident
If nature of purpose requires extended stay in PH resident
- Ramnani v. CIR
o Taxpayer won a money judgment in the amount of P65M
o CIR sought to impose a 30% flat tax on the money judgment on the ground that the taxpayer
was a nonresident alien not ETB
o Held: taxpayer is a resident alien (citing Rev. Regs. 2 5)
o The establishment of a home even temporarily here in the Philippines for the accomplishment
of a purpose even if he has the intention to return to his domicile abroad categorizes an individual
as a resident
o Taxpayer is an American citizen who frequently comes to the Philippines for the most part of the
year to oversee his various investments as shown by his passport entries
o The BI even approved the change of his status of admission from temporary visitor to immigrant/
resident alien under 13(e) of the Philippine Immigration Act
o Taxpayer has paid his Community Residence Certificates from 1987-1994
- 24
o Resident citizens
o Nonresident citizens
o Resident aliens
- 25
o Nonresident alien engaged in a PH trade or business (NRA-ETB)
o Nonresident alien not engaged in a PH trade or business (NRA-not ETB)
o Special aliens
- Special exemption of Minimum Wage Earners:

Marion Nerisse Kho
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o Workers in the private and public sectors being paid the statutory minimum wage
o Exempt from payment of income tax on their taxable income
o Holiday pay, overtime pay, night shift differential pay and hazard pay included in exemption
o If the minimum wage earner have other income, the other income is taxable
- Resident citizen
o 5-32% income tax on taxable income
o Other than Subsection (B), (C), and (D) income
o From all sources within and without the Philippines
- Non-resident citizens and OCWs
o From all sources within the Philippines
- Resident alien
- Nonresident aliens engaged in a PH trade or business
- Nonresident aliens not engaged in a PH trade or business
o 25% flat tax on all PH source FDAP income (including (B) income)
o (C) and (D) income subject to applicable rates
- Special aliens
o 15% of PH source gross compensation income
- Subsection (B) income (passive income)
o Interest, royalties, prizes and other winnings (IRPO), subject to final tax
o Cash and/or property dividends, subject to final tax
- Subsection (C) income (capital gain)
o Net capital gain on shares of stock of a domestic corporation not listed and traded in the PSE,
subject to final tax
- Subsection (D) income (capital gain)
o Capital gains from sales, exchanges or other disposition of real property located in the
Philippines, held as capital asset, subject to final tax
- Subsection (A) regular taxable income: compensation income, business and professional income, capital
gains not subject to final tax, passive income not subject to final tax, and other income (graduated rate of
5% - 32%)
o If not under subsection B, C, or D, it will fall under subsection A
- (B) Income Phil. source passive income subject to final tax
1. Interest from currency bank deposits, yield/ monetary benefit from deposit substitutes/ trust
funds 20% final tax
7.5% final tax if received by a resident from a FCDU
Exempt if received by a nonresident from an FCDU
Exempt if interest is from long term deposit or investment (5%/ 12%/ 20% if pre-
terminated before the 5th year)
2. Royalties 20% final tax (10% final tax if royalty arises from books, literary works and musical
compositions)
If royalty is active (instead of passive) income considered (A) regular income
(business income)
It is active income if the business of the person is to really earn royalties
3. Prizes and other winnings 20% final tax ((A) income, if P10,000 or less; exempt if PCSO and
lotto winnings)
4. Cash and/or property dividends from a domestic corporation 10% final tax
If dividends from a foreign corporation (A) income subject to 5% - 32% regular income
tax
o Deposit substitutes
Alternative form of obtaining fund from the public (20 or more lenders) other than
deposit
Through issuance, endorsement or acceptance of debt instruments for the borrowers
own account
For the purpose of relending or purchasing receivables and other obligations or
financing their own needs or the needs of their agent or dealer

Marion Nerisse Kho
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May include: bankers acceptances, promissory notes, repurchase agreements,

including reverse repurchase agreements, certificates of assignment or participation
and similar instruments with recourse
Excludes debt instruments for inter-bank call loans with maturity of not more
than 5 days
o Long term deposit or investment
Certificate of time deposit or investment
In the form of savings, common or individual trust funds, deposit substitutes, IMA and
other investments
With a maturity period of not less than 5 years
Issued by banks (not by NBFI and FCs)
- (C) Income capital gains from sale of shares subject to a final tax
o On sale of shares of domestic corporation not listed and traded in PSE (or listed but not traded
in PSE), held as capital asset:
On net capital gain not over P100,000 5%
On net capital gain in excess of P100,000 10%
o If the shares are sold by dealer in securities, gain derived from the sale thereof shall be
considered as an (A) income subject to the graduated rates of 5% - 32% (this is because the
shares are not held as capital asset; a dealer in securities holds shares as an ordinary asset)
o If the shares are of a foreign corporation, gain derived from the sale thereof shall be considered
(A) income
o If domestic shares are listed and traded in the PSE, sale is subject to the 0.5% stock transaction
tax on gross selling price or gross value in money
- (D) Income capital gains from sale of realty subject to a final tax
o On capital gains presumed to have been realized from the sale of real property located in the
Philippines and held as capital asset:
Subject to final tax of 6% based on gross selling price of FMV, whichever is higher
(irrespective of the loss)
Exception: sale of principal residence, under certain conditions, is exempt
from the 6% CGT
If the real property sold is located outside the Philippines income exempt if
resident alien and nonresident citizen; considered (A) income if resident
citizen
If real property sold is an ordinary asset, income shall be considered (A)
income subject to 5% - 32% graduated rates
Graduated income tax rate of 5% - 32% on taxable income, if realty sold to
the government or GOCCs, at the option of the taxpayer
What is the tax base for purposes of imposing the 6% capital gains tax on sale of realty
located in PH? Current FMV
How is current FMV determined? 6(E)
6(E) empowers the CIR to determine the FMV of real properties located in
each zone or area in the Philippines in consultation with competent appraisers
both from the private and public sectors
For tax purposes, the current FMV of property shall be the higher of the FMV
as determined by the CIR (generally the zonal value) or the FMV as
determined by the local assessor
- Since (B), (C), and (D) income are subject to final tax, they will no longer be included in the annual income
tax return filed on April 15
- Only regular (A) income is included in the annual income tax return
o Final tax typically withheld and remitted to the BIR by the income payor as withholding agent
to the BIR
o When withheld and remitted to the BIR, a final tax constitutes full and final payment of the income
tax due from the payee of the income
- (A) Regular Taxable Income income subject to the graduated rate of 5% - 32%
o Compensation income
o Business and professional income
o Capital gains not subject to final tax (i.e., non-(C) or (D) capital gains)
o Passive income not subject to final tax, and other income (i.e., non-(B) passive income)
o (A) income is aggregated and reported in the annual tax return. Income tax due computed, as
follows:
Gross Income (A) Income Pxxx
Less: Deductions and/or Personal Exemptions P(xxx)

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Taxable Income Pxxx

Multiplied by graduated rate: 5% - 32% 32%
Income Tax Due Pxxx
- Personal and additional exemptions
o Basic personal exemption P50,000 for each individual taxpayer
o Additional exemption for dependents P25,000 for each dependent not exceeding four
In case of married individuals, only one of the spouses shall claim the additional
exemption (generally the gather, unless he waives in writing in favor of the wife
If spouses legally separated, additional exemption may be claimed by spouse who has
custody of children
Dependent legitimate, illegitimate or legally adopted child chiefly dependent upon
and living with the taxpayer, not more than 21 years old, unmarried and not gainfully
employed, or if dependent, regardless of age, is incapable of self-support because of
mental or physical defect
- Change of status
o If taxpayer has additional dependents during taxable year claims full exemption
o If taxpayer dies during taxable year estate claims full personal and additional exemption as if
he died at the end of taxable year
o If dependents becomes 21 years old, marries or becomes gainfully employed during taxable
year taxpayer may still claim full exemption as if dependent became 21 years old, married or
became gainfully employed at the end of taxable year
- Personal exemption for NRA-ETBs
o Subject to reciprocity rule
B. Nonresident Aliens
- Nonresident alien individual whose residence is not within the Philippines and is not a citizen thereof
(22(G)
o Not physically present in the Philippines, but derives Philippine source income
o While physically present in the Philippines, merely a transient or sojourner
o Transient status determined by subjective standard, i.e., intent as regards length and nature of
stay
o One who comes to the Philippines for a definite purpose which in its nature may be promptly
accomplished considered a transient; if extended stay necessary to accomplish purpose not
a transient
- NRA-ETB
- How is an NRA-ETB taxed?
o Same manner as an individual citizen and a resident alien, on taxable income derived from
Philippine sources (25(A)(1))
o Meaning of ETB?
Deemed doing business NRA who comes to the Philippines and stay therein
for an aggregate period of more than 180 days during the calendar year
Must NRA be physically present in the Philippines for more than 180 days to be
considered as ETB?
No. Rule merely establishes a presumption. If NRA is clearly engaged in
trade or business, he will be considered as such even if his stay is 180
days or less
An alien to be considered as engaged in trade or business, the activity must be
considerable, regular and continuous
If isolated transaction, it is not engaged in trade or business
An alien usually prefer to be considered as engaged in trade or business so that
they wont be taxed with a higher flat rate
o Higgins v. CIR
Taxpayer was a French resident
Taxpayer devoted a considerable portion of his time to the oversight of his interest
and hired others to assist him in a New York office rented for that purpose
Taxpayers financial affairs were conducted through his NY office pursuant to his
personal detailed instructions
By cable, telephone and mail from France, taxpayer kept a watchful eye over his
securities
Taxpayer did not participate directly or indirectly in the management of the
corporation in which he held stock or bonds

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Taxpayer claimed as deductions the salaries and expenses incident to looking

after his investments
CIR disallowed the deductions
Contentions
Taxpayer the elements of continuity, constant repetition, regularity and
extent differentiate his activities from the occasional like actions of the
small investor
CIR mere personal investment activities never constitute carrying on a
trade or business, no matter how much of ones time or of ones
employees time they may occupy
Held: taxpayer was not carrying on a business to be entitled to the claimed
deductions
No amount of personal investment management would turn those activities into a
business
Mere investing, including the active management of ones own investments,
however extensive, does not constitute a trade or business
What is at stake here?
Whether the taxpayer, a nonresident alien, gets to claim deductions
incident to carrying on a business and be taxed on net income (i.e.,
taxable income)
Whether the taxpayer is subject to a flat tax of 30% (25% under NIRC
25(B)) on gross income (i.e., without the benefit of deductions)
o Weliner v. CIR (CTA case)
Aussie employed by Envirotech Corp., a NRFC
Taxpayer was Area Manager for Southeast Asian and Middle East
Salary as area manager paid directly to his bank account in the US
During period of employment, taxpayer travelled to the Philippines and stayed
therein for 191 days in 1975
His various visits to PH was BIRs basis to classify taxpayer as NRA-ETB
Taxpayers defense: no taxable PH source income since his salary as area
manager was paid in the US
Two types of NRA-ETB
Nonresident alien engaged in a trade or business in the Philippines
Nonresident alien deemed doing business in the Philippines (180-day
rule)
o Meaning of engaged in trade or business
Whether a NRA is ETB involves examining Philippine activities carried on directly
by the NRA or Philippine activities carried on by employees, agents or other
representatives of the NRA
Engaging in trade or business in the Philippines involves the process of producing
or seeking to produce income from actively engaging in business activities, as
distinguished from merely owning income-producing property (NB: Higgins
involved passive investments, although the taxpayer actively managed his passive
investments)
The classic examples of a trade or business are situations in which the taxpayer
is engaged in the marketing of goods and services
Thus the manufacture and sale of automobile is a trade or business
But the ownership of shares of a company that manufactures and sells
automobiles is generally not a trade or business (unless the taxpayer is
a dealer in securities)
As applied to NRAs, a Philippine trade or business will be found to exist if there
are REGULAR, CONTINOUS, and CONSIDERABLE business activities
Therefore, isolated and sporadic transactions will not usually be
construed as the conduct of a trade or business
o (B) Income Phil. source passive income subject to final tax
1. Interest from currency bank deposits, yield/ monetary benefit from deposit
substitutes/ trust funds 20% final tax
Interest received from FCDU exempt
Exempt if interest is from long term deposit or investment (5%/ 12%/ 20%
if pre-terminated before the 5th year)

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2. Royalties 20% final tax (10% final tax if royalty arises from books, literary works
and musical compositions)
If royalty is active (instead of passive) income considered (A) regular
income (business income)
3. Prizes and other winnings 20% final tax (Category (A) income, if P10,000 or less;
exempt if PCSO and lotto winnings)
4. Gross income from cinematographic films 25% final tax
5. Cash and/or property dividends from a domestic corporation 10% final tax
o (C) and (D) Income capital gains from sale of domestic shares and realty located in the
PH held as capital assets subject to final tax; same as citizens and resident aliens
Since subjection (B), (C) and (D) income are already subject to final tax, they will
no longer be included in the annual income tax return filed on April 15
Only subsection (A) income is included in the annual income tax return
o (A) Income income subject to the graduated rates of 5% - 32%
1. Compensation income
2. Business and professional income
3. Capital gains not subject to final tax (i.e., non-category (C) and (D) capital gains)
4. Passive income not subject to final tax, and other income (i.e., non-category (B)
passive income)
Subsection (A) income is aggregated and reported in the annual tax return
Tax due computed as follows: Gross income (Category A) deductions personal
and additional exemptions = taxable income (which is then subjected to the 5% -
32% graduated rate under 24(A))
- NRA-Not ETB
o How are NRAs not ETB taxed?
They are subject to a 25% flat tax on the entire income received from Philippine sources
(i.e., no deductions or personal/ additional exemptions allowed)
Includes interest, cash and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration, emoluments, or other
fixed, determinable, annual or periodic or casual gains, profits, and income
and capital gains (commonly referred to as FDAP income)
Capital gains from the sale of shares of stock (C income) and realty (D income) are
taxed in the same manner as citizens and resident aliens
The NIRC defines FDAP income subject to the 25% flat tax by specifically listing a
series of income forms that are usually of a recurring nature, such as interest,
dividends, rents and royalties
The statutory definition adds the encompassing (but not defined) phrase and other
fixed and determinable annual or periodical income
Questions: if the income payment is not annual or periodical, does it prevent the
income payment from being classified as FDAP income subject to the 25% flat tax?
o CIR v. Wodehouse
Taxpayer, the popular author who created the Jeeves series, received a lump sum
payment from a US publisher for an exclusive serial or book right throughout US in
relation to a specified original story . . . ready to be copyrighted.
Taxpayer argued that (i) the payment received was not a royalty but rather the proceeds
of a sale of property interest in a copyright and (ii) the payment was made in a lump
sum and, therefore, was not fixed and determinable annual or periodical gains, profits,
and income . . .
The words annual and periodical are merely generally descriptive of the character
of the gains, profits and income derived from the outright sale of property
Held: payment was a royalty; payment was FDAP income
Once it has been determined that [the transaction as not a sale and that] the receipt of
the [taxpayer] would have been required to be included in his gross income for federal
income tax purposes if they had been received in annual payments, or from time to
time, during the life of the respective copyrights, it becomes clear that the receipt of
those same sums by him in a single lump sum as payments in full, in advance, for the
same rights to be enjoyed throughout the entire life of the respective copyrights cannot,
solely by reason of the consolidation of the payment into one sum, render it tax exempt
- What are the special classes of alien?
o Who are they?
Alien individual employed by an ROHQ/ RHQ
Alien individual employed by an OBU

Marion Nerisse Kho
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Alien individual employed by a petroleum service contractor or subcontractor

o How are they taxed?
15% in gross compensation income
Any other Philippine source income subject to the pertinent income tax
o Who else are entitled to the 15% preferential tax?
Filipinos employed and occupying the same position as the special alien
INCOME TAX ON DOMESTIC CORPORATIONS

- There is a two level of taxation when one invests in a company. The first is a tax on the income of the
corporation. Then the dividends that the shareholder receives will also be taxed (as his personal income)
aside from the income tax imposed on the corporation
A. Definition
- The law did not expressly define what a corporation is. Since corporation law have requirements to be
considered as corporation, tax laws follow such
- The term corporation
o Includes
Partnerships, no matter how created or organized, etc.
Tax laws define partnership using civil code
o Does not include (they are considered as pass-through entities because they are not taxed as
a corporate level but will only be taxed if the members receive their share from the partnership)
GPPs (general professional partnership)
JV or consortium formed for the purpose of (i) undertaking construction projects;
engaging in (ii) petroleum, (iii) coal, (iv) geothermal, and (v) other energy operations,
pursuant to an operating or consortium agreement under a service contract with the
government
- What is a GPP?
o Partnerships formed by persons
o For the sole purpose of exercising their common profession
If the group of people consist of lawyers, accountants, and engineers, it will not be
considered as GPP, but as a corporation in taxation
o No part of income is derived from engaging in any trade or business
o Place of incorporation/ creation rule determines whether a corporation is domestic or foreign
- AFISCO Ins. Corp. v. CIR
o Pursuant to reinsurance treaties, a number of local insurance firms formed themselves into a
pool in order to facilitate the handling of business contracted with a nonresident foreign
reinsurance company
o May the clearing house or insurance pool so formed be deemed a partnership (PRS) or an
association that is taxable as a corporation under NIRC?
o Should the pools remittances to the member companies and to the said foreign firms be taxable
as dividends?
o Held: pool considered a taxable PRS subject to tax as a corporation; remittances by the pool to
the member companies and the nonresident reinsurer taxable dividends
o Factors cited by the court in concluding that the pool was taxable corporation
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
The pool functions through an executive board, which resembles the board of directors
of a corporation, composed on one representative for each of the crediting companies
Work of the pool is indispensable, beneficial and economically useful to the business
of the ceding companies and the nonresident reinsurer, because without it they would
not have received their premiums; profit motive or business is, therefore, the primordial
reason for the pools formation
- Pascual v. CIR
o Taxpayer bought 5 parcels of land in 1966
o Taxpayer sold 2 parcels in 1968; sold the 3 remaining in 1970
o Taxpayer realizes profit on the sales; paid CGT individually on the income realized from the
sales
o CIR assessed the taxpayer for having formed a taxable PRS
o Held: taxpayer did not form an unregistered PRS subject to tax as a corporation
o No evidence that taxpayer entered into an agreement to contribute money, property or industry
to a common fund, and that they intended to divide the profits among themselves
o The sales of the parcels of land were merely isolated transactions

Marion Nerisse Kho
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o The sharing of returns does not itself establish a PRS W/N the persons sharing therein have a
joint or common right or interest in the property
- Obillos v. CIR
o Taxpayers, 4 brothers and sisters, acquired 2 lots from their father
o After having held the 2 lots for more than a year, the taxpayers resold them to third parties
o Taxpayers derived from the sale a total profit of P134k or P33k for each of them; they treated
the profit as a capital gain and paid an income tax on one-half thereof
o CIR assessed the taxpayers corporate income tax on the P134k profit, and dividend tax on the
P33k distributive shares of the taxpayers on the P134k profit
o CIR acted on the theory that the taxpayers had formed an unregistered PRS or JV taxable as a
corporation
o Held: it is error to consider the petitioners as having formed a PRS under art. 1767 of the Civil
Code simply because they allegedly contributed P178k to buy the 2 lots, resold the same and
divided the profit among themselves
o Taxpayers had no intention to form PRS; they were co-owners pure and simple. To consider
them as partners would obliterate the distinction between a co-ownership and a PRS; taxpayers
were not engaged in any JV by reason of that isolated transaction
o Taxpayers 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 co-ownership
o 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
- Ona v. CIR
o Taxpayer, a father and his 5 children, inherited property from decedent wife consisting of 10
parcels of land and 6 houses
o While court approved the partition of the properties, no attempt was made to actually subdivide
the properties
o Instead, from 1944 to 1955, the properties remained under the management of the father who
invested and re-invested the properties and the income derived therefrom (father invested/ re-
invested in real property and securities)
o As a result the properties and the investments gradually increased
o CIR assessed taxpayers for deficiency income on the theory that they formed an unregistered
PRD
o Held: taxpayers formed a taxable PRS
o Taxpayers did not, contrary to their contention, merely limit themselves to holding the properties
inherited by them
o From the moment taxpayers allowed not only the incomes from their respective shares of the
inheritance but event he inherited properties themselves to be used by the father as a common
fund in undertaking several transactions or in business, with the intention of deriving profit to be
shared by them proportionally, such act was tantamount to actually contributing such incomes
to a common fund and, in effect, they thereby formed an unregistered PRS
B. Income Tax Rate and Base

- 30% income tax on taxable income
- Other than (B), (C), and (D) income subject to final tax
- From sources within and without the Philippines
Gross income (excluding (B), (C), and (D) income subject to final tax Pxxx
Less: itemized deductions or OSD (Pxxx)
Equals: taxable income Pxxx
Multiplied by: normal income tax rate 30%
Income tax due: Pxxx
- (B) Income Phil. sources passive income subject to final tax

funds 20% final tax
Interest received from FCDU 7.5%
2. Royalties 20% final tax
If royalty is active (instead of passive) income considered (A) business income
subject to 30% normal income tax
3. Cash and/or property dividends received by a domestic corporation from another domestic
corporation exempt (if received from a foreign corporation, considered ordinary (A) income)

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- (C) Income capital gains from sale of domestic shares not listed and traded in PSE subject to final tax;
same as citizens and resident aliens (5%/ 10% CGT)
- (D) Income capital gains presumed to have been realized from the sale of realty located in the
Philippines and held as a capital asset; same as citizens and residents (i.e., 6% CGT on gross selling
price or current FMV under Sec. 6(E))
- (A) Income income subject to the normal income tax of 30%
1. Business income
2. Capital gains not subject to final tax (i.e., non-category (C) capital gains)
3. Passive income not subject to final tax, and other income (i.e., non-category (B) passive income)
o (A) income is aggregated and reported in the annual income tax return
o Beginning on the 4th year of operations, however, the tax is 30% normal tax or 2% MCIT,
whichever is higher
C. MCIT
- When does 2% MCIT commence to be imposable?
o Beginning on the 4th taxable year following the year in which such corporation commenced its
business operations
o Bank that re-opened after cessation of business is entitled to 4-year leeway (The Manila Banking
Corp. v. CIR)
- What triggers the imposition of the 2% MCIT?
o When MCIT is greater than the normal corporate income tax imposed under 27(A)
o Excess MCIT can be carried-over and credited against normal income tax for the 3 year
immediately succeeding taxable years
- What is the tax base for purposes of imposing the 2% MCIT?
o Gross income (see definition depending on the business concern)
- Who are exempt from MCIT
o Those not subject to the 30% normal income tax rate (e.g., international carriers, OBUs, ROHQs,
petroleum service contractors, PEZA and SMBA enterprises, etc.)
D. Gross Income Tax

- The President, upon recommendation of the Sec. of Finance, may, effective 2000, allow domestic
corporations the option to be taxed on gross income, as follows:
o The tax is 15%
o Certain economic conditions are satisfied (tax and VAT effort ratio relative to GNP [20% and
4%], income tax ratio to total revenues of 40%, and 0.9% ratio of Consolidated Public Sector
Financial Position to GNP)
Never been used since enactment because the economic conditions are not satisfied
o Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%
o Shall be irrevocable for 3 consecutive years during which the corporation is qualified under the
scheme
- Gross income, for the purposes of the GIR is:
o For trading or manufacturing concerns, gross profit from sales; and
o For services concerns, gross receipts less sales allowances and discounts
E. Proprietary Educational Institutions and Hospitals

- Proprietary educational institutions and non-profit hospitals entitled to 10% preferential tax on taxable
income, except those covered by 27(D) (i.e., passive income, CGT, income from FCDUs)
- However, if gross income from unrelated trade, business or other activity exceeds 50% of the total gross
income derived by such educational institutions or hospitals from all sources, 30% regular income tax rate
applies on entire income
F. GOCCs
- General rule subject to corporate income tax
- Exception the following GOCCs are exempt from corporate income tax:
o GSIS
o SSS
o PHC
o PCSO
o Or other GOCCs if provided in their charter
INCOME TAX ON RESIDENT FOREIGN CORPORATIONS

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A. Definition
- When is a corporation considered foreign?
o When it is not domestic (22(D), in relation to subsection (C))
It is a domestic corporation is one that is created under Philippine laws
If not created under Philippine laws, it is a foreign corporation
- When is a foreign corporation considered to be a resident?
o When it is engaged in trade or business within the Philippines (22(H))
B. Engaged in Trade or Business

- When is a foreign corporation considered as engaged in a Philippine trade or business?
o See 3(d), FIA 1991, as implemented by 1(f), FIA 91 IRR
- Island Power Corp. v. CIR
o A foreign corporation that enters into an isolated transaction is not engaged in a Philippine trade
or business
C. Income Tax Rate and Base

- How are resident foreign corporations taxed, in general?
o Taxable on Philippine source income only; taxable on a net basis (i.e., entitled to deductions)
- (B) Income Phil. sources passive income subject to final tax
funds 20% final tax
Interest received from FCDU 7.5%
2. Royalties 20% final tax
If royalty is active (instead of passive) income considered (A) business income
subject to 30% normal income tax
3. Cash and/or property dividends received by a domestic corporation from another domestic
corporation exempt (if received from a foreign corporation, exempt foreign source income)
4. Income derived by an FCDU (i) from foreign currency transactions with local commercial bank
and branches of foreign banks, (ii) income from other depository banks under the FCDS and (iii)
interest income from foreign currency loans with residents (28(B)(7)(b), as amended by RA
9337)
10% final tax
Exempt if interest income on foreign currency loan is obtained from OBUs and FCDUs
All the transactions of FCDU are dealing with foreign currency. It has a special tax rate
FCDU itself is exempt from their offshore income
Offshore income is obtained from an OBU, FCDU or non-resident
Onshore income income from dealings with resident citizens
- (C) Income capital gains subject to final tax; same as domestic corporation
- There is no 6% CGT for foreign corporation
- (A) Income income subject to the normal income tax of 30%
1. Business income
2. Capital gains not subject to final tax (i.e., non-category (C) capital gains)
3. Passive income not subject to final tax, and other income (i.e., non-category (B) passive income)
o Category (A) income is aggregated and reported in the annual income tax return
o Beginning on the 4th year of operations, however, the tax is 30% normal tax or 2% MCIT,
whichever is higher
D. Special Resident Foreign Corporation

- International carriers
o What is the rate and base applicable to international carriers doing business in the Philippines?
2% of gross Philippine billings (28(A)(33))
o In the case of international airlines, how is GPB defined?
Gross revenue from carriage of persons, excess baggage, cargo and mail
Originating from the Philippines
If the flight did not originate from the Philippines, it is not considered as gross
Philippine billing
Most important requirement
GPB can apply to an online carrier
o An online carrier is a carrier who is allowed to land in the Philippines
An offline carrier will never be subject to tax of GPB
o If a carrier has a general sales agent in the Philippines and sells a
flight covering offline flights, by virtue of the definition, they should

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not be considered as doing business in the Philippines. But the SC

decided (British Airways case) that the carrier is a resident foreign
corporation because the service that creates the income arises from
the Philippines
o Bello: they should not be taxed with income tax or GPB tax because
the service is done outside of the PH
Continuous and uninterrupted flight
If the layover is less than 48 hours, the flight is considered as uninterrupted
If the layover is more than 48 hours, the flight is considered interrupted, thus
cannot be considered as GPB
Irrespective of the place of sale or issue and place of payment of passage document
Tickets revalidated, exchanged and/or indorsed to another international airline shall
form part of GPB if the passenger boards a plane in a port or point in the Philippines
If a flight originates from the Philippines, but transshipment takes place at any port
outside the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of transshipment
shall form part of GPB (28(A)(3)(a))
o Examples
o Are international carriers entitled to deductions? (No)
o In the case of international vessels, how is GPB defined?
Gross revenues from passenger, cargo and mail
Originating from the Philippines up to final destination
Regardless of the place of sale or payment of the passage or freight documents
(28(A)(3)(b))
- OBUs
o How are OBUs taxed?
Income from foreign currency transactions with nonresidents, other OBUs, local
commercial banks, branches of foreign banks authorized by the BSP exempt
Interest income derived from foreign currency loans granted to residents (other than
OBUs, local commercial banks, branches of foreign banks authorized by the BSP)
10% final tax
- RHQs and ROHQs
o What is an RHQ?
A branch established in the Philippines by MNCs
Do not derive or earn income from the Philippines (thus, exempt from income taxation)
Acts as supervisory, communications and coordinating center for affiliates, subsidiaries
or branches in the APAC Region and other foreign markets
o What is an ROHQ?
A branch established in the Philippines by MNCs
Derived income from the performance of certain qualifying services
Subject to 10% preferential income tax on taxable income (thus entitled to deductions)
E. BPRT (Branch Profit Remittance Tax)

- Effectively connected
- Branch and head office is considered the same entity
- Passive (FDAP) income, generally not effectively connected
- To be effectively connected it is not necessary that the income be derived from the actual operation of
taxpayer-corporations trade or business; sufficient that the income arises from primary business
- There is a 15% branch profit remittance tax if the branch emits its revenue to the head office
- If the income is not effectively connected to the nature of business and such is remitted to the head office,
it will not be subject to tax
o It is not effectively connected if the branch receives dividends from a domestic corporation it
invested in
INCOME TAX ON NONRESIDENT FOREIGN CORPORATION

A. Income Tax Rate and Base
- When is a foreign corporation not considered to be a resident?
o When it is not engaged in a Philippine trade or business
- How are NRFCs taxed, in general?
o 30% flat tax on FDAP income
- Marubeni Corp. v. CIR
o Marubeni both an RFC and a NRFC at the same time

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- N.V. Reederij Amsterdam and Royal Interocean Lines v. CIR

o In order that a foreign corporation may be considered engaged in trade or business, its business
transactions must be continuous. A casual business activity in the Philippines by a foreign
corporation, as in the present case, does not amount to engaging in trade or business in the
Philippines for income tax purposes
o Touching port in the Philippines 2x (in 1963 and 1964, lasting for a month each stop) to load
cargo mere isolated transactions
B. Special Nonresident Foreign Corporation

- Non-Resident Cinematographic Film Owner, Lessor or Distributor
25% on gross income from Philippine sources
- Non-Resident Owner or Lessor of Vessels Chartered by Philippine Nationals
4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens
or corporations, as approved by MARINA
o E.g. Ferries used to transport personnels from land to the oil rig
- Non-Resident Owner or Lessor of Aircraft, Machinery and Other Equipment
7.5% of gross rental or fees
- It is possible for a non-resident foreign corporation not present in the Philippines to be taxed if it leases
equipment
C. Tax on Certain incomes of NRFCs

- Interest on foreign loans 20% final tax
- Intercorporate dividends (dividends received by a NRFC from a domestic corporation)
o General rule: 30% flat tax (28(B)(1))
o Exception: 15% final tax under the tax-sparing provision
- What is the tax sparing provision?
o Dividends received by a NRFC from a domestic corporation is entitled to the reduced rate of
15% subject to the following conditions:
Domiciliary allows a tax credit of deemed-paid taxes
The tax credit allowable by the domiciliary country is at least 15% (which represents
the difference between the 30% flat tax and the 15% reduced tax)
- What is the rationale of the tax sparing provision?
o To encourage investments in the Philippines
o Illustration
USCo owns 100% of PhilCo; PhilCo declares P100 cash dividend to USCo
No tax-sparing provision: P100 dividend taxed at 30%, or P30
With tax sparing: Philippines willing to tax dividends at 15%, leaving net dividend of
P85
If US taxing the full P85, no reason why Philippines should reduce tax
If US still taxing the full P85, the Philippines might as well collect the full P30 tax, to
prevent the tax from being effectively turned over from RP to US
However, if US shall allow a credit against the tax due on the dividends of at least P15
(which is equal to the P15 tax actually paid in RP), US investors given incentive to
invest in RP
Why should US investors invest here? Because tax rate is reduced from 30% to 15%
and at the same time they are credited against their US tax an amount equal to taxes
paid in the Philippines
- (Subsection C income) Sale of shares in a domestic corp. 0.5% STT or 5%/ 10% CGT
o A and B are both NRFC. A owns stocks in a domestic corporation. A sells the stocks to B in a
foreign corporation. Is the sale taxable?
Yes. There is a Philippine source income (since the sales sold are from a domestic
corporation) thus corporation A is taxed. The BIR enforces taxation on NRFC generally
through withholding tax
The BIR will require the Corporate Secretary to require tax clearance before he
transfers the shares to corporation B
- Income covered by tax treaties special rates apply
IAET (Improperly Accumulated Earnings Tax)

- What is the purpose of the IAET?

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o To compel distribution of taxable dividends by imposing a penalty in case of unreasonable

accumulations of earnings and profits
If it is reasonable, not subject to IAET. It is reasonable if it is for the reasonable means
of business. There must be sufficient justification for retention
o Typical holding company set up
- When will a corporation be liable for IAET?
o When the corporation is formed or availed for the purpose of avoiding the dividend tax
o By permitting earnings to accumulate unreasonably instead of being distributed to avoid dividend
tax
o IAET usually applies to closely held corporations
Close corporations are corporations where 50% of the stocks are owned by less than
20 individuals.
- Who are not covered by IAET?
o Publicly held corporations, banks and other non-bank financial intermediaries, and insurance
companies
- What are indicators of improper accumulation
o That the corporation is a holding or investment company shall be prima facie evidence of
improper accumulating earnings
o Allowing earnings to accumulate beyond the reasonable needs (including the reasonably
anticipated needs) of business is determinative of the purpose to improperly accumulate tax
unless the contrary is proven by a preponderance of evidence
- When is there accumulation of earnings beyond the reasonable needs of the business?
o No hard and fast rule (facts and circumstances); taxpayers and BIR often disagree
o Under RR 2, an accumulation of profits (including undistributed profits of prior years) is
unreasonable if it is not required for legitimate business purposes
o Examples of legitimate business purposes:
Additional working capital
Expansion, improvement and repairs
Debt retirement
Acquisition of related business
Anticipated losses or reverses in business
o Where retention of profits is for legitimate business needs, the immediacy test applies, i.e., that
the profits are applied not too long from the time of retention of profits
It is not enough to just identify the purpose for retention but must identify specific steps
to achieve the purpose
There must be a certain time when the retained surplus will be used
o Consistent with Corp. Code, retention of profits not exceeding 100% of paid-in capital is not
improper accumulation
- When is IAET due?
o IAET not a self-assessed tax, meaning it is not computed and applied by corp. itself in its ITR
for the taxable year
o BIR assesses the IAET on the basis of its findings that there has been improper accumulation
- The Manila Wine Merchants v. CIR
o Failure to pay 60% of its surplus as dividends was considered as improperly accumulating
earnings. That the surplus was used for the purchase of US Treasury bonds allegedly to finance
importation and to answer for future expansion plans did not exempt taxpayer from IAET
o Under the immediacy test, the investment of profits in unrelated businesses is usually indicative
of accumulation beyond the reasonable needs
o Also, the taxpayer was unable to show a concrete plan for future expansion that would have
justified its investing the surplus in bonds a definite plan and steps taken towards the
achievement of the plan are essential
- CIR v. Tuason
o Tuason Inc. was held to be liable for improperly accumulating tis earnings of over P3M. Its
defense was that it needed the surplus for future investment. However, out of that P3M, only
P700k was actually used for the purpose
o There was a presumption that Tuason Inc. was only a holding company because it merely
subdivided large lots and sold them at a profit and most of its income was derived passively.
Tuason failed to recut this presumption thus making it liable
- Cyanamid Phil., Inc. v. CA
o Current assets to liabilities ratio used to resolve question of whether accumulation of profits to
fund increase in working capital is reasonable
- BIR Rul. 25-02

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o Individual shareholders of USCo own proportionately shares in RPCo (wholly owned sub of
USCo)
o Ownership of a domestic corporation to determine whether it is a closely held corporation or a
publicly held corporation is ultimately traced to the individual shareholders of the parent company
o Where at least 50% of outstanding capital stock or at least 50% of the total combined voting
power in a corporation is owned directly or indirectly by at least 21 or more individuals, the
corporation is considered publicly-held
TAX EXEMPT CORPORATIONS

- What types of corporations/ organizations are exempt from income tax? (Typically non-stock non-profit)
o Labor, agri or horticultural organization
o Mutual savings bank and coop bank
o Fraternal organization or mutual aid association, employee cooperative
o Cemetery company
o Non-stock, non-profit entities organized for certain purposes (religious, charitable, scientific,
athletic, rehab of veterans)
o Business league
o Non-stock, non-profit educational institution
o Government education institution
o Farmers or other coop
o Farmers or fruit growers association
- What is the scope of their exemption?
o 30 organizations are exempt from income tax only in respect to income received by them as
such (e.g., tuition fees received by a non-stock non-profit educational institution)
o Any revenue or profit that the educational institution receives (even if incidental) is exempt
because the wording of the Constitution is broad
But in case of non-stock non-profit hospital, only revenues received in the charitable
ward is exempt
- Collector v. V.G. Sinco
o Payment by a non-profit educational institution for services rendered (e.g., payment to teachers
and service providers) is not distribution of profit
o Charging of tuition does not make school profit-making enterprise
o While acquisition of additional facilities, such as buildings and equipment, may redound to the
benefit of the institution, it does not necessarily follow that the same will redound to the benefit
of its shareholder (on the ground that assets will be distributed to shareholders upon dissolution)
- When does a 30 become liable to income tax?
o When it derives income from real or personal properties
o When it derives income from activities conducted for profit (regardless of the disposition of such
income)
- CIR v. YMCA
o YMCA derived rentals from the lease of a portion of its real property to small shops
o Derived also income from parking fees assessed collected from non-members
o CIR assessed YMCA deficiency income tax
o Contention of taxpayer: income from properties must arise from activities conducted for profit
before it may be considered taxable
o Issue: W/N rental income of YMCA from real estate subject to income tax
o Held: Yes
o The phrase any of their activities conducted from profit does not qualify the word properties
o This makes income from property of organization taxable, regardless of how that income is used
whether for profit or for lofty non-profit purposes
- CIR v. St. Lukes Medical Center
o Imposition of 10% income tax on proprietary, non-profit hospitals did not remove exemption of
non-stock corporation organized and operated exclusively for charitable and social welfare
purposes
o (i) non-stock; (ii) organized exclusively; (iii) operated exclusively; (iv) non-inurement
o Revenues from paying patient are income received from activities conducted for profit subject
to 10% income tax
FRINGE BENEFITS TAX

- What are taxable fringe benefits?
o Goods, services, or other benefits granted by an employer in cash or in kind to an individual
employee (except rank and file), such as, but not limited to the ff.:

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Housing
Expense account
Vehicle
Household personnel (such as maid, driver, etc.(
Below market interest rate on loans
Country club membership fees, dues, and other expenses
Expenses for foreign travel
Holiday and vacation expenses
Educational assistance
Insurance premiums
- What are non-taxable fringe benefits?
o Exempt benefits
o Employer contributions to retirement and hospitalization benefit plans
If it is the employer who gives allowance to the employees, it is subject to FBT. If it is
through HMO, exempt from FBT
o Benefits given to rank and file
o De minimis benefits
o Fringe benefits required by the nature of, or necessary to the trade, business, or profession of
the employer, or when the fringe benefit is for the convenience or advantage of the employer
E.g., when the employer gives a motor vehicle to the employee to help the employee
makes his sales route
But the BIR made it 50-50 because they believe that the use of the vehicle is
not only for business purposes but there is also a part for personal purpose
- What is the tax base for purposes of the FBT?
o Grossed-up monetary value of the taxable fringe benefit
- What is the coverage of FBT?
o Covers only fringe benefits furnished to supervisory and managerial employees (not rank and
file)
o It is required that there is an employer-employee relationship
- Does it mean that fringe benefits are exempt if granted to rank and file employees?
o No, fringe benefits granted to rank and file employees are considered taxable compensation
income subject to the graduated rates of 5% - 32%
- What if fringe benefits are granted to a board director, who is not an employee of the company, is this
subject to FBT?
o No, employer-employee relationship must exist for FBT to apply. Considered taxable income,
however, subject to graduated rates
- How is FBT computed?
o Step 1: Determine the grossed-up monetary value of the fringe benefit. This is the monetary
value of the benefit divided by 68%
o Step 2: compute the fringe benefit tax by multiplying the grossed-up monetary value of the fringe
benefit by 32%
o Illustration: A the CFO of B Corp. availed of the companys car plan; A shouldered only 50% of
the cost of the car amounting to P340,000
GMV (P340,000/68%) = P500,000
FBT (P500,000 x 32%) = P160,000
SALE OR EXCHANGE OF PROPERTY

A. Computation of Gain or Loss
- Concept of taxable event (income reported only when realized)
o In order to avoid the cumbersome, abrasive, and unpredictable administrative task of valuing
assets annually to determine whether their value has appreciated or depreciated, 40(A) defers
the tax consequences of a gain or loss in property until it is realized through the sale or other
disposition of property. (Cottage Sav. Assn. v. CIR)
o Borne by administrative convenience
o A taxable event usually involves the
Sale or conversion of property for cash or
Exchange of property for other property
- Statutory basis 40(A)
o Sale or other disposition conversion of property (to cash or other property)
o Amount realized sum of money received plus the FMV of property (other than money)
received

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Crane v. CIR: when the buyer assumes a liability of the seller, the amount of liability
assumed forms part of the amount realized
o Basis or adjusted basis - measurement of taxpayers investment in property
Established when taxpayer acquired property
Subject to certain adjustments during period of ownership (CAPEX added;
depreciation, amortization, or depreciation deducted)
Historical cost is original basis; original basis +/- adjustments, if any = adjusted basis
- Formula for determining (gain or loss) under 40(A):
o Gain (loss) = AR AB
AR: sum of money received plus the FMV of property (other than money) received
(40(A))
AB: see rules prescribed under 40(B)
- Steps in reporting of income from the sale or disposition of property
1. Realization
2. Recognition or non-recognition
3. Characterization of gain or loss (capital or ordinary)
o Realization and recognition are not synonymous
o Concept of realization general principle/ longstanding policy
o Concept of recognition statutory basis
o General rule is recognition
o Non-recognition transaction = tax exchanges
Transfer to closely held corporation
Statutory merger
De facto merger
- 4 ways by which basis is established (40(B)):
o Cost most common measurement of basis
o FMV in certain instances (e.g., property acquired by inheritance)
o Carry-over basis assign as basis to property in relation to property transferred in a tax-free
exchange)
o Substituted basis assign as basis to property in relation to property of someone else (e.g.,
basis of transferee in property received in exchange for stock in a tax-free exchange)
- Basis rules under 40(B):
o Property acquired by purchase basis is cost (cash purchase price plus incidental expenses)
o Property acquired by inheritance basis if FMV
o Property acquired by gift basis of donee is the same as the basis of the donor or last preceding
owner who did not acquire the property by gift
If basis in the hands of the donor or last preceding owner is greater than FMV, basis
shall be FMV for purposes of determining loss
o Property acquired for less than an adequate consideration in money or moneys worth basis
is amount paid by the transferee for the property
o Property acquired via a non-recognition transaction under 40(C)(2) carry-over or substituted
basis
-
- Diedrich v. CIR
o In Crane, the Court concluded that relief from the obligation of a nonrecourse mortgage . . .
constituted income to the taxpayer. The taxpayer in Crane acquired depreciable property, an
apartment building, subject to an unassumed mortgage. The taxpayer later sold the apartment
building which was still subject to the nonrecourse mortgage, for cash plus the buyers
assumption of the mortgage. This Court held that the amount of the mortgage was property
included in the amount realized on the sale, noting that if the taxpayer transfers subject to the
mortgage, the benefit to him is as real and substantial as if the mortgage were discharged, or
as if a personal debt in an equal amount had been assumed by another.
- Philadelphia Park Amusement Co. v. US
o Original franchise: cost is P50M; useful life of 50 years
o Bridge: cost is P20M; useful life of 20 years

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o Year 10: bridge exchanged for extension of franchise

o Year 20: franchise abandoned
o Assume that FMV of the extended franchise, FMV and NBV of the bridge at the end of year 10
are equal
o Franchise: P50M 50 years
Do you deduct entire P50M in year incurred?
When do you get to deduct the P50M?
How much is the yearly depreciation/ amortization?
o Exchange: Bridge for Franchise Extension
At the end of year 10, bridge exchanged for 10-year extension of franchise
Is the exchange a taxable event?
Should gain/loss be recognized?
What is the formula for determining gain/ loss?
How much is AR? How much is AB?
What is the NBV of the franchise at the end of year 10?
How many years are remaining (w/out extension)?
What is the adjusted remaining life (adding the 10-year extension)?
How much is the basis of the 10-year extension?
How much is the AB of the original franchise?
How much is the total AB (original + extension)?
How many years remaining?
How much is the adjusted yearly depreciation/ amortization?
o Abandonment of Franchise
At the end of year 20, franchise is abandoned
What sort of deduction is taxpayer entitled to if he abandons an asset used in the trade
or business?
What is the measurement of the loss?
How much is the loss?
o Bridge for 10-year franchise Extension
Original acquisition cost of bridge (basis) P20 million
Accumulated depreciation (adjustment) 10 million
Net book value at end of year 10 (adjusted basis) P10 million
Amount realized (FMV of franchise extension) P10 million

Less adjusted basis 10 million
Gain (loss) NIL __
o Abandonment of Franchise
Original basis of franchise P50 million
Less: accumulated amortization 10 million
Net book value P40 million
Add: basis of 10-year extension 10 million
Adjusted basis at end of Year 10 P50 million
New useful life 50 years_
New yearly amortization P1 million/ year
Amount realized (upon abandonment) P0
Adjusted basis at end of year 20 P40 million
Gain (loss) (P40 million)
B. Exchange of Property
- General rule:
o The entire realized gain or loss, as the case may be, shall be recognized. 40(C)(1)
- Exception: non-recognition transactions (tax-free exchanges) 40(C)(2)
o 3 types of tax-free exchanges:
Transfer to a controlled corporation
Statutory merger or consolidation
De facto merger
- The NIRC provides non-recognition treatment for certain transactions which are viewed as mere changes
in the form of an investment
o Typically, non-recognition provision ensure that any realized gain or loss is temporarily deferred
rather than permanently eliminated

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o Technically, deferral is accomplished by requiring that a taxpayers basis in property received in

a tax-free exchange be determined either by reference to the basis of other property formerly
held by the same taxpayer or by reference to the basis of the same property in the hands of a
previous owner
- Example: A Corp. owns a piece of land with AB of P1M and FMV of P5M (i.e., P4M B.I.G.)
o Step 1: A transfers the land to B Corp. in exchange for B stock with total par value of P5M in a
transaction qualifying as tax-free exchange
o Step 2: A subsequently sells the B stock for P5M cash in a taxable transaction
o Questions:
How much is As realized gain in Step 1? 4 million
How much gain should A recognize in Step 1? 0 (because it is a non recognition
transaction)
How much realized gain, if any, should A recognize in Step 2?
What should be done following Step 1 so that As P4M B.I.G. is preserved?
C. Transfer of Property to a Controlled Corporation

- Requirements to qualify for non-recognition treatment
o Non-recognition treatment is available under 40(C)(2) only if:
One or more persons (not exceeding a total of 5 persons) (the transferors) transfer
property to a corporation (the transferee) in exchange for stock or unit of
participation in the corporation and
As a result of the exchange the transferors view as a group gain control of the
corporation
See transfer to controlled corp. chart
o Rationale for non-recognition treatment: the non-recognition policy rests on the assumption that
a contribution of property to a corporation represents a continuation in modified form, rather than
a liquidation, of the shareholders investment
-
- Requirements:
o Property is transferred (excludes cash and services) to a corporation
o In exchange for stock or unit of participation in such corporation
o Transferors (not more than five) gain control of the transferee (i.e., gain 51% of all classes of
stock entitled to vote)
- Delpher Trades Corp. v. IAC

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o Taxpayer owned a parcel of land which they leased out

o Lease K grants the lessee a right to first refusal should taxpayer sell the land
o In a deed of exchange qualifying as a tax-free exchange, taxpayers transferred the land to a
corporation in exchange for stock
o Lessee sued for reconveyance arguing that it was not given the first option to buy
o Issue: W/N the deed of exchange between the taxpayers and the transferee corporation was
meant to be a K of sale w/c prejudiced the lessees right to first refusal over the leased land
o Held: there was no transfer of actual ownership over the land; the transfer of ownership, if
anything was merely in form but not in substance
o The deed of exchange between the transferors and the transferee-corp. cannot be considered
a contract of sale
o There was no transfer of actual ownership interest by the taxpayers to a third party; the taxpayers
merely changed their ownership from one form to another; the ownership remained in the same
hands
- Busted 40(C)(2): loss of control
o Courts have held that the control requirement of 351 (NIRC 40(C)(2)) is not satisfied pursuant
to a binding agreement entered into by the transferor prior to the transfer of property to the
corporation in exchange for stock, the transferor loses control of the corporation by a taxable
sale of all or part of that stock to a third party who does not also transfer property to the
corporation in exchange for stock (Intermountain Lumber v. Commr)
o
o Formation of Newco
o Sale of shares
o Ending point
D. Statutory Merger and Consolidation

- Those that are so defined under the Corporation Code of the Philippines
o Statutory merger see chart
o Statutory consolidation see chart

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-
- CIR v. Rufino
o Taxpayers majority owners of A corporation; taxpayers also majority owners of B corporation
o As the corporate life of A was about to end, it merged with B (with B surviving) for the purpose
of continuing the business of A
o CIR argued that the merger was not undertaken for a bond fide business purpose but merely to
avoid CGT on the liquidation of A (assessed taxpayers deficiency CGT)
o Held: that B will continue the business of A is a bona fide business purpose
o The government is not left entirely without recourse; merger merely deferred taxes, which may
be asserted by the government later, when gains are realized and benefits are distributed to the
S/Hs as a result of the merger
o In assessing the tax in a subsequent transaction, the basis of the property transferred in the
hands of the transferee shall be the same as it would be in the hands of the transferor . . . The
only inhibition now is that time has not yet come
o Rationale for tax-free treatment: the exemption . . . [is] intended to encourage corporations in
pooling, combining or expanding their resources conducive to the economic development of the
country
E. De Facto Merger
- What is a de facto merger (see chart)?

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o The acquisition by one corporation of all or substantially all the properties of another corporation
solely for stock. 40(C)(6)(b)
- What constitutes substantially all properties of the transferor?
o The acquisition by one corporation of at least 80% of the assets, including cash, of another
corporation. RMR 01-02 II(1)
- What is the difference between a de facto merger and a statutory merger
o In a de facto merger, the transferor is not automatically dissolved unlike a statutory merger
o Also, unlike a statutory merger, there is no automatic transfer of assets and assumption of
liabilities in a de facto merger
-
- What is the difference between a de facto merger and a transfer of property to a controlled corporation?
o The transferor in a de factor merger is a corporation, while the transferor in a transfer of property
to a controlled corporation can either be individuals or corporations
o In a de facto merger, there is no requirement that the transferor gains control of the transferee
(what is essential is theall or sub all requirement)
- Boot, assumption of liabilities, and basis rules same as transfer of property to a controlled corporation
CAPITAL GAINS AND LOSSES

A. Capital Assets
- Sale or exchange >> gain (or loss)
- Capital asset = capital gain (or loss)
- Ordinary asset = ordinary gain (or loss)
- 39: a negative definition of capital assets
o The term capital assets means property held by the taxpayer (whether or not connected with
his trade or business) but it does not include:
Stock in trade
Inventoriable property
Property held primarily for sale
Depreciable property
Real property used in trade or business
- Corn Products Refining Co. v. CIR
o 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
o The taxpayers purchases of corn futures were an integral part of its manufacturing business
- Investment purpose vs. business purpose as criterion for determining classification of asset
- Arkansas Best Corp. v. CIR
o Issue: W/N the taxpayers loss from the sale of shares (which were purchased for a business
purpose, i.e., to preserve the business reputation of the taxpayer) is entitled to ordinary loss
treatment
o Held: No, a taxpayers motivation in purchasing an asset is irrelevant to the question whether it
falls within the broad definition of capital asset
o Taxpayers reading of Corn Products as authorizing ordinary-asset treatment for any asset
acquired and held for business rather than investment purposes is too expansive
o Business-motive test is not found in 1221 and is in direct conflict with the broad definition of
capital asset

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o Corn Products stands for the narrow proposition that hedging transactions that are an integral
part of a business inventory purchase system fall within 1221s first exception for property . .
. which would properly be included in the taxpayers inventory
o Since taxpayer, which is not a dealer in securities, has never suggested that its bank stock falls
within the inventory exclusion, Corn Products has no application in the present context
o Because taxpayers bank falls within 1221s broad definition of capital asset and is outside the
classes of excluded property, the loss arising from its sale is a capital loss
- Calasanz v. CIR
o Where inherited land is subdivided and improved and the lots are advertised to the public and
sold, the gains realized are not capital gains but ordinary gains subject to regular income tax
o Though the lots were sold merely to dispose or liquidate an inheritance, the question to be asked
in determining whether what was realized was capital or ordinary income is: Was the taxpayer
engaged in the business? In this case, the CIR correctly found that she was
o Case were property initially classified as capital (upon inheritance) becomes ordinary, after
taxpayer engaged in certain activities that converted the land into one held primarily for sale
B. Capital Gains Tax

1. Sale of shares of stock in a domestic corporation not listed and traded through the PSE 5%/ 10% capital
gains tax on net capital gain
2. Sale of shares of stock in a domestic corporation listed AND traded through the PSE STT of 0.5%
3. Sale of real property located in the Philippines classified as a capital asset 6% final tax on gross selling
price or FMV, whichever is higher
4. Sale of capital asset other than foregoing (i.e., category A capital gains) ordinary rates of 5% - 32% or
35%
- Category C CGT paid on a per transaction basis; being a final tax, Category C capital gains are no longer
included in the annual ITR
- Category A CGT is paid on a year-end basis (e.g., April 15); thus Category A net capital gain is included
in annual ITR
- CGT on sale of shares paid by seller on a per transaction basis; return filed and tax paid within 30 days
following each sale; final consolidated return filed on April 15 (or 15th day of fourth month following end of
fiscal year)
- STT is withheld by the broker and remitted to BIR
- CGT on sale of realty tax is withheld at source by the buyer
- Tax on other net capital gain net capital gain included in annual ITR and tax paid on April 15 (or 15th
day of fourth month following end of fiscal year)
C. Ordinary Income/ Loss

- The term ordinary income includes any gain from the sale or exchange of property which is not a capital
asset or property described in 39(A)(1)
- Any gain from the sale or exchange of property which is treated or considered as ordinary income shall
be treated as gain from the sale or exchange of property which is not a capital asset
- The term ordinary loss includes any loss from the sale or exchange of property which is not a capital
asset. Any loss from the sale or exchange of property which is treated or considered ordinary loss shall
be treated as loss from the sale or exchange of property which is not a capital asset
- Tuason v. Lingad
o Tuason inherited lots which were occupied by lessees of the decedents. He then sold the lots to
the lessees and his income was claimed as a capital gain
o The CIR correctly assessed his income as an ordinary gain because of the following:
The property fell under the exception in 39 it was real property used in the trade or
business. His mother had been renting the properties out and it was his duty to respect
the contracts
He was himself engaged in the real estate business
o Factors considered by the court in concluding that taxpayer was engaged in the real estate
business:
Parcels of land had in totality a large area and located in the heart of Manila
Lots subdivided into small lots and sold on installment
Substantial improvements introduced to make lots more saleable
Appointment of an agent to manage the landholdings
Sales were frequent and continuous
Annual sales volume significant
Taxpayer himself engaged in the real estate business with respect to other properties

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D. Net Capital Gains/ Losses

- Net capital gain
o Means the excess of the gains from such sales or exchanges of capital assets over the losses
from such sales or exchanges
- Net capital loss
o Means the excess of the losses from sales or exchanges of capital assets over the gains from
such sales or exchanges
- What the NIRC taxes is the net capital gain
- If net capital gain
o Include as part of gross income for the taxable year (Category A income)
- If net capital loss
o If taxpayer is a corporation, no tax benefit
o If taxpayer is other than a corporation, the net capital loss shall be treated in the succeeding
taxable year as a short term capital loss (i.e., loss from the sale of a capital asset held for not
more than 12 mos.) (39(D))
o This is called a net capital loss carry-over
E. Percentage Taken in Account

- In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss
recognized upon the sale or exchange of a capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:
o 100% if the capital asset has been held for not more than 12 months; and
o 50% if the capital asset has been held for more than 12 months
- Thus if the asset was held long-term, the tax benefit is greater
- Note: corporations not entitled to the reduced percentage of gain to be recognized
F. Limitation on Capital Loss

- Losses from sales or exchanges of capital assets shall be allowed only to the extent of the gains from
such sales or exchange
o Capital loss cannot be used to deduct in ordinary gains
o Ordinary loss can be carried over for three years
- If a bank or trust company incorporated under the laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond, debenture, note, or certificate, or other evidence of
indebtedness issued by any corporation (including one issued by a government or political subdivision
thereof), with interest coupons or in registered from, any loss resulting from such sale shall not be subject
to the foregoing limitation and shall not be included in determining the applicability of such limitation to
other losses
- China Banking Corp. v. CA
o CBC made an equity investment in another company. The company closed and the shares
issued to CBC became worthless. CBC tried to claim the loss as band debt in order to deduct it
from gross income
o It was held that it was loss from the sale or exchange of capital assets. Shares of stock are
considered ordinary asset only when they are held by one who is engaged in the business of
selling or trading shares
o In the hands of another who holds the share of stock by way of an investment, the share to him
would be capital assets. When the shares held by such investor become worthless, the loss is
deemed to be a loss from the sale or exchange of capital assets
G. Summary
- Summary of rules on capital gains and losses
o The transaction on the capital asset should be a sale or exchange
o With the transaction being a sale or exchange:
In the case of a taxpayer, other than a corporation, only the following percentages of
the gain or loss shall be taken into account in computing net capital gain, net capital
loss and net income:
100% for short-term gains (<= 12 months)
50% for long-term gains (>12 months)
Capital losses shall be allowed only to the extent of capital gains
If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss,
such loss, in an amount not in excess of the taxable income of such year, shall be
treated in the succeeding year as a short-term capital loss. This is called net capital
loss carry-over

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SITUS OF TAXATION
A. Gross Income from Sources Within & Without the Philippines
- Why are the sources rules important?
o Only two: foreign sourced or Philippine sourced
o For resident citizens and domestic corporations, the foreign tax credit for income taxes paid to
foreign countries is available to offset Philippine income taxes only if the foreign taxes are paid
with respect to foreign source income
o For nonresident citizens, aliens, and foreign corporations, the source rules are important
because they are taxable only on Philippine source income
o For NRA-NETB and NRFCs, the 25%/30% flat tax on Philippine source FDAP income
- Interest
o What is the source rule for interest?
Sourced by reference to the residence of the payor. 42(A)(1) and C(1)
Accordingly, interest paid by a domestic corporation, non-corporate resident of the
Phil., the National Government or any of its political subdivisions, agencies or
instrumentalities is Philippine source income
Interest on foreign loans is subject to 20% final withholding tax. See 28(B)(5)(a)
If not paid by a resident, foreign source interest
o If debtor is resident, domestic sourced
o If debtor is non-resident, foreign sourced
- Dividends
o What is the source rule for dividends?
Within:
From a domestic corporation
From a foreign corporation, if:
o At least 50% of the foreign corporations gross income for a 3-year
base period is derived from Philippine sources
o Phil. source dividends = dividends x GI Phil./GI world
Without:
From a foreign corporation
- Personal Services
o What is the source rule for personal services?
Determined by the place of performance rule
Services performed in the Philippines within
Services performed outside the Philippines without
o CIR v. Marubeni Corp.
The projects were completed on a turnkey basis (a job in which the contractor agrees
to complete the work of building and installation to the point of readiness or occupancy;
in other words, the products are brought to the client complete and ready for use).
The two contracts were divided into two parts the offshore portion and the onshore
portion. All materials and equipment in the contract under the offshore portion were
manufactured and completed in Japan. After manufacture, these were transported to
Leyte and installed to the pier with the use of bolts. Marubeni correctly claimed that the
income derived from the offshore portion should be exempt from tax since it was
derived outside of the Philippine jurisdiction
Cannot tax the entire consideration. Has to distinguish between onshore and off shore
portion
o CIR v. BOAC
Taxpayer is an offline international carrier
Has a GSA in the Philippines selling passage documents for offline flights
Issue: W/N income from offline flights considered Philippine source income
Held: Yes
Taxpayer is a resident foreign corporation because it is doing business in the
Philippines through a GSA
The source of an income is the property, activity, or service that produced
the income
The sale of tickets in the Philippines is the activity that produced the income
The absence of flight operations to and from the Philippines is not determinative of the
source of income
The test of taxability is the source, and the source of an income is that activity which
produced the income (i.e., sale of passage documents in the Philippines)

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Feliciano, J. dissenting
For purposes of income taxation, the source of income relates not to the
physical sourcing of a flow of money or the physical situs of payment but rather
to the property, activity or service which produced the income
Applicable source rule is performance of service (contract of carriage) not sale
of personal property (sale of airline tickets)
Since services were performed outside the Philippines, compensation derived
therefrom foreign source
o Howden v. Commissioner of Internal Revenue
Portions of premiums earned from insurance locally underwritten by domestic
corporations, ceded to and received by non-resident foreign reinsurance companies,
through a non-resident foreign insurance broker, pursuant to reinsurance contracts
signed by the reinsurers abroad but signed by the domestic corporation in the
Philippines, are subject to income tax locally
The source of an income is the property, activity or service that produced the income.
The reinsurance premiums remitted to Howden by virtue of the contracts had for their
source the undertaking to indemnify the domestic corp. against liability. Said
undertaking is the activity that produced the reinsurance premiums, and the same took
place in the Phil.
Enumeration in Sec. 42 not exclusive
Income may be earned by a corporation in the Phil. although such corporation conducts
all its business abroad. The Tax Code does not require a foreign corporation to be
engaged in business in the Phil. in order for its income form sources within the
Philippines to be taxable. It subjects foreign corps. not doing business in the Phil. to tax
for income from sources within the Phil
o Korfund Co., Inc. v. CIR
The case required the determination of the source of payments from a U.S. company
to a German company (Zorn) and a nonresident German citizen (Stoessel) under
contracts in which, among other things, they had agreed not to compete in the U.S. and
Canada
Taxpayer contention: income was paid for agreements to refrain from doing specific
things negative acts. Negative performance is based on continuous exercise of will,
a mental exertion that occurred in Germany (hence foreign source income)
Held: the rights of Stoessel and Zorn to do business in the U.S. in competition with the
taxpayer, were interests in property in the U.S. They might have received amounts here
for services or information, but were willing to forego that right and possibility for a
limited period for a consideration
What they received was in lieu of what they might have received
The situs of the right was in the U.S., not elsewhere, and the income that flowed from
the privileges was necessarily earned and produced here
o Stemkowski v. CIR
Taxpayer professional hockey player in NHL; Canadian citizen who played for the New
York Rangers
NHL players year divided into four periods: (1) training camp, including exhibition
games; (2) regular season; (3) play-offs; and (4) off-season
For taxable year 1971, taxpayer lived in Canada during all of the off-season and most
of training camp. Played in Canada 15 days out of 179 during regular season and five
out of 28 days in the play-offs
Taxpayer return position: total no. of days for which taxpayer was compensated was
234 days (all but off-season)
IRS and Tax Court position: taxpayer compensation covers only 179 days (regular
season); therefore taxpayer could not use days spent in Canada during training camp,
play-offs and off-season in calculating foreign-source exclusion
Held: where services performed partly within and partly without U.S., but compensation
is not separately allocated, U.S. source income allocated on time basis
Compensation does not cover off-season, but covers training camp and play-offs
Off-season not covered because contract imposes no specific obligations on a player.
Taxpayer argues that obligation to appear at training camp in good condition makes
off-season conditioning a contractual condition.
Court, however, held that fitness is not a service, but a condition of employment
- Rentals & Royalties

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o The source of rental and royalty income is determined by the place where the property is located
or used
Tangible property - accordingly, rentals or royalties for the lease of tangible property
are sourced where the property is physically located
Ex.: if a Forco leases computer hardware to another Forco which uses the
hardware in the Philippines, rental payments are Philippine source income,
notwithstanding the residence of the licensor, licensee, or where payments
take place
Intangible property the source of royalty income from the LICENSE (as distinguished
from an outright sale) of intangible property including patents, copyrights, goodwill or
other intellectual property, depends on where the rights are used, which is generally
the place where the intangible property derives its legal protection
o Sometimes it is difficult to determine whether the payment is for the provision of services -- which
is characterized as compensation for personal services rendered
o Or payment for the supply of know-how -- which is characterized as royalties
o There is a need to distinguish between the two because the situs rules are different
Situs rule for compensation for services is the place of performance rule
Situs rule for royalties is the place where the right or privilege is exercised
o The need to distinguish between the two sometimes gives rise to practical difficulties
o In Karrer v. US, the taxpayer was a Swiss national who was employed as a scientist by a foreign
corporation to perform research services in Switzerland
Under the terms of the employment contract, the taxpayer received a percentage of the
proceeds of the sale within the U.S. of synthetic vitamins produced with his inventions
Court held that payments to the taxpayer constituted foreign-source compensation
income even though they were measured by proceeds of sales in the U.S. because
the employees right to such payments derives from his services to his employer and
not from any rights in inventions owned by the employee
o Boulez v. CIR
Boulez, a French citizen residing in Germany, is a world-renowned musical director and
orchestra conductor
Boulez concluded a contract with CBS Records under which recordings would be made
by the New York Philharmonic Orchestra and several other orchestras under his
direction
The contract provided that royalties would be paid to Boulez based upon a percentage
of the proceeds derived by CBS from the sale of the records
Under the contract CBS retained the property rights to the master recordings, matrices
and phonograph records produced under the agreement
The recordings were made in the U.S., and the IRS took the position that the payments,
although characterized as royalties in the contract, were in substance compensation
payments measured by record sales
Issue: By the contract entered into between Boulez and CBS, did the parties agree that
Boulez was licensing or conveying to CBS a property interest in the recordings which
he was retained to make, and in return for which he was to receive royalties?
Held: No. Boulez derived U.S. source compensation from services income
Before a person can derive income from royalties, it is fundamental that he must have
an ownership interest in the property whose licensing or sale gives rise to the income
Royalty defined as a share of the product or profit reserved by the owner for
permitting another to use the property
Also, for a payment to constitute a royalty, the payee must have an ownership interest
in the property whose use generates the payment
Thus, the existence of a property right in the payee is fundamental for the purpose of
determining whether royalty income exists
Did Boulez have any property rights in the recordings which he made for CBS Records,
which he could either license or sell and which would give rise to royalty income here?
We think not [because CBS retained the property rights to the master recordings,
matrices and phonograph records produced]
o Whats the bottom line?
To be considered as royalties, the licensor must have an ownership/proprietary
interest in the property whose use by the licensee himself generates royalties
o Contracts for the supply of know-how concern information that already exists or concern the
supply of that type of information after its development or creation and include specific provisions
concerning the confidentiality of that information

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o In the case of contracts for the provision of services, the supplier undertakes to perform services
which may require the use, by that supplier, of special knowledge, skill and expertise but not the
transfer of such special knowledge, skill or expertise to the other party
- Sale of Real Property
o Gain from sale of real property sourced where the property is located
o Accordingly, the sale of land and buildings located in the Philippines will generate Philippine-
source income
o Gain realized from the disposition of land and buildings located elsewhere will be treated as
foreign-source income
- Sale of Personal Property
o Sale by producer or manufacturer of personal property
Situs is either (i) entirely within or entirely without; or (ii) partly within and partly without
Treatment (i) or (ii) depends on (a) place of sale and (b) place of
manufacture/production
Entirely within or entirely without
If (a) AND (b) within the Philippines source is entirely within
If (a) AND (b) without the Philippines source is entirely without
Partly within and partly without
If (a) within and (b) without, or vice-versa source is partly within and partly without
o Purchase and sale of personal property (e.g., trading)
The source of income realized from the purchase and sale of personal property will
generally be determined by the situs of the property at the time of the passage of title
The passage of title test derives from law on sales and generally allows the parties to
arrange title passage wherever they choose
Example: SGCo sells computer hardware to Philco CIF Manila, gain from
sale is foreign-source
o Under CIF Manila terms, the buyer of the goods accepts delivery at
the ships rail at the port of shipment, and a negotiable bill of lading
deliverable to the order of the buyer evidencing possession and
control of the goods is given to him
If transfer of title happens at destination Philippine sourced
If transfer of title happens in foreign country foreign sourced
CIF foreign sourced
o Sale of shares of stock in a domestic corporation
Derived entirely from sources within the Philippines regardless of where the shares are
sold
o Outright sale or assignment of intangibles
Same rule as purchase and sale of personal property (i.e., place of sale determines
source)
Distinguish from licensing of intangibles which gives rise to royalty income
B. Taxable Sources from Within or Without

- Taxable income from sources within
o From gross income within, deduct the following if applicable
Expenses, losses and other deductions properly allocable thereto
Retable part of expenses, interests, losses and other deductions effectively connected
with the business or trade conducted exclusively within the Philippines which cannot
definitely be allocated to some items or class of gross income
- Taxable income from sources without
o Same rule as item 1

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ACCOUNTING METHODS AND PERIODS

- General Rule
o Taxable income shall be computed upon the basis of taxpayers annual accounting period (fiscal
or calendar year method) in accordance with method of accounting regularly employed in
keeping books
o No uniform method of accounting prescribed for all taxpayers and any method may be adopted,
provided the method chosen clearly reflects income, unless specifically provided for by law (e.g.,
accounting for long-term contracts)
o Most common methods:
Cash method -- all items of gross income received during the year shall be accounted
for in the year of such receipt and expenses shall be claimed as a deduction in the year
of payment
Receipt is actual or constructive receipt -- there is actual receipt when money
or its equivalent is placed at the control of the person who rendered the service
without restrictions by the payor
Accrual method -- income is accounted for in the year in which earned, regardless of
whether it has been received or not. Expenses are claimed as a deduction in the year
in which incurred
- Year of Income Inclusion
o Under accrual method, taxable income comes into existence when all events have occurred
which fix the right to receive the income and the amount can be determined with reasonable
accuracy
Thus taxpayer on accrual basis was deemed to have derived income for taxable year
from goods sold and shipped in said year to a foreign buyer, notwithstanding that
taxpayer had not received the price in full
- Year in Which Deduction Taken
o Year in which deduction taken: paid or incurred during the taxable year
o Isabela Cultural Corp. v. CIR
Taxpayer may not claim as a deduction in 1986 the cost of legal and auditing services
rendered in 1984 and 1985, although billed only and paid in 1986
All events test: expense must be claimed as a deduction when liability is (1) fixed and
(2) the amount can be determined with reasonable accuracy
- Percentage of Completion
o Long-term contract building, installation or construction contracts covering a period in excess
of one year
o Gross income shall be reported on the basis of percentage of completion Deductions claimed
for all expenditures made during the taxable year
o Return shall be accompanied by certification from architect or engineer showing percentage of
o completion
- Installment Method
o Considered appropriate when collections of the proceeds of sales and income extend over
relatively long periods of time and where there is a possibility that full collection might not be
made
o As customers make installment payments, the seller recognizes gross profit on sale in proportion
to the cash collected during the year
o Available to sales of dealers in personal property who regularly sells on installment plan
o Sale of realty and casual sale of personal property:
Price exceeds P1,000
If realty, initial payments received during the taxable year do not exceed 25% of the
selling price
RETURNS AND PAYMENT OF TAXES

A. Individuals
- Who are required to file ITRs:
o Resident citizens
o Non-resident citizens, with respect to Philippine-source income
o Resident aliens, with respect to Philippine-source income
o NRA-ETB. 51(A)(1)
- Who are not required to file ITRs?
o Individual whose G/I does not exceed total personal and additional exemptions
However, citizens and aliens engaged in a Philippine trade or business or exercising a
profession shall file an ITR, irrespective of G/I

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o Individuals earning purely Philippine-source compensation income, the income tax of which had
been correctly withheld
Exception: individuals with 2 or more concurrent employers
o Individuals whose sole income has been subjected to FWT
o Individuals exempt from income tax (e.g., minimum wage earners). 51(A)(2)
- Where should the ITR be filed?
o AAB/RDO/Collection Agent/authorized treasurer of city or municipality in which taxpayer has
legal residence or principal place of business
o Office of the Commissioner, if taxpayer has no legal residence or place of business in the
Philippines. 51(B)
- When should the individual ITR be filed? In general, on April 15. 51(C)(1)
- What is the rule for husband and wife?
o Married individuals, whether citizens, resident or nonresident aliens, who do not derive income
purely from compensation, shall file a return for the taxable year to include the income of both
spouses
o But, where it is impracticable for the spouses to file one return, each spouse may file a separate
return which shall be consolidated by the Bureau for purposes of verification. 51(D)
- What is the rule for parents and children?
o The income of unmarried minors derived from property received from a living parent shall be
included in the return of the parent
o Except:
When the donors tax has been paid on such property; or
When the transfer of such property is exempt from donors tax. 51(E)
- When and where should income taxes be paid?
o Pay-as-you-file
o Thus, the last day for the payment of income tax coincides with the last day for the filing of the
return
o The tax is paid at the place where the return is filed. 56(A)(1)
- Who can pay income tax in installments?
o Only individuals can pay income taxes in installments
- When can individuals pay income tax in installments?
o If the tax due exceeds P2,000, the taxpayer may opt to pay the tax in 2 equal installments
o The first installment shall be paid at the time the return is filed and the second installment on or
before July 15 following the close of the calendar year. If any installment is not paid on time, the
whole amount of the tax unpaid becomes due and payable together with surcharge and interest.
o If the tax withheld from salaries is more than of the tax due, the taxpayer pay nothing in his
first installment (he pays nothing at the time of filing). The second installment is the total tax
due less the excess withholding tax. 56(A)(2)
- When should the capital gains tax return on sale of shares (not listed or traded in PSE) and sale of realty
be filed?
o Sale of shares: within 30 days after each transaction and a final consolidated return on or before
April 15 of each year covering all stock transactions of the preceding taxable year
o Sale of realty classified as a capital asset: within 30 days following each sale or other disposition
In case the taxpayer elects and is qualified to report the gain by installments under
49, the tax due from each installment shall be paid within 30 days from receipt of the
installments. 56(A)(3)
- Who are required to file a declaration of estimated income for the current taxable year?
o Every individual subject to income tax who receive self-employment income
- When should the declaration be filed?
o On or before April 15 of the same taxable year
- What is self-employment income?
o In general, it consists of the earnings derived by the individual from the practice of profession or
conduct of trade or business carried on by him as a sole proprietor or by a partnership of which
he is a member. 74
- When is the estimated income tax paid?
o The estimated income tax is paid in 4 installments
1st installment at the time of the declaration
2nd installment August 15
3rd installment Nov. 15
4th installment - on or before April 15 of the following calendar year when the final
adjusted income tax return is due to be filed
B. Corporations

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- Who are required to file ITRs?

o Every corporation subject to income tax, except NRFCs. 52(A)
- What ITRs are required to be filed by corporations?
o Quarterly ITR
o Final or adjustment return (FAR)
o CGT returns (stock and realty)
- When are the ITRs required to be filed?
o Quarterly ITR:
Within 60 days from close of the taxable quarter (1st to 3rd quarters only). 75 &
77(B)
o FAR:
Calendar year basis April 15
Fiscal year basis 15th day of the 4th month following close of fiscal year. 77(B)
- When are the ITRs required to be filed?
o Return of corporation contemplating dissolution or reorganization:
Within 30 days from adoption by the corporation of a resolution or plan for its
dissolution, or for liquidation, or for its reorganization. 52(C)
Note: a dissolution or reorganization triggers a statutory tax audit or
investigation (before a certificate of tax clearance is issued by the BIR for
submission to the SEC)
Case: BPI v. CIR
In the case of a merger, the absorbed/dissolving corporation is required to file
its ITR within 30 days from the cessation of business or approval by the SEC
of the merger
o CGT returns (stock and realty) same rule as individuals
- Where should the ITRs be filed?
o AAB/RDO/collecting agent/treasurer where the principal office is located; or
o Place where corporations main books of accounts and other data from which the return is
prepared are kept. 77(A)
- When should the income tax be paid?
o Pay-as-you-file. 77(C)
- What options are available to the corporation in case the sum of the quarterly tax payments/withholding
tax credits during the year exceeds the income tax due for the entire taxable income of that year?
o Carry-over the excess credit (to be credited against est. quarterly income tax liabilities for the
taxable quarters of the succeeding taxable years)
o Be credited or refunded with the excess amount paid (cash refund or TCC). 76
These 2 options are alternative in nature; choice of one precludes the other
- What is the irrevocability rule?
o Once the carry-over option is exercised, such option shall be irrevocable for that taxable period
and no application for cash refund or issuance of a TCC shall be allowed. 76
- How is an option exercised?
o By marking the appropriate box in Item 31 of the FAR (Annual Income Tax Return)
- What if the taxpayer does not mark/tick the appropriate box in Item 31 of the ITR, how will revenue
authorities determine which option was chosen by the taxpayer?
o Through subsequent acts of the taxpayer (constructive election)
o E.g., (i) filing a claim for refund; or (ii) reflecting the excess credits as prior years excess credits
in the succeeding quarterly/annual ITR
- Philam Asset Mgt., Inc. v. CIR
o For taxable year 1997, taxpayer unable to utilize its P522k CWT due to net loss position;
taxpayer filed a written refund claim with the BIR in Sept. 1998
o For taxable year 1998, taxpayer similarly was unable to utilize its P459k CWT due to net loss
position; in April 2000, taxpayer filed its 1999 ITR showing an income tax due of P80k; in its
1999 ITR, taxpayer reflected the 1998 CWT of P459k as prior years excess credit; in Nov.
2000, taxpayer filed a refund claim for the P459k excess CWT
o In its ITRs for both 1997 and 1998, taxpayer did not indicate its option to have the excess CWT
either refunded or carried-over and applied to the succeeding year
o Both CTA and CA denied the taxpayers 1997 and 1998 refund claims
o Held: 1997 claim granted; 1998 claim denied
o Taxpayer has 2 options in case the sum of tax credits/payments during the year exceeds the
income tax due: (i) tax refund or (ii) carry-over excess credits
o 2 options are alternative in nature; choice of one precludes the other
o Taxpayer exercises the option by marking the appropriate option box in the ITR

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o Failure to signify ones intention in the FAR does not mean outright barring of a valid request for
refund, should the taxpayer choose this option later on
o For the 1997 claim, despite the taxpayers failure to make the appropriate marking in the ITR,
the filing of its written claim effectively serves an expression of its choice to request a tax refund,
instead of a carry-over credit
o Although the taxpayer did not mark the refund box in its 1997 FAR, neither did it perform any act
indicating that it chose a carry-over credit; on the contrary it filed on Sept. 11, 1998 an
administrative refund claim of its 1997 excess tax credits; in none of its quarterly returns in 1998
did it apply the excess CWTs
o For the 1998 claim, the subsequent acts of the taxpayer reveal that it has effectively chosen the
carry-over option (taxpayer reflected in its 1999 FAR the 1998 excess credits as prior years
excess credits)
o Once the carry-over option is taken, actually or constructively, it becomes irrevocable
WITHHOLDING TAX
- What is the nature of withholding tax?
o The principle of a withholding tax is that it is withheld (retained) by the payor from an income
payment (e.g., salaries, dividends, royalties, etc.) and remitted directly to revenue authorities
o The payee is given only the balance of the income payment
o The primary motivation is to ensure collection of taxes by mandating the withholding of taxes at
source
o The tax withheld is either (i) full and final payment of the income tax due or (ii) merely an advance
payment of eventual income taxes due, depending on the type of income payment involved
- What is the nature of the final withholding tax system?
o Under the final withholding tax system the amount of income tax withheld by the withholding
agent is constituted as a full and final payment of the income tax due from the payee on the said
income
o Being a final tax, the payee is no longer required to file an income tax return for the particular
income (or include the income subject to FWT in the income tax return)
- What is the nature of the creditable withholding tax system?
o Under the creditable withholding tax system, taxes withheld on certain income payments are
intended to equal or at least approximate the tax due of the payee on said income
o The income recipient is still required to file an income tax return to report the income and/or pay
the difference between the tax withheld and the tax due on the income
o A CWT is considered a prepayment or an advance payment of eventual income taxes due at the
end of the taxable year
Gross income P5,000,000

Taxable income 2,000,000
Income tax due (30%) 3,000,000
Less: tax credits 900,000
Prior years excess credit
Excess MCIT P50,000
Quarterly income tax payments -
Creditable withholding tax 1,000,000
Foreign tax credit 500,000
Income tax still due (refundable) - (1,550,000)
(650,000)
- What are the consequences of failure to withhold?

o The deficiency tax shall be collected from the payor/ withholding agent, plus surcharge, penalties
and interest
Rationale: (i) to compel withholding and remittance of taxes withheld to the government
and (ii) for administrative convenience/facilitate enforcement
o The income payment which is otherwise deductible from the gross income of the payor shall not
be allowed as a deduction. 34(K)
- In the case of failure to withhold, but the income recipient reported the income payment and paid taxes
due thereon, does that fact relieve the withholding agent from liability for deficiency withholding tax?
o Yes. However, the payor is still liable for applicable surcharges, penalties and interest arising
from the failure to withhold
- What are income payments subject to FWT?

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o See enumeration in Rev. Regs. 2-98 2.57.1, as amended

- What are income payments subject to CWT?
o See enumeration in Rev. Regs. 2-98 2.57.2, as amended
- CIR v. Wander Phil., Inc.
o Payor of dividends to an NRFC, as the withholding agent, has standing to file refund claim
Issue raised by the BIR for the first time on appeal
Withholding agent may be assessed for deficiency withholding tax at source, plus
surcharge and interest
- CIR v. P&G Phil. Mfg. Corp.
o Standing of withholding agent to file refund claim for overpaid tax on dividends denied
o The real party in interest is the recipient of the dividends, therefore should have been the
claimant
o Note: 1988 P&G decision reversed on reconsideration in 1991
o Incapacity of claimant cannot raised for the first time on appeal
o P&G is considered a taxpayer, which is defined as any person subject to tax imposed by the
Title [on Tax on Income]
o The withholding agent who is required to deduct and withhold any tax is made personally liable
for such tax
o Being a wholly-owned subsidiary of the income recipient, P&G Phil. has implied authority to file
the refund claim
- Filipinas Synthetic Fiber Corporation v. CA
o Where the withholding agent adopts the accrual method of accounting in its regular
bookkeeping, the same method must be used in determining its withholding tax liability
o Filsyn cannot use the accrual method to its advantage in computing deductions and then turn
around and disown it in computing withholding tax liability
ESTATES AND TRUSTS

- In general, estates and trusts taxed in the same manner as individuals
o Person, for tax purposes, includes estates and trusts (Sec. 22(A), NIRC)
- Includes the following:
o Income accumulated in trust for benefit of unborn childrenor unascertained persons with
contingent interests, and income accumulated or held for future distribution under the terms of
a will or trust
o Income distributed currently by the fiduciary to beneficiaries and income collected by the
guardian of an infant which is to be held or distributed as the court may direct
o Income received by estates during settlement or administration
o Income which, in discretion of fiduciary, may either be distributed to beneficiaries or accumulated
- Taxable trusts exclude reasonable private benefit plans employees trust which forms part of a pension,
stock bonus or profit-sharing plan of an employer for the benefit of employees
- Income of a reasonable private benefit plan is exempt from the tax imposed under Title VI (income tax)
- General rule on taxability:
o In general, income of trust for the taxable year which is to be distributed to beneficiaries shall be
taxed in the hands of the beneficiaries
o However, income of a trust which is accumulated or held for future distribution shall be taxed in
the hands of the trustee
- Exceptions:
o Revocable trusts -- income taxed to grantor
o Trusts where the income may be held or distributed for the benefit of the grantor -- income taxed
to grantor
o Trust administered in a foreign country income undiminished by any amounts distributed to
beneficiaries will be taxed to the trustee/s

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RIGHTS AND REMEDIES OF THE GOVERNMENT UNDER THE NIRC

I. POWER OF THE BIR TO OBTAIN INFORMATION AND MAKE AN ASSESSMENT
- Powers of the BIR
o Self assessment system system under which taxpayer makes a declaration in the return on
the basis of his assessment and calculate the tax due
Usually accompanied by payment (pay-as-you-file - 56(A)(1), NIRC)
But sometimes, taxpayer makes mistakes, thus the BIR is empowered to obtain
information
o How do tax authorities determine whether taxpayer made a correct return and paid the correct
taxes?
Power to interpret the provisions of the NIRC and the power to make assessment
BIR has powers to obtain factual information in order to issue an assessment
o It is basic premise that the assessment must be based on actual facts
Assessment based on actual facts basic principle in tax assessments
If without factual basis, the assessment is null and void
o Naked assessment is the assessment that is bereft of any factual
basis
The assessment issued by the BIR is assumed correct but in order for the
presumption to set in, there must be factual basis for the issuance of
assessment
In order to gather factual information, the BIR has power to conduct
investigation and tax audit, etc.
o BIR has power to issue access letters. This is usually used if they
are preparing a tax evasion case. It is a preliminary investigation
conducted by the BIR if there is a prima facie criminal case that can
be filed against the tax payer
The access letters are given to third parties related
o BIR has subpoena powers not only from the tax payer but also from
third parties
5 & 6 - sources of factual information and allowable means to obtain them
- Power of BIR to obtain information and make and assessment
o Sources of information and means to obtain them (5 & 6)
Examine books, papers, records or other data (5(A))
TPI ( 5(B))
Subpoena duces tecum ( 5(C))
The Letter of Authority signals the start of an investigation by the BIR
o The LA is usually accompanied by a request for production of
documents
o If this request is not heeded by the taxpayer, several requests will be
issued
o If the taxpayer still not follow the request, a subpoena will be issued,
which will be the formal demand of the BIR for the production of
documents
o If the subpoena is still not followed, the BIR can file a criminal case
against the taxpayer
The Revenue Officer who conducts the investigation must be the officer
indicate in the LA
Subpoena ad testificandum ( 5(D))
Tax mapping ( 5(E))
Examination of returns ( 6(A))
Best evidence obtainable ( 6(B))
Inventory-taking, surveillance, and presumptive gross sales and receipts ( 6(C))
Termination of taxable period ( 6(D))
Fixing of real property values ( 6(E))
Inquiry of bank deposits ( 6(F))
There are exceptions in the Bank Secrecy Law
o If the taxpayer applies for tax compromise
o In computation of estate tax
Accreditation and registration of tax agents ( 6(G))
Prescribe additional procedural or documentary requirements ( 6(H))

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- Investigative authority
o Sec. 5 authorizes CIR to obtain information and to summon, examine and take testimony of
persons to:
Ascertain correctness of return (or in making a return where none was made)
Determine liability for any internal revenue tax liability (and to collect such liability)
Evaluate tax compliance
o Sec. 6 authorizes CIR to make assessment and prescribe additional requirements for tax
administration and enforcement
Administrative summons to taxpayer 5(C), 6(C)
In connection with a tax audit, BIR may summon taxpayer or any officer or
employee to appear before the BIR and bring with him/her books of accounts
and other accounting records and documents subpoena duces tecum
Third party summons 5(B), (C)
In connection with a tax audit, BIR may obtain info from persons other than
the taxpayer
BIR does not limit info-gathering from taxpayer
Info from third party used to cross check against info obtained from taxpayer
discrepancy could be basis for deficiency assessment
E.g., VAT payments of taxpayer per return are crosschecked against
importations made by taxpayer per BOC records
o Informers Reward major source of information of the BIR
The BIR has the power to give rewards to informers who will supply information against
a taxpayer who evades taxes
Before there is no cap for the reward (25% of the amount). But there was a proliferation
of professional informers thus a cap was imposed
Requirements ( 282)
Qualified person
o BIR officers and their family members within 6th degree of
consanguinity are disqualified
o Public officers and their family members within the 6th degree of
consanguinity are disqualified
Definite and sworn info
Not yet in BIRs possession
Reward based on amount actually recovered or collected
10% or P1 million, whichever is lower
Meralco Securities Corp. v. Savellano
Decision of CIR that no taxes due is a valid exercise of discretion in the
performance of official duty which cannot be controlled or reversed by
mandamus
Since respondent judge may not order by mandamus the CIR to issue the
assessment, no deficiency tax can be assessed and collected
Since nothing is collected, informers reward not due
Most of these informers are disgruntled employees of the employers. Usually, they are
the accountants of the employers
Fitness by Design, Inc. v. CIR
On the basis of confidential information/ documents from third party, the BIR
issued an assessment
Taxpayer: the assessment is barred by prescription. The taxpayer filed a
preliminary hearing on the propriety of the assessment on the ground of
prescription
The taxpayer filed a motion for the production of the documents relating to
confidential information submitted by the information. The taxpayer believed
that the stolen documents are the basis of the assessment of the BIR. CTA
denied the motion
Issue: w/n stolen documents can be made basis of an assessment
SC: the motion was irrelevant to the case because the case is about the issue
of prescription
The BIR could under its power demand production of documents
o The SC did not answer the issue that the documents could have
been stolen
- Power to Make Assessment

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o Examination of returns 6(A)

Examination is for the purpose of assessing the correct amount of taxes
o Failure to submit required returns, statements, reports and other docs 6(B)
When a report required by law as basis for assessment not forthcoming
Or when there is reason to believe that such report is false, incomplete or erroneous
CIR may assess taxes on the basis of the best evidence obtainable
o Inventory-taking, surveillance 6(C)
BIR may order inventory-taking as basis for determining internal revenue tax liabilities
rarely exercised by BIR
BIR may conduct surveillance if there is reason to believe that taxpayer not declaring
correct income or sales/receipts
BIR may prescribe presumptive gross receipts (if taxpayer failed to issue O/Rs,
invoices; or there is reason to believe books of accounts do not correctly reflect true
income)
o Termination of Taxable Period 6(D):
If taxpayer retiring from business
Intending to leave PH
Remove or conceal property
Performing any act to obstruct proceedings for collection of current or past quarter or
year
CIR may declare tax period terminated and shall send taxpayer notice of decision with
demand for immediate payment
o Prescribe zonal values 6(E)
CIR may prescribe FMV of real properties
Upon consultation with competent appraisers both from private and public sectors
For purposes of computing internal revenue taxes, the value of the property is
whichever is the higher between the zonal value and the FMV as shown in the schedule
of values of provincial and city assessors
CIR v. Aquafresh Seafoods, Inc.
Reclassification of zonal values cannot be done without first complying with
the procedures prescribed by law (i.e., consult with competent appraisers)
Rationale: 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 base on the part of the administrator on one hand and
the taxpayer on the other hand
o Inquiry into bank deposits 6(F)
6(F) an exception to RA 1405
CIR may inquire into bank deposits of decedent to determine gross estate
There is a law which automatically freeze the account of the decedent
And of taxpayer applying for compromise of internal revenues taxes on the ground of
financial incapacity
In practice, the taxpayer will issue a waiver of secrecy of bank deposits
o Accreditation of tax agents 6(G)
Accreditation of agents who prepare and file tax returns, statements, protests and who
appear before the BIR for taxpayers
Supposedly to professionalize tax practice and weed out fixers
Lawyers exempted from this requirement (only SC can regulate the practice of law)
o Issuance of FAN procedure for issuance of assessment per 228 and Rev. Regs. 12-99 (as
amended by Rev. Regs. 18-2013):
The notice for informal conference is removed by Rev. Reg. 18-2013.
Before, there is a notice for informal conference (L/N) 15 days to respond,
otherwise considered in default
PAN 15 days to reply, otherwise considered in default
This is the preliminary step for the BIR to notify the taxpayer
Exceptions to notice for informal conference and PAN:
o (i) mathematical error;
o (ii) discrepancy between amount withheld and amount remitted;
Example, when the employer withholds taxes from salary
of employee and does not remit the correct amount to the
BIR
o (iii) double claim;

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When the taxpayer indicates that it will claim tax credit but
it has already claimed a tax refund
o (iv) nonpayment of excise tax; and
o (v) exempt person transfers articles to non-exempt persons
Example: a RHQ is entitled to tax and duty free motor
vehicle. If it sold the vehicle to a non-exempt person, the
BIR can issue FAN against RHQ
In these exceptions, the BIR need not issue PAN and can issue FAN
immediately
If the taxpayers does not file a reply, the BIR can finalize the assessment by issuing
FAN
If the taxpayer replies disputing the PAN, the BIR will issue the FAN within 15 days
(provided by the amendment)
Bello: nawala yung purpose of filing a reply
Before the amendment, the BIR will consider the reply for its next step. It can
either cancel, modify, or alter the assessment
Formal letter of demand and FAN must contain factual and legal basis of assessment
Under Sec. 203, it has 3 years to issue an assessment. The assessment that
the law talks about is a FAN
o If the PAN is within the 3 year period but the FAN is outside the 3
year period, the government is barred from assessing and collecting
from the taxpayer
o Gen. procedure for disputing assessment ( 228)
File written protest within 30 days from receipt of FAN must contain factual and legal
basis
2 kinds of protest:
o Request for reconsideration
The issues are purely legal document
Supporting documents are submitted
It is a plea of consideration based on documents on hand
o Request for reinvestigation
Plea of reconsideration based on the documents on hand
and based on documents to be submitted
Choice of protest has bearing on prescriptive period. In practice, file request
for reconsideration and/or reinvestigation
If the taxpayer fails to file protest within the period, the assessment becomes
final and executory
o Assessment becomes incontestable
Submit relevant supporting documents within 60 days from filing written protest
This refers to request for reinvestigation
The BIR will have 180 days from submission of supporting documents if
reinvestigation, or upon receipt of protest if reconsideration, to decide
Appeal to CTA within 30 days from receipt of final decision on disputed assessment
or within 30 days from lapse of 180 days from submission of relevant supporting
documents
If the taxpayer receives FDDA, the protest is denied. This signals to the
taxpayer to appeal to the CTA within 30 days
If the BIR does not act on the protest within the 180 day period, the remedy of
the taxpayer:
o May appeal the inaction of the CTA within 30 days (from the lapse of
180 days)
o Another option (provided by jurisprudence): when the 180 day lapses
without action from the BIR, wait for a final decision or denial then
appeal the decision to the CTA
o These two options are mutually exclusive
o What constitutes an assessment?
It is important that the taxpayer knows that it receives a final assessment so that the
taxpayer can go to CTA to appeal the decision
But sometimes, the BIR is not clear whether it is already assessing the
taxpayer or whether the assessment is already final
BIR sometimes not clear that it is assessing the taxpayer

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CIR v. Pascor Realty and Dev. Corp.

o There is a tax fraud investigation conducted by the BIR
If the evidence is sufficient to file a case, the BIR will file a
criminal case against the taxpayer
If the evidence is not sufficient to convict the taxpayer
beyond reasonable doubt, the BIR will file a civil case
against the taxpayer
o BIR: CTA has no jurisdiction because there is no assessment
CTA is a court of limited jurisdiction. What can be appealed
in the CTA is the decision on a disputed assessment
o Taxpayer: the computation in the criminal case filed by the BIR is an
assessment
o Not all documents coming from the BIR containing a computation of
tax liability can be deemed an assessment
o An assessment must be sent to and received by the taxpayer, and
must demand payment of the taxes within a prescribed period
o Thus, a criminal complaint for tax evasion is not an assessment since
it does not state a demand or period for payment; it is addressed to
the DOJ and not to the taxpayer
o No jurisdiction of CTA because no assessment in this case
o When the BIR opts for a criminal case, the BIR need not issue an
assessment against the taxpayer
FBDC v. CIR
o An assessment is a written notice and demand made by the BIR on
the taxpayer for the settlement of a due tax liability and is there
definitely set and fixed
o Thus, undated letter directing taxpayer to pay an amount equivalent
to disallowed input tax, surcharge, penalties and interest to be
verified by Assessment Division of the BIR was held not equivalent
to an assessment since taxpayers liability was neither definite and
final considering that the same was still subject to audit verification
nor was payment demanded from taxpayer within a prescribed
period
Summary: Pascor Realty and FBDC
o An assessment must be sent to and received by the taxpayer, and
must demand payment of the taxes within a prescribed period
o 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
When the law speaks of demand of payment of taxes within a prescribed
period, it talks about deficiency taxes. There is a due tax liability. The deadline
has lapsed and the taxpayer has not paid the tax due
o If the demand is on a tax not yet due, it is not considered as an
assessment but only an advisory letter
Effect of follow-up letter
Republic v. CA
o It is alleged that the assessment of the BIR is not received by the
taxpayer
o Held: Presumption that mailed letter is received by addressee in the
ordinary course of the mail is merely a presumption, and is subject
to controversion, and a direct denial of the receipt thereof shifts the
burden on the party favored by the presumption to prove that the
mailed letter was indeed received by the addressee
o However, CIR wrote taxpayer a follow-up letter dated September 19,
1956; this letter is a notice of assessment in itself which was duly
received by taxpayer in accordance with its own admission
The tenor of the follow up letter is like an assessment notice
If the follow up letter does not contain the necessary
information of an assessment, it cannot be considered as
an assessment
If the taxpayer denies receiving the assessment, the burden of proof shifts to the BIR
to establish that it sent the assessment to the taxpayer

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If the BIR cannot prove that it served the PAN before serving the FAN, the assessment
is void for failure to serve a PAN before a FAN
o Presumption of correctness of assessment
The presumption is disputable which can be overturned by evidences
Sy Po v. CTA
Where taxpayer appeals on the ground that the CIRs assessment is
erroneous, it is incumbent upon him to prove what is the correct and just
liability by a full and fair disclosure of all pertinent data in his possession.
Otherwise, if taxpayer confines himself to proving that the tax assessment is
wrong, the tax court proceedings would settle nothing, and the way would be
left open for subsequent assessments and appeals in interminable succession
Tax assessments by tax examiners are presumed correct and made in good
faith. Taxpayer has the duty to prove otherwise. In the absence of proof of any
irregularities in the performance of duties, an assessment duly made by a BIR
examiner and approved by his superior officers will not be disturbed. All
presumptions are in favor of the correctness of tax assessments
It is possible that the figure produced by the BIR is incorrect. But since the
BIR has in its side the presumption of regularity, such figure will be presumed
correct
Best evidence obtainable if the taxpayer does not cooperate, the BIR can rely on the
best evidence obtainable
This is created to force taxpayer to keep records
Based on this rule, the assessment is presumed correct
The threshold of facts needed by the BIR is very low
o Assessment must be based on actual facts
CIR v. Benipayo
Assessment based on findings that during 1949 to 1951, ratio of adults and
children patronizing theatre was 3 to 1
However, during years in question (1952 to 1955), trend was reversed, i.e., 1
to 3
Examiner concluded that taxpayer must have fraudulently issued tax-free
childrens tickets to avoid payment of amusement tax
Held: assessment void for lack of factual basis
In order to stand the test of judicial scrutiny, an assessment must be based
on actual facts
The presumption of correctness of an assessment, being a mere presumption,
cannot be made to rest on another presumption
Assessment should not be based on mere presumptions, no matter how
logical said presumptions may be
Before the presumption that the assessment is correct, the assessment must first be
based on facts
Chemical Ind. of the Phil., Inc. v. CIR
Assessment arising from disallowance of interest on a loan the proceeds of
which were allegedly used to purchase stock of affiliate without factual basis
BIR findings that loan proceeds used for non-business purpose based on
increase in Investments in Affiliated Cos account
Taxpayer, however, was able to explain why account increased
o Assessment issued outside scope of L/A
Sony Phil., Inc. v. CIR
Assessment for deficiency VAT based on 1998 documents held void since L/A
issued to ROs authorized them to audit tax liabilities for 1997
Assessment void since examiners went beyond the scope of their authority
under the L/A
II. COLLECTION OF UNPAID TAXES

A. Distraint, garnishment, Levy, and Seizure
- What are the remedies of the government for the collection of delinquent taxes?
1. Summary remedies of distraint and levy (administrative)
2. Civil action (judicial)
Not really used in practice
3. Criminal action (judicial)

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The collection here is just secondary. The primary purpose is to prosecute the criminal
act
o These remedies may be pursued singly or simultaneously at the discretion of revenue authorities
o In reality, the BIR usually serve notice of garnishment of bank accounts
Garnishment of bank account is an example of distraint of personal property
The notice of garnishment must be served to the taxpayer and to the bank manager
If the notice is not given to the taxpayer, the notice is invalid, there can be no
garnishment
The BIR knows that you have an account in a bank because taxpayers usually pay
through checks
- What are the summary remedies available to the BIR?
1. Distraint (actual or constructive) refers to personal property
2. Levy refers to real property
- Two types of distraint:
o Actual
Who?
Delinquent taxpayer
o Assessment needed
o Constructive
Who?
Delinquent taxpayer
o Assessment needed
Taxpayer intending to evade
o Assessment not necessary; enough that administrative procedures
(leading to issuance of an assessment) are commenced
- What is constructive distraint of property? ( 206)
o It is a preventive remedy of the Government which aims at forestalling a possible dissipation of
the taxpayers assets when delinquency sets in. Hence, actual delinquency is not necessary
before this can be resorted to
o The assets of the taxpayer are frozen by the BIR
o The typical example is freezing of bank accounts. The BIR will not get the cash but they will just
freeze the account
o Not really used in practice
- What are the instances when constructive distraint may be availed of?
o When the CIR believes that the taxpayer:
is retiring from any business subject to tax; or
intends to leave the Philippines; or
intends to remove his property from the Phil.; or
intends to hide or conceal his property or
performs any act tending to obstruct the proceedings for collecting the tax due
- How is constructive distraint effected?
o The taxpayer will be required to sign a receipt covering the property distrained and obligate
himself to preserve it intact and unaltered and not to dispose of it in any manner whatever,
without express authority of CIR
o If the taxpayer refuses, the revenue officer will prepare a list of the properties distrained and will
leave a copy thereof in the premises, in the presence of witnesses
- What is the procedure for actual distraint?
1. Commencement of distraint proceedings ( 207(A))
2. Service of warrant of distraint ( 208)
3. Notice of sale of distrained property ( 209)
4. Release of distrained property, prior to sale ( 210)
5. Sale of property distrained ( 209)
6. Purchase by Government at sale upon distraint ( 212)
- What is the procedure for levy of real property?
1. Commencement of levy proceedings ( 207(B))
2. Service of warrant of levy ( 207(B))
3. Advertisement for sale ( 213)
4. Public sale of the property under levy
5. Redemption of property sold ( 214)
6. Forfeiture to the govt for want of bidder ( 215)
7. Resale of real estate taken for taxes ( 216)
8. Further distraint and levy ( 217)

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B. Civil Action
- Requirement for the institution of civil and criminal actions
o Institution of civil and criminal actions for the recovery of taxes and enforcement of any fine,
penalty or forfeiture under the NIRC requires the approval of the CIR ( 220)
Bello: The CIR can deputize the Regional Directors based on Sec. 7 of the NIRC. But
the DOJ and CTA disagree. They believe that the CIR cannot delegate such power
- Republic v. Lim Tian Teng Sons & Co.
o Republic Act 1125 creating the CTA allows the taxpayer to dispute the correctness or legality of
an assessment both in the purely administrative level and in said court, but it does not stop or
prohibit the CIR from collecting the tax through any of the means provided for in Section 316 of
the Tax Code, except when enjoined by said CTA under sec. 11
o Nowhere in the Tax Code is the CIR required to rule first on a taxpayers request for
reinvestigation before he can go to court for the purpose of collecting the tax assessed*
o Bello: this is wrong. Orbiter na nga, mali pa. See San Juan v. Vasquez case for correct decision
- San Juan v. Vasquez
o The determination of the correctness or incorrectness of a tax assessment to which the taxpayer
is not agreeable falls within the jurisdiction of the CTA and not of the CFI, for under the
aforequoted provision of law, the Court of Tax Appeals has exclusive appellate jurisdiction to
review on appeal any decision of the CIR in cases involving disputed assessments and other
matters arising under the NIRC or other law or part of law administered by the BIR
o Thus, the BIR may not institute a collection case before regular courts while the taxpayer is still
disputing the correctness of the assessment
- Yabes v. Flojo
o In this case, the BIR filed a collection case in CFI and the taxpayer filed a case in CTA contesting
the legality of the assessment
o The CFI cannot lawfully acquire jurisdiction over a contested assessment made by the CIR
against the deceased taxpayer, which has not yet become final and executory, and which
assessment is still pending before the CTA
o CTA has exclusive jurisdiction over disputed assessments; CFI should have dismissed the case
- In case the taxpayer questions the assessment in courts, the BIR may not proceed to collect the
deficiency/ assessment
- Must the assessment be final and executory before the BIR can collect the tax deficiency?
o It depends on the collection remedy availed of by the BIR
The assessment need not be final and executory before the BIR can avail of the
summary remedies of distraint and levy (see 11, RA 1125, as amended by RA 9282;
RP v. Lim Tian Teng)
Sec. 11 provides that no appeal shall prevent the government from distraining
or levying property for collection of taxes
The assessment must be final and executory before the BIR may institute a civil case
for collection of deficiency tax (see Yabes, San Juan, and 7(b)(2)(c) of RA 1125, as
amended by RA 9282)
In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return . . . a [civil or criminal] proceeding in court for the collection of such tax may be
filed without assessment . . . . ( 222(a), NIRC)
Note: under 7(b)(1) of RA 1125, as amended by RA 9282, the civil liability
is deemed instituted along with the criminal action; no right to reserve civil
aspect is allowed
o The remedy of the taxpayer if the BIR enforces collection through distraint or levy despite the
fact that the taxpayer questions the validity of the assessment is if the collection of the tax will
jeopardize the interest of the government or taxpayer, the taxpayer may apply for suspension of
collection
The suspension of collection is in reality a TRO or a preliminary injunction
Do not ask for TRO or preliminary injunction, ask for suspension order
But if you apply for a suspension order, you have to post a cash or surety bond for an
amount not more than twice the amount sought to be collected by the BIR
- How do you reconcile Yabes and San Juan, on one hand, with Lim Tian Teng, on the other hand?
o Lim Tian Tengs holding that nowhere in the Tax Code is the [CIR] required to rule first on a
[taxpayers] request for reinvestigation before he can go to court for the purpose of collecting the
tax assessed is an obiter dictum

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o The assessment in Lim Tian Teng was already final and executory (taxpayer failed to appeal the
decision on the protest -- the referral of the matter to the OSG for collection -- to the CTA); hence,
the civil suit for collection was proper
o Yabes and San Juan involved disputed assessments (hence, not yet final and executory)
- Question: the BIR issued a FAN; without waiting for the taxpayer to file a protest, the BIR issued a warrant
of distraint and levy on the properties of the taxpayer to collect the tax deficiency. Is the BIRs action
valid?
o While an assessment need not be final and executory before the BIR may avail of the summary
remedies of distraint and levy, there is good ground to argue that the BIRs action is not valid on
the ground of denial of due process
o The statutory period of 30 days given to the taxpayer to protest the assessment is a statutory
right which the BIR cannot revoke
- What if 10 days after filing of protest, the BIR issued a warrant of distraint and levy, is this valid?
o No, because it is tantamount to denial of due process because if the protest is in the form if
reinvestigation, the taxpayer has 60 days to submit supporting documents.
- What if 20 days after the submission of the supporting documents, the BIR issued a warrant of distraint
and levy, is this valid?
o Yes, because the issuance of warrant of distraint or levy is tantamount to the denial of the protest
of the taxpayer. Thus the taxpayer must appeal to the CTA within 30 days together with an
application for suspension order
- When may the BIR, at the earliest time possible, may enforce collection by issuing warrant of distraint or
levy?
o When delinquency sets in. Delinquency sets in if the BIR denies the protest.
But the taxpayer is without any remedy. He can file for a suspension order
C. Criminal Action
- CIR v. Pascor Realty and Dev. Corp.
o Filing of criminal case need not be preceded by an assessment
After the BIR has conducted a formal investigation, it can file a criminal complaint with
the DOJ without issuing an assessment against the taxpayer
But there is a law which provides that the civil action is deemed instituted in the criminal
action and no separate civil action may be instituted
The practical effect of this is that if the BIR did not issue an assessment
against the taxpayer before filing a criminal case, the BIR is in fact waiving its
right to collect the tax due (civil liability)
o The CTA will only impose the criminal liability and not the civil liability
If the BIR wants to collect aside from prosecuting the criminal act, it must issue
an assessment
o The assessment can be a PAN
o NIRC 222 specifically states that in case where a false or fraudulent return is filed or failure to
file a return, as in this case, proceedings in court may be commenced without an assessment
o NIRC 205 mandates that civil and criminal aspect may be pursued simultaneously
- Republic v. Patanao
o Acquittal of taxpayer in the criminal proceeding does not necessarily entail exoneration from his
liability to pay the taxes
- Ungab v. Cusi
o Held: What is involved here is not the collection of taxes where the assessment of the CIR may
be reviewed by the CTA, but a criminal prosecution for violations of the NIRC which is cognizable
by CFIs. While there can be no civil action to enforce collection before the assessment
procedures under the NIRC 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
NIRC
o An assessment not necessary to a criminal prosecution for willful attempt to defeat and evade
taxes. A crime is complete when the violator has knowingly and willfully 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 govts
failure to discover the error and promptly to assess has no connection with the commission of
the crime
- Tax fraud investigation is a special investigation
- Steps in development of criminal case under the RATE Program (RMO 27-2010):
o In all RATE cases, an internal preliminary investigation must be first be conducted to establish
prima facie evidence of fraud or tax evasion no-contact audit

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This is different from the preliminary investigation made by DOJ

In this phase, the taxpayer is not yet aware that the BIR is investigating him for tax
evasion case
The BIR gathers data from records available to the BIR or records from third parties
o LOA issued for formal investigation contact audit
In this phase, the taxpayer knows that the BIR is investigating him from possible tax
fraud
If the National Investigation Division issues the LA, the investigation is a tax fraud
investigation
o If evidence not enough to prove taxpayers guilt beyond reasonable doubt, but there exists clear
and convincing evidence that fraud has been committed PAN/FAN issued with 50% fraud
surcharge CIVIL
In this case, the BIR may go away with the PAN and issue FAN immediately
o If evidence is enough to prove taxpayers guilt beyond reasonable doubt, complaint affidavit will
be prepared for filing with the DOJ CRIMINAL
- Before you can impose a 50% surcharge, there must be a willful neglect of filing a return or willful filing of
a false or fraudulent return
- Substantial under-declaration of income and substantial overstatement of deductions as prima facie
evidence of fraud ( 248(B))
o There is substantial under-declaration if the under-declaration is 30% or more
o In practice, the BIR uses this provision to file criminal case against the taxpayer
o Can the BIR use this presumption to file a criminal case? Is there a presumption of criminal
liability?
Yes, there is a presumption of criminal liability if there are basic facts where the
presumption arises (e.g., technical malversation)
Bello: There is nothing in the tax code which provides a presumption of criminal liability.
248(B) is used for civil liability. Thus the BIR cannot file a criminal case on the basis
of 248(B)
- People v. Kintanar: Willful Blindness Doctrine
o General rule: joint filing of ITR of husband and wife. It is the husband who files the ITR
o 3 elements of tax evasion
There is a person liable to a tax
That person does not pay the tax
The non payment of tax is made willfully
Most important element
The burden of proof is with the BIR to show that the taxpayer did not file tax
return willfully
o Willful in tax crimes means voluntary, intentional violation of a known legal duty, and bad faith
or bad purpose need not be shown
Bad faith or bad purpose need not be shown
o Taxpayers sole reliance on her husband to file their ITRs is not a valid reason to justify her non-
filing, considering that she knew from the start that she and her husband are mandated by law
to file their ITRs
o Being an experienced businesswoman, taxpayer ought to know and understand all the matters
concerning her business. This includes knowledge and awareness of her tax obligation in
connection with her business. taxpayer should know how much are her tax dues, the details
stated on the ITRs, where the same are filed, and other important facts related to the filing of her
ITRs; after all, these matters concern her finances
o Neglect or omission (to ensure filing of ITR, to know how much taxes are due, or inquire on the
facts surrounding the ITR) is tantamount to deliberate ignorance or conscious avoidance
- People v. Judy Anne Santos
o Taxpayer acquitted; all elements proven except element of willfulness
o Willfulness cannot be presumed from mere inadvertent or negligent acts
o While taxpayer negligent, such is enough to convict
o Negligence, whether slight or gross, is not equivalent to the fraud with intent to evade tax
contemplated by law. Fraud must amount to intentional wrongdoing with the sole objective of
avoiding the tax. Court also took note of taxpayers intent to settle which negates motive to
commit fraud
o In creditable withholding tax, the income tax must still be reported
o Compared to the case of Kintanar, Mrs. Kintanar was an experienced business woman unlike
Judy Ann Santos who was merely negligent

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D. Anti-Injunction Rule
- General Rule
o No court shall have the authority to grant an injunction to restrain the collection of national
internal revenue tax, fee or charge imposed by the NIRC ( 218, NIRC)
o No appeal taken to the CTA . . . shall suspend the payment, levy, distraint and/or sale of any
property of the taxpayer for the satisfaction of his tax liability ( 11, RA 1125, as amended by
RA 9282)
- Exception
o Where collection of the tax may jeopardize the interest of the Government and/or the taxpayer
(RA 1125 11; Rule 10, Revised Rules of the CTA)
o The CTA may issue suspension order which acts like a TRO/ injunction
There are no instance when the RTC can issue a suspension order for the collection of
tax
But if you question the constitutionality of a tax law, you file a petition for
certiorari and prohibition on the RTC and the RTC can issue an injunction
order on the implementation of the tax law
o Incidentally, the collection of tax will be enjoined but what is really
enjoined is the application of the law
- Churchill v. Rafferty
o 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
o Ratio: It is upon taxation that the Government chiefly relies to obtain the means to carry on its
operations, and it is of the utmost importance that the modes adopted to enforce the collection
of the taxes levied should be summary and interfered with as little as possible
o Courts issue injunction if there will be a grave irreparable injury and there are no other remedies
available. But in case of tax collection, there are remedies available, such as paying the tax on
protest and later on file a refund, thus injunction generally is not allowed on tax collection cases
- CIR v. Cebu Portland Cement Co.
o Held: The argument that the assessment cannot as yet be enforced because it is still being
contested loses sight of the urgency of the need to collect taxes as the lifeblood of the
government
o If the payment of taxes could be postponed by simply questioning their validity, the machinery
of the state would grind to a halt and all government functions would be paralyzed
o This is the reason for the existence of the anti-injunction rule
o To require CIR to actually refund to taxpayer 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
E. Compromise and Abatement

- Compromise by the CIR under Sec. 204 is different from the administrative settlement of taxes
- Compromise means there is a mutual concession between the BIR and taxpayer on the amount that will
be paid by the taxpayer
- In practice, what is subjected to compromise is the basic tax and what is subjected to abatement are the
interest and surcharges
- What are the two main grounds which authorizes the CIR to compromise the payment of internal revenue
taxes?
o Doubtful validity of the assessment minimum compromise rate is 40% of basic tax assessed
Basic tax excludes surcharge and interests
o Financial incapacity minimum compromise rate is 10% of basic tax assessed
- When may the CIR abate or cancel a tax liability?
o When the tax or a portion thereof appears to be unjustly or excessively assessed
o When administrative and collection costs involved do not justify the collection of the amount due
- BIR Rul. 111-99
o Application for abatement appreciated on the basis of the merit of each individual case
o Thus, CIR may not abate en masse imposable penalties on the 895 barangays of Manila in
connection with delayed remittance of withholding taxes BIR Rul. 59-01
o Reliance in good faith on tax ruling as a basis for abatement
III. IMPOSITION OF SURCHARGE, INTEREST, & COMPROMISE PENALTY

A. Civil Penalties
- Surcharge is imposed on the basic tax without regard to the interest
- When does the 25% surcharge apply ( 248(A))?
1. Failure to file return and pay tax due thereon within prescribed period

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2. Filing return with internal revenue officer other than with whom return is required to be filed
If the taxpayer is a corporation, file it in the RDO of the principal place of business
3. Failure to pay deficiency tax within time prescribed for its payment in the notice of assessment
This needs a deficiency assessment issued by the BIR
If the BIR issued a notice of assessment to the taxpayer, there is no surcharge yet. The
25% surcharge will only apply upon the deadline provided in the notice. Normally it is
30 days. It is only after the 30 days that the surcharge will be applied
4. Failure to pay full or part of the amount of tax shown on return on or before date required for its
payment
5. Failure to pay full amount of the tax due for which no return is required to be filed on or before
the date required for its payment
This is a dead letter law
- When does the 50% surcharge apply ( 248(B))?
1. Willful neglect to file the return within the prescribed period
2. False or fraudulent return is willfully made
Question: When is there prima facie evidence of a false or fraudulent return?
Answer: substantial (i.e., more than 30%) under declaration of sales, receipts or
income; substantial overstatement of deductions
This is merely a disputable presumption
CIR v. Javier
Fraud contemplated by law is actual 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 tax
It must amount to intentional wrong-doing with the sole objective of avoiding
the tax
In this case, the taxpayer was expecting a 1k wire transfer but received 1M.
The taxpayer withdrew all 1M.
o Is the 1M subject to income tax? Yes, because there is realization of
economic gain
But in this case, the there was a footnote in the taxpayers ITR that he received
the money as a gift. By virtue of this footnote, the court said there was no
willfulness on the part of the taxpayer to evade taxes. The footnote was an
invitation and notice to the BIR that the amount was not included in the
taxpayers income
CIR v. Japan Airlines
Fraud is not presumed (mere allegation of fraud not enough); must be
established as a fact by the BIR
Good faith as a defense against fraud surcharge
In this case, the taxpayer thought that as an offline carrier, it is not liable for
gross Philippine billings
PICOP v. CIR
Where taxpayer failed to pay taxes on account of the fact that it based its
actions upon reliance to certain official acts or rulings, the 25% surcharge is
not imposable upon taxpayer as it was only acting in complete honesty and
good faith when it did not pay the sales tax
- Imposition of the 25% surcharge will bar the imposition of the 50% surcharge and vice versa
- May the BIR waive the imposition of the 25% surcharge?
o General rule: no; imposition of the 25% surcharge is mandatory for cases falling under 248(A)
o Exception: the BIR has waived the 25% surcharge in justifiable circumstances, e.g.:
1. Taxpayer mistakes arising from a difficult interpretation of the law
2. Change in BIR payment policies resulting in confusion
3. Other justifiable circumstances
o BIR Rul. 2-95
Taxpayer requested waiver of surcharges and penalties arising from failure to withhold
and remit withholding taxes
Taxpayer cited lack of funds following the demolition of the YMCA building, which was
its main source of income
Ruling: imposition of surcharge mandatory, therefore cannot be waived
o BIR Rul. 48-99

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Taxpayer paid DST on purchase of real property at wrong venue (paid at RDO of buyer;
should have been paid at sellers RDO)
Ruling: 25% surcharge waived
RMO directing payment at sellers RDO at the time of the sale was at its experimental
stage and had not yet been widely disseminated so as to inform taxpaying public about
the repeal of previous rulings allowing payment of DST at payors residence
o BIR Rul. 205-99
Taxpayer suffered business reverses
Had no cash flow to pay income tax liabilities
Intended to use its TCCs to pay taxes
Revalidation of TCCs, however, took some time to secure despite best efforts exerted
by taxpayer (repeated follow-ups, phone calls and personal visits)
Ruling: in view of justifiable circumstances, surcharge and penalty waived, but not
interest
o BIR Rul. 78-98
Taxpayer unable to pay withholding taxes on the last day due to change in payment
system; RDO officials also could not give a definitive answer on the new payment
system
Taxpayers tender of a managers check was not accepted by AAB
Ruling: penalties and surcharges waived
CIR was convinced that taxpayer attempted to pay withholding tax on the last day (thru
the MC), but due to confusion on the implementation of new payment system was
unable to do so
- May the BIR waive the 50% fraud in cases of willful neglect to file return, or false or fraudulent returns
willfully made? No.
o Are there exceptions? None
- Questions
o Example 1 (penalty for deficiency tax):
Taxpayer filed its ITR for taxable year 1997 in April 15, 1998 and paid income tax of
P100,000
After a tax investigation, the BIR disallowed P200,000 of the taxpayers representation
expenses for failure to meet the statutory requisites for deductibility
Disallowance resulted in a deficiency tax of P70,000; taxpayer issued an assessment
Question: should BIR impose a 25% surcharge on the P20,000 deficiency tax in the
assessment?
(No; see 248(A)(3))
o Example 2 (50% fraud penalty):
Taxpayer filed its ITR for taxable year 1997 in April 15, 1998 with a net taxable income
of P500,000
After a tax investigation, the BIR discovered that the taxpayers ITR is false or
fraudulent since it did not report willfully certain income amounting to P500,000
On its net income per investigation of P1 million, the income tax due is P350,000; the
resulting basic tax deficiency is P175,000 since the taxpayer paid only income tax of
P175,000 per its return filed; assessment issued on May 31, 1999 demanding payment
of the deficiency tax on or before June 30, 1999
Question: should BIR impose a 50% surcharge on the P175,000 deficiency tax in the
assessment?
(Yes; filing of a false or fraudulent return triggers the automatic imposition of the 50%
surcharge under 248(B))
o Example 3 (late payment of a deficiency tax assessed):
Based on example 2, assuming that the 1997 deficiency income tax assessment
against the taxpayer, consisting of the basic tax of P175,000 + 50% surcharge +
interest, is paid only by the taxpayer on July 31, 1999; assuming further that the
assessment became final and executory for failure to file a timely protest
Is the taxpayer liable for an additional 25% surcharge?
(Yes, under 248(A)(3); liable also for additional interest on the entire amount (which
includes the 50% surcharge and interest)
B. Interest
- Cagayan Electric v. CIR

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o However, it cannot be denied that the 1969 assessment was highly controversial. The CIR at
the outset was not certain as to taxpayers income tax liability. Taxpayer had reason not to pay
income tax because of the tax exemption in its franchise
o For this reason, taxpayer should only be liable for the tax proper, and should not be held liable
for surcharge and interest
- Statutory basis: Sec. 249
- Two types of interest:
o Deficiency interest 20% interest imposed on the deficiency in the basic tax due; accrues from
the date prescribed for its payment until full payment
Tax base: basic tax
o Delinquency interest 20% imposed in case of failure to pay a deficiency tax, or any surcharge
or interest thereon on the due date appearing in the notice and demand (i.e., FAN/FLD or the
FDDA)
Will only apply if there is assessment from the BIR
Tax base: basic tax + surcharge + interest
- Relevant periods:
1. Due date prescribed for payment of the basic tax;
This is the deadline to file and pay the return
2. Due date appearing in the notice and demand of the Commissioner; and
3. Date of actual payment
o
Bello: this is the correct method in computing
o
Is this legal?
Overlapping 20% interest prescribed by the CTA in decided assessment
cases
Manner of computing interest adopted by the BIR in Rev. Regs. 18-2013
Bello: this is wrong because it lacks statutory basis. This amounts to an imposition of
penalty by the BIR where in fact interest is imposed as a compensation
But beginning 2013, the BIR codified CTA decisions of overlapping interest
- Republic v. Heras
o Collection of interest is not punitive in nature, but compensatory; it is compensation to the State
for the delay in the payment of the tax
o It is the charge for the use by the taxpayer of funds that rightfully should have been in the
government coffers and utilized for the ends thereof
- RP v. Heras Collection of interest is not punitive in nature, but compensatory; it is compensation to
the State for the delay in the payment of the tax
- Only penalties that the BIR is authorized to impose in addition to the deficiency tax those found in Sec.
248(A) and (B) 25% or 50% surcharge
- Double imposition of 20% interest amounts to an unjust collection of an additional penalty, rather than
mere compensation to the State for delay in the payment of the tax
- Taxable year 2000; deficiency income tax of P1 million that has become final and executory
o Deadline for payment prescribed in assessment is April 15, 2003
o Payment made on April 15, 2004
Basic deficiency tax P1,000,000
Surcharge (25%) 250,000
Deficiency interest (20% on P1M): 4/16/01 4/15/04 600,000
Total amount due P1,850,000
Add: delinquency interest (20% on P1M): 4/15/03 4/15/04 200,000

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Basic deficiency tax P1,000,000

Surcharge (25%) 250,000
Deficiency interest (20% on P1M): 4/16/01 4/15/04 400,000
Add: delinquency interest (20% on P1.65M): 4/15/03 4/15/04 330,000
C. Compromise Penalty
- Criminal violations may be compromised, except:
o Those already filed in court, or
o Those involving fraud
- Compromise penalty is a compromise in the criminal violation of the taxpayer. Compromise under Sec.
204 is a compromise in national internal revenue taxes
- CIR v. Lianga Bay Logging Co., Inc.
o BIR assessed taxpayer 25% surcharge for allegedly removing forest products without auxiliary
invoices; taxpayer assessed also compromise penalty
o Held: Imposition of compromise penalty must be with the conformity of the taxpayer, otherwise
the imposition is illegal
RIGHTS AND REMEDIES OF TAXPAYERS UNDER THE NIRC

I. AMEND RETURN
- May a taxpayer amend his tax return as a matter of right?
o Yes, subject to the following conditions:
The amendment is made within 3 years from the filing of the return; and
No notice for investigation or audit of such return, statement or declaration has, in the
meantime, been actually served upon the taxpayer ( 6(A))
- Rohm Apollo Semiconductor Phil. v. CIR
o Although taxpayer is allowed to amend its returns, the amendment so allowed does not extend
as to give support to taxpayers allegations in its pleadings that are contradictory to the existing
evidence on record
II. PROTEST ASSESSMENT

A. Procedure
- What is the procedure for protesting an assessment?
1. Notice of informal conference Taxpayer to respond in 15 days from receipt of notice, otherwise
he shall be considered in default; docket to be endorsed to the next higher office for review and
issuance of assessment, if warranted (removed by a revenue regulation)
2. PAN Taxpayer to respond within 15 days, otherwise he shall be considered in default, in which
case a formal letter of demand and assessment notice shall be issued to taxpayer
If taxpayer files reply disagreeing with PAN, FAN/FLD shall be issued
3. FAN Taxpayer to file a protest within 30 days, otherwise the assessment shall become final,
executory and demandable
4. Relevant supporting documents to be submitted by taxpayer within 60 days from the filing
of the protest, otherwise the assessment shall become final, executory and demandable
Per RR 18-2013, applicable only to requests for reinvestigation
5. Appeal to CTA within 30 days from denial of protest or within 30 days from the lapse of 180
days from submission of relevant supporting documents, otherwise the assessment shall
become final, executory and demandable
The taxpayer may wait for the BIR decision before filing a petition with the CTA
B. PAN
- PAN is mandatory. If without PAN and the BIR issued FAN, the FAN is null and void
- Must the BIR issue the taxpayer a PAN before a FAN? Yes ( 228)
- When may the BIR dispense with a PAN? Only in the ff. instances:
o Mathematical error
o Discrepancy bet. tax withheld and tax actually remitted
o When taxpayer opting for a refund or TCC carried over and automatically applied excess credits
against tax liabilities of the succeeding taxable quarter/s or year/s
o Non-payment of excise tax
o Transfer by exempt person of tax-free articles to nonexempt persons ( 228)

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- If taxpayer fails to present evidence during the PAN stage, does this mean that the taxpayer is precluded
from introducing evidence in the FAN stage?
o No. Taxpayer still entitled to protest the FAN and submit relevant supporting docs. Failure to
present evidence during PAN stage (or even failure to respond to the PAN) not an implied
admission of the correctness of the assessment
o It is only upon taxpayers failure to file a protest upon receipt of the FAN or to appeal the denial
of the protest within the prescribed periods would the FAN become final, unappealable and
executory thereby negating taxpayers right to present evidence precisely because the right to
dispute the assessment has prescribed and the court can no longer acquire jurisdiction over the
same
- What is the BIRs remedy then if taxpayer fails to present evidence during the PAN stage?
o BIR is entitled to issue a FAN based on its findings
- Pier 8 Arrastre and Stevedoring Services v. CIR
o Failure of taxpayer to appear and/or to present evidence during PAN stage, or even during the
protest period does not mean a waiver of the right to present any evidence to dispute the
assessment
o Such failure is not equivalent to an implied admission of the correctness of the tax assessment
o It is only when taxpayer fails to file a timely protest on the FAN or fails to timely appeal the denial
of the protest would the assessment become final, unappealable and executory thereby negating
taxpayers right to present evidence precisely because the right to dispute the assessment has
prescribed and the court can no longer acquire jurisdiction over the same
- What if BIR issues a FAN without first issuing a PAN (assuming the non-issuance of the PAN does not
fall within the exceptions), will that invalidate the assessment?
o Arguably, yes. Denial of due process. Even if taxpayer had all the opportunity to protest the FAN
and submit relevant supporting documents? Cant the BIR argue that all that the due process
clause requires is the opportunity to be heard (which was satisfied when taxpayer protested the
FAN and submitted relevant supporting documents)?
o Must be raised though as an affirmative defense in the protest to the FAN (otherwise if not raised,
might be considered waived)
o See, however, the case of CIR v. Menguito which seems to hold that the lack of a PAN is not
fatal to the BIR so long as a FAN is served on the taxpayer
However, while the lack of a post-reporting notice and preassessment notice is a
deviation from the requirements under RR 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 NIRC
Requirement that an assessment be satisfactorily proven to have been issued
and released or, if receipt thereof is denied, that said assessment has been
served on taxpayer, applies only to a FAN, but not to post-reporting notices or
PAN
A post-reporting notice and PAN do not bear the gravity of a FAN; they merely
hint at the initial findings of the BIR and invite the taxpayer to an informal
conference. Neither contains a declaration of the tax liability of the taxpayer
or a demand for payment thereof. Hence, the lack of such notices inflicts
prejudice on the taxpayer for as long as the latter is properly served a FAN
- Lack of PAN is fatal
o CIR v. Metro Star Superama
[T]he 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 [of Rev. Regs. 12-99] describes the
mandatory nature of the service of a PAN
C. Requirement to inform taxpayer of factual and legal basis of assessment

- What is the effect if the BIR fails to inform the taxpayer of the factual and legal basis of the assessment?
o The assessment is rendered void
- Even if the BIR officer explained verbally the factual and legal basis of the assessment, the assessment
is still null and void
- The PAN need not have a factual and legal basis provided that the FAN has
o But an internal regulation requires PAN to include factual and legal basis
- Even if the taxpayer was able to piece the factual and legal basis of the BIR for issuing the assessment,
but the FAN did not include the factual and legal basis, the FAN is null and void
- CIR v. Reyes

Marion Nerisse Kho
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o Merely notifying the taxpayer of the BIRs findings without informing the taxpayer of factual and
legal basis of the assessment is insufficient
- In what form should the informing take? In written form
- Must factual and legal basis be embodied in the assessment notice itself?
- What is the minimum requirement?
- Australasia Cylinder Corp. v. CIR
o In whatever form and manner the assessment notice is written, as long as taxpayer is informed
on how the assessment is arrived at, then the requirement of the law is sufficiently met
o Mere computation of taxable income per audit without explaining how the BIR arrived at the
figures or without explaining the factual and legal basis of the assessment renders the
assessment void
- PNZ Marketing v. CIR
o Factual and legal basis embodied in the formal letter of demand attached to the FAN complies
with 228
- Phil. Mining Service Corp. v. CIR
o Report of investigation and memorandum of RO detailing factual and legal basis of assessment
issued to taxpayer prior to FAN (which only contained deficiency tax due) satisfies 228
- Oceanic Wireless Network v. CIR
o There is substantial compliance with 228 when the taxpayer is able to protest the assessments
intelligently, thereby implying that it had actual knowledge of the factual and legal bases of the
assessments
o The allegation that taxpayer failed to receive copy of the detailed computation during the informal
conference of the penalties for the quarterly income tax assessment carries little consideration
by the court. It is sufficient that taxpayer was informed of the reason why the said assessment
was issued. Clearly, taxpayer was informed of the factual and legal bases on which the
assessment for deficiency quarterly income tax was based
- Recap:
o CTA broadly interpreted requirement in the BIRs favor
Report of investigation and memorandum of examiner detailing factual and legal basis
of assessment issued to taxpayer prior to FAN (which only contained deficiency tax
due) satisfies 228. Phil. Mining Service Corp. v. CIR
o There is substantial compliance with 228 when the taxpayer is able to protest the assessments
intelligently, thereby implying that it had actual knowledge of the factual and legal bases of the
assessments. Oceanic Wireless Network v. CIR
- CIR v. Enron Subic Power Corp.
o BIR contention: taxpayer was properly apprised of its tax deficiency. During the pre-
assessment stage, CIR advised taxpayers representative of the tax deficiency, informed it of
the proposed tax deficiency assessment through a preliminary five-day letter and furnished
taxpayer a copy of the audit working paper showing in detail the legal and factual bases of the
assessment. These steps sufficed to inform taxpayer of the laws and facts on which the
deficiency tax assessment was based
o The advice of tax deficiency, given by the CIR to an employee of taxpayer, 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
o 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 taxpayer was informed of the law and facts on which the
deficiency tax assessment was made
o The law requires that the legal and factual bases of the assessment be stated in the formal letter
of demand and assessment notice pursuant to RR 12-99
D. Submission of supporting documents

- 228 requires the taxpayer to submit all relevant supporting docs within 60 days from filing the protest.
What is the effect if the taxpayer fails to comply with this requirements?
o The assessment becomes final, executory and demandable
- Who determines whether the taxpayer has submitted all relevant supporting documents?
o The taxpayer. Relevant supporting documents refers to such documents which the taxpayer
feels would be necessary to support his protest and not what the CIR feels should be submitted,
otherwise, taxpayers would always be at the mercy of the BIR which may require production of

Marion Nerisse Kho
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such documents which taxpayer could not produce. In this manner the assessment could easily
become final
- H. Tambunting Pawnshop, Inc. v. CIR
o Relevant supporting documents refers to such documents which the taxpayer feels would be
necessary to support his protest and not what the CIR feels should be submitted, otherwise,
taxpayers would always be at the mercy of the BIR which may require production of such
documents which taxpayer could not produce. In this manner the assessment could easily
become final
- CIR v. First Express Pawnshop
o 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
o 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
- What is the BIRs remedy then if it feels that the docs submitted by the taxpayer are insufficient?
o Deny the protest and state that the supporting documents submitted by the taxpayer failed to
overturn the presumption of correctness of the assessment
E. Effect of failure to file protest

- Dayrit v. Cruz
o The assessments having become final and executory, the CFI properly acquired jurisdiction
o The aforesaid exclusive jurisdiction of the CTA arises only in cases of disputed tax assessments.
As noted earlier, taxpayers letter dated October 7, 1972 asking for reconsideration of the
questioned assessments cannot be considered as one disputing the assessments because
petitioners failed to substantiate their claim that the deficiency assessments are contrary to law.
taxpayers asked for a period of thirty (30) days within which to submit their position paper but
they failed to submit the same nonetheless. Hence, taxpayers letter for a reconsideration of the
assessments is nothing but a mere scrap of paper
III. IN CASE OF DENIAL OF PROTEST OR INACTION, APPEAL TO CTA

A. Scope of jurisdiction of CTA/ what is appealable to the CTA
- Scope of jurisdiction of the CTA:
1. Disputed Assessments, Refunds, etc.
Decisions of the CIR on:
disputed assessments;
refunds of internal revenue taxes, fees, etc.;
other matters arising under the NIRC or other tax laws
Inaction of the CIR on disputed assessments, refunds, etc.
2. Local Tax Cases
RTC decisions on local tax cases
3. Customs Duties and Taxes
Decisions of the COC:
on cases involving liability for duties and taxes;
seizure, detention and release of property; and
other matters arising under the TCCP and other customs laws
4. Real Property Tax
Decisions of the CBAA on appeal of real property tax matters originally decided by the
LBAA
5. Decisions of DOF and DTI on certain matters
Decisions of SecFin on customs cases elevated to him on automatic review of COC
decisions adverse to the government under TCCP 2315
Decisions of Sec. of Trade and Industry and/or Sec. of Agriculture involving dumping,
countervailing duties and safeguard measures
6. Tax and Customs Criminal Offenses
Original jurisdiction over criminal offenses arising from violation of the NIRC, TCCP and
other tax/customs laws where amount involved is P1 million or more

Marion Nerisse Kho
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Appellate jurisdiction over RTC decisions on criminal offenses where amount involved
is less than P1 million
7. Tax Collection Cases
Original jurisdiction over tax collection cases involving final and executory assessments
where amount involved is P1 million or more
Appellate jurisdiction over RTC decisions on tax collection cases where amount
involved is less than P1 million
- CIR v. Villa
o Held: The word decisions in 1, 7 of RA 1125 means the decisions of the CIR on the protest
of the taxpayer against the assessments. Definitely, said word does not signify the assessment
itself
o Since in the instant case the taxpayer appealed from the assessment of the CIR without
previously contesting the same, the appeal was premature and the CTA had no jurisdiction to
entertain said appeal. For, as stated, the jurisdiction of the CTA is to review by appeal decisions
of the CIR on disputed assessments. The CTA is a court of special jurisdiction. As such, it can
take cognizance only of such matters as are clearly within its jurisdiction
B. Application of the 180-day rule

- Lascona Land Co. v. CIR
o It is only the decision not appealed by taxpayer to the CTA that becomes final, executory and
demandable. Otherwise, Congress could have easily included the word assessment as also
becoming final, executory and demandable should the BIR fail to act on the protest within 180
days and the inaction is not appealed to the CTA
o In cases of inaction, Sec. 228 merely gave the taxpayer an option:
First, he may appeal to the CTA within thirty (30) days from the lapse of the 180-day
period, or
Second, he may wait until the CIR decides on his protest before he elevates his case
to the CTA
- Lascona affirmed by SC
o Meanwhile, Revised Rules of the CTA approved and issued by the SC on Nov. 22, 2005 adopting
Lascona (see 3(a)(2), Rule 4 and 3(a), Rule 8)
- Correlate Lascona and 3(a)(2), Rule 4 and 3(a), Rule 8 with 7(a)(2) of RA 1125, which provides:
o Inaction by the [CIR] in cases involving disputed assessments . . . where the [NIRC] provides a
specific period of action, in which case the inaction shall be deemed a denial
- Under NIRC 228, [i]f the protest is denied in whole or in part . . . the taxpayer adversely affected by the
decision . . . may appeal to the [CTA] within thirty (30) days from receipt of the said decision . . . otherwise,
the decision shall become final, executory and demandable
- RCBC v. CIR
o Based on the foregoing, [taxpayer] can not now claim that the disputed assessment is not yet
final as it remained unacted upon by the [CIR]; that it can still await the final decision of the [CIR]
and thereafter appeal the same to the [CTA]. This legal maneuver cannot be countenanced.
After availing the first option, i.e., filing a petition for review which was however filed out of time,
[taxpayer] can not successfully resort to the second option, i.e., awaiting the final decision of the
[CIR] and appealing the same to the [CTA], on the pretext that there is yet no final decision on
the disputed assessment because of the [CIRs] inaction.
o Appeal options thus mutually exclusive
C. What constitutes denial of protest/ decision on disputed assessment

- General rule: FDDA
o A regulation provides that once a taxpayer receives a FDDA, the taxpayer has two remedies
Appeal to the CTA
Appeal to the Office of the Commissioner (optional appeal)
This is allowed if the FDDA is issued by a authorized officer
If the Office of the Commissioner denies the appeal, the taxpayer has 30 days
to file an appeal with the CTA
- Issuance of Revised Assessment Upon Reinvestigation
o Avon Products Mfg., Inc. v. CIR
June 3 letter (which included the revised assessment) particularly referred to taxpayers
requests for reinvestigation; also made a demand for settlement of reduced tax
liabilities within 15 days together with a threat to enforce collection via summary
remedies without further notice
The revised assessment is effectively a denial of the protest in whole or in part

Marion Nerisse Kho
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- Final Notice Before Seizure

o CIR v. Isabela Cultural Corp.
Held: In the light of the above facts, the Final Notice Before Seizure cannot but be
considered as the CIR's decision disposing of the request for reconsideration filed by
taxpayer, 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
o CIR v. Ayala Securities Corp.
Taxpayer assessed; taxpayer protested assessment
On February 21, 1963, taxpayer received a letter dated February 18, 1963 wherein CIR
called taxpayers attention to the unpaid tax as assessed and demanded payment
within 5 days
Believing that February 18, 1963 letter was the CIRs decision on the disputed
assessment, taxpayer appealed to CTA
The letter of February 18, 1963 (Exh. G), in the view of the Court, is tantamount to a
denial of the reconsideration or protest of the taxpayer on the assessment made by the
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 taxpayer on April 21,
1961.
This certainly is a clear indication of the firm stand of the CIR against the
reconsideration of the disputed assessment, in view of the continued refusal of the
taxpayer to execute the waiver of the period of limitation upon the assessment in
question.
This being so, the 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 Surigao Electric Co. Inc. v. CTA
Moreover, the letter of demand dated April 29, 1963 unquestionably constitutes the
final action taken by the CIR on the taxpayers several requests for reconsideration and
recomputation. In this letter, the CIR not only in effect demanded that the taxpayer pay
the amount of P11,533.53 but also gave warning that in the event it failed to pay, the
said CIR 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 indicates the final nature of the determination
made by the CIR of the taxpayers deficiency franchise tax liability
Thus, this Court has considered the following communications sent by the CIR to
taxpayers as embodying rulings appealable to the CTA: (a) a letter which stated the
result of the reinvestigation requested by the taxpayer and the consequent modification
of the assessment; (b) a letter which denied the request of the taxpayer for the
reconsideration, cancellation, or withdrawal of the original assessment; (c) a letter
which contained a demand on the taxpayer for the payment of the revised or reduced
assessment; and (d) a letter which notified the taxpayer of a revision of previous
assessments
We deem it appropriate to state that 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
On the basis of this indicium indubitably showing that the CIRs 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

Marion Nerisse Kho
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On the part of the CIR, 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 CIR 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 SC admonished the BIR and said that the BIR has to make sure that
what the BIR sends to the taxpayer is a clear denial of the protest
- Filing of collection suit
o CIR v. Union Shipping Corp.
Held: citing its admonition to the CIR in Surigao Electric, SC held that: there appears
to be no dispute that CIR did not rule on taxpayers motion for reconsideration but
contrary to the above ruling of this Court, left taxpayer in the dark as to which action of
the CIR is the decision appealable to the CTA. Had he categorically stated that he
denied taxpayers MR and that his action constitutes his final determination on the
disputed assessment, taxpayer without needless difficulty would have been able to
determine when his right to appeal accrues and the resulting confusion would have
been avoided
Much later, this Court reiterated the above-mentioned dictum in a ruling applicable on
all fours to the issue in the case at bar, that the reviewable decision of the BIR is that
contained in the letter of its Commissioner, that such constitutes the final decision on
the matter which may be appealed to the CTA 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 CIR, 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 taxpayer 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
the CIR when the latter filed a civil suit for collection of deficiency income. So that on
January 10, 1979 when taxpayer filed the appeal with the Court of 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
- Issuance of WDL
o Protest is part and parcel of due process thus the BIR cannot revoke such right of the taxpayer
by issuing a WDL. This is because the taxpayer is not yet delinquent
o The BIR can issue the WDL after the taxpayer has submitted all the relevant supporting
document if the taxpayer submitted a request for reinvestigation
The WDL is tantamount to denial of the protest
Despite the wordings of the SC in the Surigao case, in practice, you treat a WDL as a
denial of the protest
o Central Cement Corp. v. CIR
Held: the matter of jurisdiction was neither raised by CIR in his "Answer" nor in the trial
on the merits of this case.
CIRs counsel actively participated in court proceedings; issue of lack jurisdiction raised
only when case was already submitted for decision
While lack of jurisdiction may be assailed at any stage, a party's active participation in
the proceedings before the court without jurisdiction will estop such party from assailing
such lack of jurisdiction
In the case at bar, the WDLs were issued by CIR knowing fully well that the deficiency
assessments were under protest by taxpayer. Even when the issuance of the WDLs
were objected to by taxpayer for being in violation of the Tax Code, CIR did not lift said
warrants.
It is by CIRs own doing that administrative remedies available to taxpayer were
effectively shut-off thereby, leaving taxpayer with no recourse but to seek relief from
this Court
o CIR v. Algue, Inc.

Marion Nerisse Kho
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It is true that as a rule the WDL is "proof of the finality of the assessment" and "renders
hopeless a request for reconsideration," being "tantamount to an outright denial thereof
and makes the said request deemed rejected."
But there is a special circumstance in the case at bar that prevents application of this
accepted doctrine
The proven fact is that 4 days after the taxpayer received the CIRs notice of
assessment, it filed its letter of protest. This was apparently not taken into account
before the WDL was issued; indeed, such protest could not be located in the office of
the CIR. It was only after Atty. Guevara gave the BIR a copy of the protest that it was,
if at all, considered by the tax authorities.
o Advertising Assoc., Inc. v. CIR
Held: We hold that the petition for review was filed on time. The reviewable decision is
that contained in Commissioner Plana's letter of May 23, 1979 and not the WDLs
No amount of quibbling or sophistry can blink the fact that said letter, as its tenor shows,
embodies the Commissioner's final decision within the meaning of section 7 of RA
1125. The CIR said so. He even directed the taxpayer to appeal it to the Tax Court.
The directive is in consonance with this Court's dictum that the Commissioner should
always indicate to the taxpayer in clear and unequivocal language what constitutes his
final determination of the disputed assessment. That procedure is demanded by the
pressing need for fair play, regularity and orderliness in administrative action (Surigao
Electric Co., Inc. vs. Court of Tax Appeals).
D. Period to appeal/ effect of failure to appeal

- Basa v. RP
o Held: if taxpayer wanted to contest the assessment, he should have appealed to CTA
o Not having done so, he could no longer contest the same in the CFI
o Taxpayer can no longer raise prescription, which should have been interposed as a defense in
CTA
o Once the assessment becomes final and executory, it is incontestable
- Mambulao Lumber Co. v. CIR
o CFI ruled in favor of CIR; taxpayer appealed to CA which affirmed CFI
o Held: assessment already final and executory for taxpayers failure to appeal the July 8, 1959
letter
o In a suit for collection of internal revenue taxes, as in this case, where the assessment has
already become final and executory, the action to collect is akin to an action to enforce a
judgment
o No inquiry can be made therein as to the merits of the original case or the justness of the
judgment relied upon. Petitioner is thus already precluded from raising the defense of
prescription
E. Mode of appeal and effect of appeal

- What is the taxpayers remedy in case the BIR denies the protest (i.e., issues an adverse decision on the
disputed assessment ) or fails to act on the same within the 180-day period?
o Appeal the denial or the inaction to the CTA within 30 days from the denial or from the lapse of
the 180-day period by filing a petition for review (RA 1125 11)
o A division of the CTA shall hear the appeal
- What is the effect of the appeal on the disputed assessment?
o Gen. rule: the appeal will not suspend the payment, levy, distraint and/or sale of any property of
the taxpayer for the satisfaction of his tax liability (RA 1125 11, 4th par.)
o Exception: when the collection will jeopardize the interest of the govt or the taxpayer (court will
issue an injunction provided amount claimed is deposited or surety bond is posted for not more
than 2x the amount claimed)
- What is the taxpayers remedy in case the CTA division issues an adverse decision vs. the taxpayer?
o File an MR or new trial within 15 days from notice of decision (RA 1125 11, 3rd par.)
o Upon issuance of resolution denying the MR or new trial, appeal the same to the CTA En Banc
within 15 days from notice of the resolution (RA 1125 18; Revised Rules of the CTA 3(b),
rule 8)
- May the taxpayer appeal the adverse decision directly to the CTA En Banc without filing an MR?
o No. Appeals to the CTA En Banc must be preceded by the timely filing of an MR new trial with
the CTA division (Revised Rules of the CTA 1, rule 8; see also RA 1125 18)
- May the taxpayer appeal the adverse decision of the CTA division directly to the SC under Rule 45 (on a
pure question of law)?

Marion Nerisse Kho
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o No. Failure to file a motion for reconsideration of an assailed decision of a CTA division, or at
least file a petition for review with the CTA en banc, before filing a petition for review with the SC
renders the assailed decision final and executory. Commissioner of Customs v. Gelmart
Industries Phil., Inc.
IV. APPEAL TO SC
- The decision of the CTA En Banc will be appealed to the SC
- An MR to the decision of the CTA En Banc is optional. It is not required before going to SC
- After decision of the CTA En Banc, the taxpayer has 3 remedies:
o File an MR in CTA En Banc
o File an appeal in SC
o File a motion for extension with the SC
V. REFUND AND/OR TAX CREDIT OF ERRONEOUSLY PAID TAX

A. What constitutes erroneous payment
- There must be an allegation that the tax is erroneously or illegally collected
o Erroneously or wrongfully collected means that the case is not yet due but collected
- Chemical Industries of the Phil., Inc. v. CIR
o In this case, there is a contract that is subject to a resolutory condition
o Held: the March 31, 1998 ruling request addressed to the Deputy Commissioner is not a claim
for refund but a letter requesting for a ruling for the refund of the tax allegedly paid by taxpayer
o The ruling request is not the written claim for refund required by law before a judicial refund claim
may be filed with the CTA
o The stock transaction tax was not illegally or erroneously assessed or collected
o No allegation that at the time the stock transaction tax was paid, no such tax was due and
payable; in other words, there was no allegation that the payment therefore was erroneous
o The share sale was already perfected and remained effective until one or more of the resolutory
conditions occurred; such being the case, the payment of the tax was proper and legal
o In this case, at the time of payment, the tax was due thus the refund was not allowed
o DST is in the form of excise tax (a tax that is imposed on a privilege). Here, it is the privilege of
transferring ownership. In this case, the DST already accrued
o There must be a wrongful payment (not legally due) before there can be a refund
- What can be refunded or credited is a tax that is erroneously, illegally, excessively or in any manner
wrongfully collected
- In short, there must be a wrongful payment because what is paid, or part of it, is not legally due (San
Roque case)
- What is the test to determine W/N tax was illegally or erroneously assessed or collected?
o At the time the claimed tax was paid, no such tax was due and payable
o Payment of a tax beyond beyond what is legally due
B. Requirement to file administrative claim

- 204 administrative claim, which is in writing, must be filed within 2 years from payment of the tax
o No exception in the 2 year period, even in cases of supervening events
- 229 judicial claim of taxpayer
- If the BIR denies the administrative claim of the taxpayer for refund, the taxpayer should file an appeal
with the CTA within 30 days from notice of decision
- If the BIR did not act on the administrative claim of refund, the taxpayer need not wait for a decision, and
appeal with the CTA before the lapse of the two year period
o In practice, appeal within 3 or 4 days before expiration of the period
o The period of filing must be near the date of prescription of period for you to have a cause of
action
o If the taxpayer files the admin claim 5 days before the lapse of the period, and files the judicial
claim the next day, the judicial claim will prosper
o Bello filed the admin claim on the last day of the prescribed period and filed the judicial claim in
the afternoon. The CTA allowed
- The administrative claim and the judicial claim must be filed within the 2 year period
o If the admin claim was filed within the 2 year period and the judicial claim is filed outside the 2
year period, the judicial claim will not prosper
- Bermejo v. Collector
o Held: taxpayer contended that the requirement to file a refund claim with the CIR was complied
with, because prior to the institution of the court case, there were letters sent to the CIR
protesting the tax

Marion Nerisse Kho
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o The law clearly stipulates that after paying the tax, the taxpayer must submit a claim for refund
before resorting to the courts.
o The idea probably is, first, to afford the CIR an opportunity to correct the action of subordinate
officers;
o 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.
o Previous objections to the tax may not take the place of that claim for refund, because there may
be some reason to believe that, in paying, the taxpayer has finally come to realize the validity of
the assessment.
o You cannot go to the CTA for a judicial claim without first filing an administrative claim
o Before BIR can refund, the taxpayer has to file an administrative claim for refund first
C. Effect of supervening event

- CIR v. Central Azucarera Don Pedro
o The taxpayer here is registered with the BOI
o Held: 2-year period counted from the supervening event which gave rise to the right to refund
(i.e., grant of tax exemption on September 20, 1965)
o When the tax sought to be refunded is illegally or erroneously collected, the 2-year period starts
from the date the tax was paid
o But when the tax is legally collected (as in the present case), the 2-year period commences to
run from the date of occurrence of the supervening event which gave rise to the right to refund
o NB: this case is no longer good law in view of present language of 229 (irrespective of any
supervening event)
- Meralco v. CIR
o Contention of taxpayer: 2-year period should commence to run only from the time the refund
is ascertained; therefore period should be reckoned from Oct. 7, 2003 when BIR issued ruling
o Held: portion of amount sought to be refunded prescribed
o Under 229, the administrative claim and the judicial claim must be filed within 2 years from
date of payment of the tax regardless of any supervening cause
o There is no requirement in the law that a taxpayer must first request for a tax ruling confirming
exemption before it can file a refund claim in cases of erroneous payment or overpayment of
taxes
D. Offsetting against deficiency assessments

- CIR v. Cebu Portland Cement
o Taxpayer won in a judgment of tax refund
o Held: The argument that the assessment cannot as yet be enforced because it is still being
contested loses sight of the urgency of the need to collect taxes as the lifeblood of the
government
o If the payment of taxes could be postponed by simply questioning their validity, the machinery
of the state would grind to a halt and all government functions would be paralyzed
o This is the reason for the existence of the anti-injunction rule
o To require CIR to actually refund to taxpayer 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
o We hold that the CTA erred in ordering such a charade
o Off setting the judgment of tax refund with a deficiency assessment is allowed by the SC
o What is effectively happening here is the government enforcing collection. The government is in
effect distraining personal property. Before the BIR can do this, the taxpayer must already be
delinquent
o There can be no off setting of the tax refund and tax deficiency if the tax payer is not yet
considered as a delinquent with his tax deficiency
- BPI Securities Corp. v. CIR
o Moreover, it appears that the memorandum-report has not yet ripened into a formal assessment
duly approved by the Regional Director or by the CIR
o Thus, the same can proceed independently of the claim for refund and its merits or demerits
may be determined in separate proceedings as provided for in the Tax Code
o The principle that taxes are not subject to set-off or legal compensation must govern, especially
in this case where the taxes and the taxpayer's claim are not fully liquidated, due and
demandable
o In this case, no assessment, whether tentative or final, has been issued to petitioner.
Consequently, we do not find any reason to deviate from the above rulings. Thus, the argument
of the respondent that petitioner's refund claim must be denied on the basis of the findings and

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recommendation in the memorandum issued by the Revenue Officer does not deserve
consideration
o Question: what if there was already a FAN that the taxpayer protested, would the result be
different?
- FNCB Finance v. CIR
o Taxpayer filed a refund claim
o CIR offered in evidence a report of investigation which found taxpayer liable instead for
deficiency income tax
o Held: automatic set-off capricious
o Violation of due process
o Without an assessment, there is no debt from taxpayer that can be set-off
E. Liability of government for interest, attorneys fees, etc.

- Philex Mining Corp. v. CIR
o No interest on refund of tax can be awarded unless authorized by law or the collection of the tax
was attended by arbitrariness.
o An action is not arbitrary when exercised honestly and upon due consideration where there is
room for two opinions, however much it may be believed that an erroneous conclusion was
reached. Arbitrariness presupposes inexcusable or obstinate disregard of legal provisions. None
of the exceptions are present in the case at bar. Respondents decision denying petitioners
claim for refund was based on an honest interpretation of law. We, therefore see no reason why
petitioner should be entitled to the payment of interest.
F. Taxes not subject to set-off

- Francia v. IAC
o Taxpayer owned real property, a portion of which was expropriated by the govt and for which
govt owed taxpayer P4,116
o The rest of taxpayers property sold at public auction for delinquency RPT of P2,400
o Taxpayer contends that his tax delinquency of P2,400.00 has been extinguished by legal
compensation. He claims that the government owed him P4,116.00 when a portion of his land
was expropriated on October 15, 1977. Hence, his tax obligation had been set-off by operation
of law as of October 15, 1977
o Held: contention of the taxpayer has no merit. We have consistently ruled that there can be no
off-setting of taxes against the claims that the taxpayer may have against the government. A
person cannot refuse to pay a tax on the ground that the government owes him an amount equal
to or greater than the tax being collected. The collection of a tax cannot await the results of a
lawsuit against the government
o This rule was reiterated in the case of Cordero v. Gonda where we stated that: ". . . internal
revenue taxes can not be the subject of compensation: Reason: government and taxpayer 'are
not mutually creditors and debtors of each other' under Article 1278 of the Civil Code and a
"claim for taxes is not such a debt, demand, contract or judgment as is allowed to be set-off.
o Moreover, RPT was due to an LGU while the expropriation was effected by the national
government
o Taxes is not a civil obligation but a sovereign obligation thus it cannot be off set
o When the government off sets taxes, they are in effect collecting payment of tax through
distraint of personal property
- BIR Rul. 415-93
o Ruling request for automatic offsetting of claims for excess input VAT against excise tax liability
denied
o Claim subject to verification and final determination before issuance of TCC
- Summary
o Government invokes set-off (denies refund on account of pending assessment):
Doctrine: government cannot defeat taxpayers entitlement to refund on account of a
proposed assessment
Options available to the government:
o Formalize/finalize assessment (i.e., issue FAN), then invoke Cebu
Portland
o If there is a final judgment awarding the refund claim, distrain
judgment debt
Provided the taxpayer is already delinquent
o Taxpayer invokes set-off (refuses to pay assessment on account of pending refund claim):

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No set-off rule in RP v. Mambulao: collection of taxes cannot await result of a lawsuit

determining propriety of refund claim
It is against public policy for a taxpayer to invoke off setting of obligations
VI. APPEAL IN CASE OF DENIAL OF REFUND/ TAX CREDIT CLAIM

- Appeal to CTA/SC same as appeal of denial of protest
VII. DECISION ON OTHER MATTERS

- What may be appealed to the CTA pursuant to par. 2, Sec. 4 of the NIRC and Sec. 7(a)(1) of RA 9282?
o Decisions on:
Disputed assessments
Disputed refund
Other matters arising under the NIRC and other tax laws
- Rodriguez v. Blaquera
o Decision of the CIR on the matter of an enforcement of the National Internal Revenue Code
- PNOC v. CA
o CTA had jurisdiction to review decisions of CIR to enter into a compromise agreement with
PNOC and to reject the informers claim for additional reward wherein questions of law involving
the interpretation and application of the NIRC and E.O. No. 44 and its implementing rules and
regulations were at issue
- Phil. Journalists, Inc. v. CIR
o Decision to issue a warrant of distraint and levy to enforce collection of an assessment that was
already barred by prescription
- Appeal Remedy vs. Challenged BIR Issuances
o If the BIR issues a Rev. Regs., RMO or RMC that is perceived to be contrary to law, what is the
taxpayers appeal remedy?
o Conflicting decisions on proper remedy
o Sec. 4, par. 1
Power to interpret the provisions of the Tax Code and other tax laws
subject to review by the Sec. of Finance
o Sec. 4, par. 2
Power to decide disputed assessments, refunds, or other matters arising under the Tax
Code and other tax laws
Subject to appellate jurisdiction of the CTA
- If exercise of power is quasi-legislative in nature appeal is to DOF (Sec. 4, 1st par.)
- If exercise of power is quasi-judicial in nature appeal is to CTA (Sec. 4, 2nd par.; Sec. 7, RA 9282)
- Quasi-legislative power to make rules and regulations of general applicability
- Quasi-judicial power to hear and determine questions of fact to which the legislative policy is to apply
and to decide in accordance with the standards laid down by law; exercise of power results to a decision
or order affecting a named person or applying to a specific situation and becoming final and executory
after the lapse of a certain period
- What is the scope of the DOFs review power under Sec. 4?
o The Sec. of Finance only has the power of review over interpretations of the CIR of the provisions
of the NIRC or other tax laws
- What is covered by the CIRs power of interpretation?
o The power of administrative agencies, such as the BIR, to interpret and construe the statutes
entrusted to them for implementation is an exercise of the quasi-legislative power of
administrative agencies as distinguished from their quasi-judicial power
- CTA has appellate jurisdiction over decisions of the CIR on other matters arising under the Tax Code or
other laws administered by the [BIR] (Sec. 4, 2nd par.)
o Decision of CIR on other matters should be quasi-judicial in nature for the 2nd par. of Sec. 4
to apply
o See, however, CIR v. Leal (SC held that CTA has jurisdiction over RMCs issued by BIR)
- Types of BIR Issuances
o Rulings refer to rulings, opinions and interpretations of the CIR with respect to provisions of
the Tax Code and other tax laws, which are issued in response to a specific request for ruling
filed by a taxpayer with the BIR
o Rev. Regs. contain all needful rules and regulations for the effective enforcement of the
provisions of the NIRC. Promulgated by the Sec. of Finance, upon recommendation of the
Commissioner of Internal Revenue

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o RMO contains directives or instructions outlining procedures, techniques, methods, etc. which
are necessary to carry out programs or to achieve policy goals and objectives. Promulgated by
Commissioner of Internal Revenue
o RMC disseminate and embody pertinent and applicable portions, as well as amplifications, of
the rules, precedents, laws, regulations, opinions and other orders and directives issued by the
CIR, and by other offices and agencies, for the information, guidance or compliance of revenue
personnel. Promulgated by CIR
o CIR v. Leal (2002)
Challenged RMOs/RMCs are actually rulings or opinions of the CIR implementing the
Tax Code on taxability of pawn shops
Jurisdiction to review rulings of the CIR, such as RMOs/RMCs, pertains to CTA, not
RTC
CTA has jurisdiction over decisions of the CIR on other matters arising under the Tax
Code
Bello: this is wrong. Appeal should be with the Secretary of Finance
o Asia Intl Auctioneers v. Parayno (2007)
Citing Leal, Blaquera, SC held that assailed RMC is a ruling or opinion of the CIR on
the tax treatment of sale of motor vehicles in public auction within SBF appealable to
CTA
Also held that failure of taxpayers to ask for reconsideration of the assailed issuances
is another reason for dismissal of the case
o British American Tobacco v. Camacho (2008)
While RA 9282 confers on CTA jurisdiction to resolve tax disputes in general, this does
not include case where the constitutionality of a law or rule is challenged
Where what is assailed is the validity or constitutionality of a law, or a rule or regulation
issued by the administrative agency in the performance of its quasi-legislative function,
the regular courts have jurisdiction to pass upon the same
The determination of whether a specific rule or set of rules issued by an administrative
agency contravenes the law or the constitution is within the jurisdiction of the regular
courts
o Sunlife of Canada v. CIR, CTA Case
Decision of CIR to issue RMC clarifying taxability of insurance companies for MCIT,
business tax and DST purposes not a decision contemplated by Sec. 7 of RA 1125
that is appealable to the CTA
Since principal relief sought is to declare null and void RMC 30-2008, the same is
outside jurisdiction of CTA (citing British American Tobacco)
o Gorospe v. Vinzons-Chato
Petition before SC assailing validity of RMC dismissed for non-exhaustion of
administrative remedies. SC held, citing Sec. 4:
Petitioners should have asked CIR for a reconsideration
If action on reconsideration is adverse, denial should have been appealed to
SecFin
o Philamlife v. Sec. of Finance (2014)
BIR issued a ruling denying the request of taxpayer that the sale of shares at a price
below FMV is not subject to donors tax
BIR anchored denial on Rev. Regs 6-2008 which treats sale of shares at below FMV
as deemed donations subject to donors tax
Taxpayers Sec. 4 appeal of the adverse ruling to the Sec. of Finance denied
Taxpayer appealed decision of the Sec. of Finance to the CA (instead of the CTA),
where it sought to invalidate
Held: Reviews by the Secretary of Finance pursuant to Sec. 4 of the NIRC are
appealable to the CTA under other matters
Appellate power of the CTA includes certiorari pursuant to City of Manila v. Grecia-
Cuerdo
City of Manila diametrically opposes British American Tobacco to the effect that it is
now within the power of the CTA, through its power of certiorari, to rule on the validity
of a particular administrative rule or regulation so long as it is within its appellate
jurisdiction. Hence, it can now rule not only on the propriety of an assessment or
tax treatment of a certain transaction, but also on the validity of the revenue
regulation or RMC on which the assessment is based

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In this case, the taxpayer exhausted administrative remedies by first going to the
secretary of finance then upon denial, he went to CA
o Banco de Oro v. RP (2015)
BIR rulings subjecting to withholding tax on maturity of the so-called PEACe Bonds
appealed directly to SC
SC held that non-exhaustion of administrative remedies proper (purely question of law
and urgency of judicial intervention exceptions)
SC said that follow the principle of exhaustion of admin remedies but there
are exceptions
The SC allowed direct question to the SC because of transcendental
importance of the issue
Appeal of the questioned tax rulings to the Secretary of Finance would have been
proper remedy (citing 1st par. of Sec. 4)
SC agreed with BIR that jurisdiction to review rulings of the CIR pertains to the CTA,
citing Leal and Blaquera
o Banco de Oro v. RP (2016)
The CTA has undoubtedly jurisdiction to pass upon the constitutionality of validity of a
tax law or regulation when raised by the taxpayer as a defense in disputing or
contesting an assessment or claiming a refund. It is only in the lawful exercise of is
power to pass upon all matters brought before it, as sanctioned by Sec. 7 of RA 1125,
as amended
CTA may likewise take cognizance of cases directly challenging the constitutionality or
validity of a tax law or regulation or administrative issuance (revenue orders, revenue
memorandum circulars, rulings)
In other words, within the judicial system, the law intends the CTA to have exclusive
jurisdiction to resolve all tax problems. Petitions for writs of certiorari against the acts
or omissions of the said quasi-judicial agencies (CIR, COC, SecFin, CBAA, and Sec.
Of Trade and Industry) should thus, be filed before the CTA
o Recap:
Indirect (Collateral) Attack: e.g., denial of protest on an assessment for alleged
deficiency income tax and VAT on condominium dues on the basis of RMC 65-2012
appeal denial to CTA
Direct Attack:
Appeal RMC/RMO/Rev. Regs. to Secretary of Finance pursuant to Sec. 4, 1st
par.; then appeal denial by SecFin to CTA on the basis of other matters
(Philam Life and BDO/PEACe bonds case)
When what is involved is the constitutionality of an RMC/RMO/Rev. Regs., file
petition for declaratory relief or petition for prohibition with RTC (after
exhausting administrative remedies, e.g., request for reconsideration with
BIR) (British American Tobacco; Clark Investors and Locators Assn)
If direct attack, first, go to Secretary of Finance, then if still denied, go to CTA
If collateral attack, no need to go to Secretary of Finance
If you question the constitutionality of a tax provision in the NIRC, you do not need to
go to Sec. of Finance because you do not question a ruling of the BIR, but an act of
Congress, thus go immediately to CTA
Generally, SC has concurrent jurisdiction in petitions for prohibition or certiorari. But
because of the principle of hierarchy of courts, go first to CTA
But you can go straight to SC if issue is of transcendental importance
All tax issues eventually go to CTA
VIII. STATUTE OF LIMITATIONS

A. Period to assess
- 3 years from actual filing or from the time the return should have been filed, whichever is later
- The assessment contemplated by law that will toll the prescriptive period is a FAN
- When is an assessment deemed made?
o Basilan Estates, Inc. v. CIR
Besides, even granting that notice had been received by the taxpayer 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
o It is not required that the taxpayer actually received the assessment

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- Effect of filing an amended return

o What is the effect of filing an amended return?
It has the effect of extending the prescriptive period to assess, if the amendment is
substantial
Whether the amendment is substantial depends on facts and circumstances
o CIR v. Phoenix Assurance Co.
The changes and alterations embodied in the amended ITR consisted of the exclusion
of reinsurance premiums received from domestic insurance companies by taxpayers
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 modifying the original return
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
Rationale:
To strengthen our opinion, we believe that to hold otherwise, we would be
paving the way for taxpayers to evade the payment of taxes by simply
reporting in their original return heavy losses and amending the same more
than five years later when the CIR has lost his authority to assess the proper
tax thereunder. The object of the Tax Code is to impose taxes for the needs
of the Government, not to enhance tax avoidance to its prejudice
- Effect of filing a wrong return
o What is the effect of filing a wrong return?
The effect is as if no return is filed (thus the applicable prescriptive is 10 yrs. From
discovery of the omission to file a return, rather than the 3-year ordinary prescriptive
period)
o Butuan Sawmill, Inc. v. CTA
Held: an ITR 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 taxpayer must file a correct return
- How prescriptive period counted
o CIR v. Primetown Prop. Group, Inc.
When the law speaks of a year, it is understood to be 12 calendar months
A calendar month is a month designated in the calendar without regard to the number
of days it may contain
It is the period of time running from the beginning of a certain numbered day up to,
including, the corresponding numbered day of the next month, and if there is not a
sufficient number of days in the next month, then up to and including the last day of
that month
- Gen. rule: 3 years (ordinary prescription) Sec. 203
- Exceptions: 10 years (extraordinary prescription)
o False/fraudulent return or no return Sec. 222(a)
Taligaman Lumber Co. v. CIR
Taxpayer assessed deficiency sales tax
Taxpayer argued that assessment prescribed
BIR argued that taxpayer did not file returns, hence, the 10-year period applies
Held: no showing that returns were filed, hence, 10-year period applies
Taxpayer objects to the application of the 10-year prescriptive period 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 taxpayer herein, it was incumbent upon the latter, if it wanted to avail
itself of the benefits of Section 331 (5-year prescriptive period), 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 10

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years within which to make the corresponding assessments, as it did in this

case
Aznar v. CTA
Ruling of CTA: 10-year period applies; substantial underdeclarations of
income for 6 consecutive years demonstrate the falsity or fraudulence of the
ITRs
Held: 10-year period applies; return of taxpayer false
3 instances justifying application of 10-year period: (1) false return, (2)
fraudulent return with intent to evade payment of taxes, and (3) failure to file
a return
There is a difference 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 within which to assess tax
liabilities under Sec. 331 of the NIRC 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 ten years provided for in Sec. 332 (a) NIRC, from the
time of the discovery of the falsity, fraud or omission even seems to be
inadequate and should be the one enforced
Issue: W/N the 50% fraud surcharge should apply (which the CTA imposed)
Held: No
With intent to evade tax is not required in filing a false return
CIR v. B.F. Goodrich
CIR insists that taxpayer committed falsity when it sold the property for a
price lesser than its declared FMV
This fact alone did not constitute a false return which contains wrong
information due to mistake, carelessness or ignorance
This case thus establishes the rule that not all erroneous entries in the return
will render the same false for purposes of applying the 10-yr. prescriptive
period
Telesat, Inc. v. CIR
In order to render a return made by taxpayer a false return within the
meaning of Sec. 223, there must appear a design to mislead or deceive on
the part of the taxpayer, or at least culpable negligence
A mistake not culpable in respect of its value would not constitute a false return
In fact SC has held that mere falsity of a return does not merit the application
of the 10-year prescriptive period
The element of fraud as in the case of taxpayers intent to evade payment of
the correct amount of tax, must be clearly established
Taxpayer was able to explain discrepancy as merely a timing difference due
to accounting method
Estate of Reyes. v. CIR
Taxpayer contention: phrase with intent to evade tax qualifies both false
and fraudulent returns; their supposed good faith in committing errors negates
intent to evade
Held: pursuant to Aznar, false return do not necessarily mean with intent to
evade taxes, otherwise, there will be no distinction between false and
fraudulent returns
Returns false because there were substantial underdeclarations of
properties and substantial overstatement of deductions
o Waiver of prescriptive period Sec. 222(b)
RP v. Acebedo
Even the waiver signed by taxpayer on Dec. 17, 1959 could no longer revive
the right of action, for under the law such waiver must be executed within the
original five-year period within which suit could be commenced
CIR v. CA
Contention of BIR: waivers valid even if not signed by CIR because (a) when
RO extended the period to conduct audit, CIR gave implied consent, (b)

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signature of CIR mere formality and the lack of it does not vitiate the binding
effect of the waiver, (c) waiver is not a contract but a unilateral act of
renouncing ones right to avail of the defense of prescription
Held: the waiver of the prescriptive period must be in writing and signed by
both the taxpayer and the CIR; the waivers are invalid and without binding
effect on taxpayer for lack of CIRs consent
It is the very signatures of the taxpayer and CIR that give birth to a valid
agreement
Phil. Journalists, Inc. v. CIR
Held: assessment prescribed as waiver did not comply with RMO 20-90
Waiver of statute of limitations not a waiver of the right to invoke defense of
prescription
Waiver unlimited
Waiver not signed by CIR (only RD Officer)
Waiver bilateral act not unilateral
Date of acceptance not stated (thus, not clear if waiver executed before
expiration of prescriptive period)
Taxpayer not furnished copy of duly accepted waiver (which effectively notifies
taxpayer that waiver was accepted)
Conclusion: (1) waiver defective, hence, did not operate to extend
prescriptive period; (2) consequently, assessment invalid because it was
issued beyond prescriptive period; and (3) WDL null and void for having been
issued on the basis of an invalid assessment
CIR v. Kudos Metal: Reqts of valid waiver MEMORIZE THIS!
1. Waiver must be in proper form prescribed by RMO 20-90
2. Waiver must be signed by taxpayer himself or his duly authorized
representative. In case of corporation, authority of person signing waiver must
be in writing and duly notarized
3. Waiver should be duly notarized
4. CIR or his duly authorized representative must sign the waiver indicating
acceptance. Date of acceptance should be indicated
5. Both date of execution and date of acceptance must be before prescriptive
period lapses
6. Waiver must be executed in three copies: original to docket; 2 nd copy to
taxpayer; 3rd copy to Office accepting waiver. Fact of receipt of taxpayers
copy should be indicated in the original copy to show that taxpayer was
notified of acceptance by BIR and perfection of agreement
o There are no SC decisions yet but CTA decisions show that the
taxpayer should be able to get the accepted waiver agreement within
the prescriptive period or else the waiver is void.
CIR v. Next Mobile, Inc.: doctrine of equitable estoppel
CTA found the following flaws in multiple waivers executed by the taxpayer:
(i) lack of notarized board authority; (ii) dates of acceptance by the BIR not
indicated; (iii) fact of receipt by the taxpayer not indicated
Instead of ruling in the same manner as Kudos Metal, SC applied the doctrine
of equitable estoppel and disregarded the obvious deficiencies in the waivers
and sided with the BIR
SC observed that both parties at fault and that taxpayer knew of the defects
in the waivers, yet did nothing to correct them, and instead questioned later
on the very same deficiencies that the taxpayer caused to avoid liability
RCBC v. CIR: Estoppel to question validity of waivers
Taxpayer executed waivers
Received FAN/FLDs for deficiency income tax, GRT, FWT, final tax on FCDU
onshore income, EWT and DST
Protest, then later on appealed the inaction to the CTA
Subsequently, taxpayer received a revised FLD/FAN following the request for
reinvestigation requested by taxpayer reducing the amount of the original
assessment
Taxpayer paid deficiency income tax, GRT, FWT, EWT and DST
Taxpayer refused to pay final tax on FCDU onshore income and DST which
remained the subject of the CTA petition

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Taxpayer argued that waivers void

Held: Taxpayer estopped from questioning validity of waivers. Through its
partial payment of the amount assessed within the extended period as
provided in the waivers, taxpayer impliedly admitted the validity of the waivers
Had taxpayer truly believed that the waivers were invalid and the assessments
barred by prescription, then it should not have paid the reduced amount of
taxes in the revised assessments
o Suspension of prescriptive period Sec. 223
CIR prohibited from assessing or collecting + 60 days
Request for reinvestigation by taxpayer which is granted
Taxpayer cannot be located in address given in return
No property to satisfy WDL
Taxpayer is out of the Philippines
What are the instances which will suspend the prescriptive period to assess, begin
distraint/levy and file a civil suit for collection?
CIR is prohibited from assessing, beginning distraint/levy or proceeding in
court and for 60 days thereafter
When taxpayer requests reinvestigation which is granted by the CIR
Taxpayer cannot be located
When WDL is duly served and no property could be located
When taxpayer is out of the Philippines ( 223)
Continental Micronesia, Inc. v. CIR
While We have noted that the request for reinvestigation which was granted
by the CIR in the case at bar was on the PAN and not on the FAN, still, 223
applies.
223 of the Code makes no distinction as to whether the request for
reinvestigation of an assessment against the taxpayer is on a PAN or FAN. It
is a well-known maxim in statutory construction that where the law does not
distinguish, We should not distinguish.
Thus, for as long as the request for reinvestigation is granted by the CIR, the
running of statute of limitations to issue an assessment under 203 and 223
is suspended.
It is further worthy to stress that the suspension of the running of Statute of
Limitations provided in 203 and 222 refers to the phrase "on the making
of assessment" which phrase refers to the three-year or ten year period, as
the case may be, which includes the issuance of a PAN. Hence, when
taxpayer requested for a reinvestigation on the PAN, the making of the
assessment was tolled
o Question: what are the instances when the 10- year prescriptive period applies?
False/fraudulent return with intent to evade payment of taxes
No return
o Question: when do you start counting the 10- year period?
Counted from discovery of falsity, fraud or omission
B. Period to collect
- Taxes assessed within prescriptive period may be collected by distraint or levy or by a proceeding in court
within 5 years following the assessment of the tax Sec 223(c)
- 5-year period could be extended by agreement of the CIR and the taxpayer Sec. 223(d)
- RP v. Ablaza
o Rationale for prescriptive period:
To obligate the government to act promptly in the making of assessment
To protect taxpayers from unscrupulous tax agents
- It is the service of the warrant of distraint or levy that stops the running of prescriptive period even if BIR
does not act on it
- Palanca v. CIR
o Following assessment of deficiency estate tax, WDL served on taxpayer, which was however
not executed due to various requests for reinvestigation/re-computation filed by taxpayer
o After repeated requests were denied and CIR was undertaking steps to collect the deficiency
(via execution of the WDL), taxpayer argued that right of BIR to collect prescribed already
o Held: right to collect not yet prescribed

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o All that is required to stop the running of the period of limitation therein prescribed is to distraint
or levy, or institute a proceeding in court, within 5 years after the assessment of the tax. A judicial
action for the collection of a tax is begun by the filing of a complaint with the proper CFI, or where
the assessment is appealed to the CTA, by filing an answer to the taxpayers petition for review
wherein payment of the tax is prayed for
o Summary remedy of distraint and levy is begun by the issuance of a WDL.
o The right of the CIR to collect by summary method has the effect of stopping the running of
prescription once a WDL is issued
o The issuance of the WDL begins the summary remedy of distraint and levy and that it is not
necessary that it be actually executed to be made effective; not essential that the WDL be fully
executed in order that it may have the effect of suspending the running of the statute of limitation
upon collection of the tax
o Running of prescriptive period for summary remedy and civil case is different
Summary remedy may be barred but the BIR may file a civil case, and vice versa
Summary remedy is available anytime the taxpayer becomes delinquent
It is possible that the remedy of summary of distraint and levy is barred because the
BIR did not issue upon delinquency of the taxpayer, but if the taxpayer files an appeal
to the decision of the BIR, the period for filing of civil case is suspended thus it may not
be considered barred
- RP v. Ker: Pendency of appeal bars BIR from enforcing collection via civil action
o Feb. 16, 1953: taxpayer assessed for tax years 1948 to 1950
o July 23, 1953: taxpayer assessed for tax year 1947
o Jan. 5, 1954: Upon reinvestigation at the request of taxpayer, revised assessment issued
reducing 1947 and 1950 assessments; 1948 and 1949 assessments remained the same
o Mar. 1, 1956: taxpayer filed petition for review with CTA (dismissed by CTA for being time-
barred; dismissal affirmed by SC)
o Mar. 27, 1962: action for collection (lower court dismissed 1947 claim but ordered taxpayer to
pay 1948 1950 tax liabilities)
o Held: 1947 assessment prescribed; BIR failed to prove fraud
o Taxpayer Contention: since RP filed the complaint for the collection of the deficiency income
tax for the years 1948 1950 only on March 27, 1962, or 9 years, 1 month and 11 days from
Feb. 16, 1953, the date the tax was assessed, the right to collect the same has prescribed
o BIR Contention: the running of the prescriptive period was interrupted by the filing of the
taxpayers petition for review in the CTA on March 1, 1956
o Held: Did the pendency of the taxpayers appeal in the CTA and in the SC have the effect of
legally preventing the CIR from instituting an action in the CFI for the collection of the tax? Our
view is that it did.
o From March 1, 1956 when taxpayer filed a petition for review in the CTA contesting the legality
of the assessments in question, until the termination of its appeal in the SC, the CIR was
prevented from filing an ordinary action in the CFI 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
- RP v. Hizon
o July 18, 1986: assessment (became final and executory for failure to contest)
o Jan. 12, 1989: WDL issued, but not executed
o Nov. 3, 1992: taxpayer sought recon of assessment (denied by BIR on Aug. 11, 1994)
o Jan. 1, 1997: collection case
o Held: collection enforcement by judicial action prescribed (out-of-time protest did not suspend
period; assessment already demandable)
o BIR, however, can still execute WDL having been timely issued (sufficient that WDL issued
before expiration of prescriptive period; not necessary that WDL be executed)
- CIR v. Wyeth Suaco Laboratories
o Dec. 19, 1974: taxpayer received 2 assessment notices for deficiency FWT on royalty payments
and deficiency advance sales tax
o Jan. 17 and Feb. 8, 1975: protest letters on the 2 assessments
o Jan. 2, 1980: protest denied in part; revised assessment issued prompting taxpayer to appeal to
CTA
o Feb. 7, 1980: WDL issued (enjoined by CTA)
o Held: settled is the rule that the prescriptive period to collect by distraint or levy or by a
proceeding in court is interrupted once a taxpayer requests for reinvestigation or reconsideration
of the assessment

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o Although the protest letters prepared by SGV & Co. in behalf of taxpayer did not categorically
state or use the words reinvestigation and reconsideration, the same are to be treated as
letters of reinvestigation and reconsideration.
o By virtue of these letters, the BIR ordered its Manufacturing Audit Division to review the
assessments made. Furthermore, taxpayers 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.
o These letters of taxpayer interrupted the running of the 5-year prescriptive period to collect the
deficiency taxes.
o Verily, the original assessments dated December 16 and 17, 1974 were both received by
taxpayer on December 19, 1974. However, when taxpayer protested the assessments and
sought its reconsideration in two (2) letters received by the BIR on January 20 and
o February 10, 1975, the prescriptive period was interrupted.
o This period started to run again when the BIR served the final assessment to taxpayer on
January 2, 1980. Since the WDL were served on taxpayer on March 12, 1980, then, only about
four (4) months of the five-year prescriptive period was used.
- BPI v. CIR
o Oct. 20, 1989: taxpayer received FAN dated Oct. 10, 1989 for tax year 1985
o Nov. 17, 1989: taxpayer filed protest requesting that assessment be revoked and cancelled
o Oct. 23, 1992: taxpayer received WDL dated Oct. 15, 1992 (not executed however)
o Sept. 11, 1997: BIR denied protest (prompting taxpayer to appeal to CTA)
o CTA ruled that right to collect not yet prescribed; request for reinvestigation is granted when the
BIR entertains the request by not issuing a WDL
o Issue: W/N right of government to collect has prescribed
o Held: Yes
o Service of WDL on taxpayer on Oct. 23, 1992 was time-barred (BIR only had until Oct. 19, 1992
to enforce collection)
o Prescriptive period for collection of taxes can only be suspended by a request for reinvestigation
(which is granted), not a request for reconsideration
o Protest filed by taxpayer did not constitute a request for reinvestigation
o Request for reconsideration refers to a plea for a re-evaluation of an assessment on the basis
of existing records without need of additional evidence. It may involve both a question of fact or
of law or both.
o Request for reinvestigation refers to a plea for re-evaluation of an assessment on the basis of
newly-discovered or additional evidence that a taxpayer intends to present in the reinvestigation.
It may also involve a question of fact or law or both
o Wyeth Suaco clarified
- Hambrecht & Quist v. CIR
o Feb. 15, 1993: taxpayer informed BIR of change of business address
o Nov. 4, 1993: taxpayer received tracer-letter from A/R & Billing Division of BIR demanding
payment of deficiency taxes for 1989
o Dec. 3, 1993: taxpayer protested deficiency assessment as set forth in tracer-letter
o Nov. 7, 2001: nearly 8 years later, taxpayer received decision from BIR denying the protest on
the ground that the protest was time barred
o Dec. 6, 2001: appeal to CTA (in a decision dated Sept. 24, 2004, CTA held that that although
the subject assessment notice sent by registered mail to taxpayers former place of business
has become final and unappealable for failure to protest the same within the period provided by
law, nevertheless, the right of CIR in said case to collect the assessed taxes has already
prescribed)
o Issue: W/N CTA has jurisdiction to rule that right to collect has prescribed
o BIR Contention: when the law says that CTA has jurisdiction over other matters, it
presupposes that the assessment has not become final and unappealable. Thus, if the
assessment has become final and unappealable, CTA has no jurisdiction to decide other
matters related to the assessment, such as, the issue on the right to collect the same
o Held: CTA has jurisdiction
o We do not agree. Nowhere in the law does any limitation appear as to the extent of the
jurisdiction of the Court over other matters
o The appellate jurisdiction of the CTA is not limited to cases which involve disputed assessments.
The second part also covers other cases that arise out of the NIRC or other related laws
administered by the BIR
o As correctly pointed out by taxpayer, a tax assessment deals with how much taxes are due from
a taxpayer, while tax collection deals with the whole process of collecting the same from the

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taxpayers. Therefore, it can really happen, as in this case, that while there may no longer be any
dispute on the assessment as it has become final, there is still an existing controversy pertaining
to the right of the BIR to legally collect the assessed taxes
o CIR must make a tax assessment within 3 years after the correspondent return is filed. However,
no action can be brought by it for the recovery of the tax after the lapse of that period in case no
assessment has been made. Any tax assessed must in turn be collected by the remedies
provided by law, i.e. distraint or levy, within 3 years following the assessment save in cases
specified by law
o A request for reconsideration or reinvestigation filed by a taxpayer, which has not been
seasonably filed, does not interrupt the prescriptive period to collect taxes appropriately
assessed
o In the instant case, the Original Division of this Court found the assessment issued against herein
respondent, HQPI to be final and unappealable because its motion for
reconsideration/reinvestigation was filed out of time. This being so, CIR should have instituted
collection proceedings within the 3-year period from assessment, either by distraint or levy, or
by judicial action. Apparently, the BIR did not initiate collection proceedings within the period
provided by law to enforce the assessment, and the taxpayer had the legal right to assail the
same when it filed the petition
o Correspondingly, the Original Division of this Court appropriately possessed the jurisdiction to
act on said case because the officers of the BIR should not be allowed to benefit from their
neglect in collecting taxes from the taxpayer within the reglementary period
C. Period to file protest

- Pantranco v. Blaquera
o 30-day appeal period is jurisdictional and nonextendible
D. Period to appeal decision on disputed assessment
E. Period to file refund claim

- Collector v. Sweeney
o Taxpayer, a non-stock, non-profit corporation, was assessed deficiency fixed and percentage
taxes for operating a bar exclusively for its members
o Taxpayer protested assessment (while protest pending, Club was dissolved)
o CIR denied protest; sought to collect deficiency taxes from past presidents of Club
o Under threat of criminal prosecution for tax evasion, past presidents paid the taxes under protest;
on the same day, past presidents filed refund claim
o Due to inaction of CIR on refund claim, past presidents appealed claim to CTA
o CIR Contention: CTA has no jurisdiction over the case because the CIR has yet to rule on the
refund claim
o Held: as to the propriety of taking the case to the CTA before taxpayers received any advice as
to the action taken, if any, on their petition for refund, this question has already been ruled upon
by Us to the effect that taxpayers need not wait for the action of the CIR on the request for refund
before taking the matter to court
o Nowhere does the law imply that the CIR must act upon the claim or that the taxpayer shall not
go to court before he is notified of the CIR's action. Having filed his claim and the CIR having
had ample time to study it, the claimant may, indeed should, within the statutory period of 2 years
proceed with his suit without waiting for the CIR's decision
o Indeed, it must be observed that under said provisions, the taxpayers failure to comply with the
requirement regarding the institution of the action or proceeding in court within 2 years after the
payment of the taxes bars him from the recovery of the same, irrespective of whether a claim for
the refund of such taxes filed with the CIR is still pending action of the latter
- Gibbs v. CIR
o Taxpayer assessed (protested; denied)
o Oct. 3, 1956: taxpayer paid tax under protest; at the same time, sought immediate refund
o Oct. 26, 1956: CIR denied refund claim (denial received by taxpayer on Nov. 14, 1956)
o Sept. 26, 1957: 10 mos. after receiving the denial, taxpayer filed petition for review with CTA
(dismissed by CTA; appeal filed more than 30 days from receipt of denial)
o Issue: W/N judicial refund claim filed on time
o Held: No, time-barred
o Taxpayer Contention: although appeal was filed beyond 30-day period, CTA still had
jurisdiction over the same, by virtue of NIRC 306 (now 229)

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o NIRC 306 should be construed together with 11 of RA 1125. In fine, a taxpayer who has paid
the tax, whether under protest or not, and who is claiming a refund of the same, must comply
with the requirements of both sections, that is, he must file a claim for refund with the CIR within
2 years from the date of his payment of the tax, as required by said NIRC 306, and appeal to
the CTA within 30 days from receipt of the CIR's decision or ruling denying his claim for refund,
as required by said 11 of RA 1125. If however, the CIR take time in deciding the claim, and
the period of 2 years is about to end, the suit or proceeding must be started in the CTA before
the end of the two-year period without awaiting the decision of the CIR. This is so because of
the positive requirement of 306 and the doctrine that delay of the CIR in rendering decision
does not extend the peremptory period fixed by the statute
- CIR v. CA
o April 2, 1986: taxpayer filed annual ITR for tax year 1985
o ITR showed over-payment of quarterly income tax by P65k
o April 14, 1988: administrative refund claim
o April 15, 1988: judicial refund claim
o Issue: whether the 2-year period of prescription for filing a claim for refund, as provided in 230,
is to be counted from April 2, 1986 when the corporate income tax return was actually filed or
from April 15, 1986 when, according to
o 70(b), the final adjustment return could still be filed without incurring any penalty
o Held: from April 2, 1986; hence, admin claim and judicial claim barred by prescription
o In the context of 230, which provides for a 2-year period of prescription counted from the date
of payment of the tax for actions for refund of corporate income tax, the 2-year period should
be computed from the time of actual filing of the Adjustment Return or Annual Income Tax
Return. This is so because at that point, it can already be determined whether there has been
an overpayment by the taxpayer. Moreover, under
o 49(a) of the NIRC, payment is made at the time the return is filed
- ACCRA Investments Corp. v. CA
o April 15, 1982: taxpayer filed annual ITR showing overpaid income tax arising from excess
creditable withholding tax (withholding agents remitted taxes withheld from income payments to
taxpayer from Feb. to Dec. 1981)
o Dec. 29, 1983: refund claim with BIR (no BIR action)
o April 13, 1984: petition for review (dismissed by CTA; reckoning point of 2-year prescriptive
period is Dec. 31, 1981, when taxes withheld were paid to BIR, not April 15, 1982, when taxpayer
filed annual ITR)
o Held: 2-year prescriptive period is counted from April 15, 1982
o As regards excess CWT, the 2-year period from the date of payment of the tax is reckoned
when the tax liability falls due
o A taxpayer whose income is withheld at source will be deemed to have paid his tax liability when
the same falls due at the end of the tax year. It is from this latter date then, or when the tax
liability falls due, that the 2-year prescriptive period under 306 (now part of 230) starts to run
with respect to payments effected through the withholding tax system (Gibbs v. CIR)
o W/N the taxpayer is entitled to a refund is determined when the taxpayer files its annual ITR on
or before April 15, 1982 when its tax liability for 1981 fell due
o If we were to uphold the respondent appellate court in making the date of payment coincide
with the end of the taxable year, the taxpayer at the end of the 1981 taxable year was in no
position then to determine whether it was liable or not for the payment of its 1981 income tax
o It bears emphasis at this point that the rationale in computing the 2-year prescriptive period with
respect to the taxpayers claim for refund from the time it filed its FAR is the fact that it was only
then that the taxpayer could ascertain whether it made profits or incurred losses in its business
operations. The date of payment, therefore, in the herein taxpayers case was when its tax
liability, if any, fell due upon its filing of its final adjustment return on April 15, 1982
- CIR v. TMX Sales, Inc.
o Issue: In a case involving overpaid corporate quarterly income tax, does the 2-year prescriptive
period to claim a refund of erroneously collected tax provided for in 292 (now 229) commence
to run from the date the quarterly income tax was paid, or from the date of filing of the Final
Adjustment Return (final payment)?
o Facts: May 15, 1981: taxpayer filed quarterly income tax return reporting income of P571k and
paying income tax of P247k
o During subsequent quarters taxpayer suffered net losses such that when it filed its annual ITR
on April 15, 1982, it reported a negative tax position
o July 9, 1982: refund claim (not acted upon)
o March 14, 1984: petition for review

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o Held: the most reasonable and logical application of the law would be to compute the 2-year
prescriptive period at the time of filing the FAR or the Annual Income Tax Return, when it can
be finally ascertained if the taxpayer has still to pay additional income tax or if he is entitled to a
refund of overpaid income tax
o The filing of a quarterly ITRs and payment of quarterly income tax should only be considered
mere installments of the annual tax due. These quarterly tax payments which are computed
based on the cumulative figures of gross receipts and deductions in order to arrive at a net
taxable income, should be treated as advances or portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal year
o In the case of Collector v. Prieto, this Court held that when a tax is paid in installments, the 2-
year prescriptive period should be counted from the date of the final payment. This ruling is
reiterated in CIR v. Palanca , wherein this Court stated that where the tax account was paid on
installment, the computation of the 2-year prescriptive period should be from the date of the last
installment
IX. NON-RETROACTIVITY OF RULINGS OR REGULATIONS

- Gen. rule: the government is not bound by the mistakes of its agents
- Exception: Sec. 246
- Rationale: justice and fair play
o Because the opinion or ruling of the Commissioner of Internal Revenue, the agency tasked with
the enforcement of tax laws, is accorded much weight and even finality, when there is no
showing that it is patently wrong, taxpayer cannot be convicted for taking the tax authorities at
their word
- Administrative agencies, such as the BIR, are not bound by precedents and may overrule or abandon
their own rulings or interpretations of the law or those of their predecessors in favor of new ones which
are deemed more consonant with the letter and spirit of the law
o The power to abandon rulings, however, are limited by Sec. 246
- What is the danger if Sec. 246 is not in place?
- CIR v. Burroughs, Ltd.
o Taxpayer remitted branch profits to parent; paid 15% BPRT based on total branch profits out of
which remittance was made
o Subsequent BIR ruling that 15% BPRT should be based on amount actually remitted, not on
total branch profits out of which remittance is to be made
o Refund claim
o RMC revoking BIR ruling
o Taxpayer entitled to refund since revocatory RMC cannot be given retroactive effect
- PBCom v. CIR
o Issue was whether refund claim of taxpayer was filed out of time
o Taxpayer relied on RMC which changed period of prescription for overpaid quarterly income tax
from 2 years to 10 years
o SC did not apply Sec. 246
Taxes are the lifeblood of the nation BS
State is not estopped by the mistakes of its agents
Sec. 246 not applicable because nullity of RMC was declared by the court and not by
the CIR
- ABS-CBN v. CTA
ESTATE TAX
I. THE GROSS ESTATE
A. Introduction
- When does the estate tax accrue?
o Upon the death of the decedent. Inheritance taxation is also governed by the statute in force at
the time of the death of the decedent
- What is the nature of estate tax?
o It is in the nature of an excise tax imposed upon the right or privilege to succeed to, receive, or
take property by or under a will or the intestacy law, or deed, grant, or gift, to become operative
at or after death
- At what point is the value of the gross estate measured for purposes of imposing the estate tax?
o Because succession takes place and the right of the state to impose estate tax accrues upon
the death of the decedent, the tax should be measured by the value of the estate as it stood at

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the time of the decedents death, regardless of any subsequent contingency affecting value or
any subsequent increase or decrease in value. Lorenzo v. Posadas; NIRC 85
o Estate tax is to be paid within 6 months from the death of the decedent but the value of the estate
is determined at the time of death. It is irrelevant whether the value of the estate depreciated or
appreciated
- Does the postponement of possession postpone the payment of estate tax as well?
o No. A transmission by inheritance is taxable at the time of the predecessors death,
notwithstanding the postponement of the actual possession or enjoyment of the estate by the
beneficiary, and the tax is measured by the value of the property transmitted at that time
regardless of its appreciation or depreciation.
o Thus, the estate tax is payable even where a testator provided in his will that his real properties
be held for a period of 10 years after his death then, thereafter, the real properties shall go to his
nephew. Lorenzo v. Posadas
o An estate tax by its nature is an excise tax. Do not confuse this with the excise tax that is imposed
on cigarettes or alcohol
Excise tax tax on a privilege in entering into a transaction
Estate tax is a tax on the privilege of transmitting ownership not on the property
B. General Definition of Gross Estate

- What is generally included in the gross estate of a resident citizen decedent?
o All property, real or personal, tangible or intangible, wherever situated (i.e., taxed on a worldwide
basis) (NIRC 85)
- Nonresident citizen? Worldwide basis
- Resident alien? Worldwide basis
o In estate tax, residence means domicile
o Tax residence (like in income tax) is different from domicile. Domicile is the place where there is
intent to resume residence
- Nonresident alien?
o Only that part of his entire gross estate which is situated in the Philippines (see, however,
special rules in 104 for certain intangible property)
o Example: German who is taking a vacation in the PH and had a heart attack in PH. The BIR
cannot impose estate tax on his properties in Germany. But if the German has established
domicile in the PH, the BIR can impose estate tax on his property in Germany
C. Constitution of Gross Estate

- What shall be included in the gross estate?
o Properties physically in the estate
Property in which decedent had an interest
Proceeds of life insurance (unless designation of beneficiary is irrevocable)
o Properties no longer physically in the estate (because there was an inter vivos transfer)
1. Transfers in contemplation of death
2. Transfers taking effect at death
3. Transfers with retained interest
4. Revocable transfers
5. Property passing under general power of appointment
6. Transfers for insufficient consideration
By express provision of law, these properties are brought back to the estate to
determine the gross estate
Transfers with retained interest and revocable transfers overlap sometimes
- What is covered by property in which decedent had an interest?
o Covers property beneficially owned by the decedent (includes property wherein legal title is not
in the name of the decedent but is beneficially owned by the decedent)
E.g., land registered in the name of a trustor or a dummy
Stock certificates in the name of the decedents stock broker or held by a bank in trust
for the decedent
Cash deposits in a numbered account in the Cayman Islands
o Conversely, if the decedent merely holds title to a property only as a guardian or trustee or in
some other fiduciary capacity (i.e., mere naked title), he would not be considered as having an
interest in such property
o It talks about beneficial ownership. Thus, even if the decedent doesn't have the naked title, but
his estate has beneficial ownership, it will still be considered as part of his gross estate
- Transfers in Contemplation of Death

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o An example of property no longer physically in the patrimony of the decedent at the time of death
(because there was an inter vivos transfer) but by fiction of law is brought back into the patrimony
of the decedent (i.e., deemed inclusion)
o The law only targets gratuitous transfers. Hence, transfers for a full and adequate consideration
in money or moneys worth is not covered by the inclusion (theory of conversion)
Reason: the transfer amounts only to a substitution or exchange of assets and
therefore the gross estate is not reduced, and no estate tax is avoided
o What is meant by a transfer in contemplation of death?
The transfer was motivated by the thought of death
e.g., decedent suffers a stroke but survives; a day after he is discharged from
the hospital, he donates his properties to his children (or sells the properties
for an insufficient consideration)
the donated property, while no longer physically in the estate of the decedent
at the time of his death, would still result in inclusion because the transfer was
motivated by the thought of death
o How do you know whether the transfer was made in contemplation of death?
Determined using a facts and circumstances test (therefore, subjective). Some factors
considered:
Age (advanced age at the time of transfer?)
Health (terminally ill at the time of transfer or in the pink of health?)
Length of time between the transfer and death
o The shorter the time of interval between the transfer and death, the
more reason the BIR can assert that it was made in contemplation of
death
Concurrent making of a will
And other similar circumstances
o Since the law covers only transfers motivated by the thought of death, if the motive for the
transfer is something else other than the thought of death, the transfer will not result in inclusion.
Some nondeath factors:
Reduce annual income tax liability of the transferor
Relieve the transferor from the burden of management
To protect the family from the hazards of business operations
Or other valid business reasons
- Transfers Taking Effect at Death
o What is the rationale for inclusion?
These transfers are essentially equivalent to testamentary dispositions. The effect is
the same as when transfers are provided for in a last will and testament of the decedent
o What is the test to determine whether a transfer takes effect at death?
The possession or enjoyment is conditional upon surviving the decedent. Thus, if the
transferee of a property interest can get possession or enjoyment while the decedent
transferor is living, the property shall not be included in the decedents gross estate
Can possession or enjoyment of the property be obtained without surviving the
decedent? If yes, property is excluded from the gross estate. If no, property is included
in the gross estate
o Thus a joint survivorship agreement (e.g., and/or account) is considered a transfer taking effect
at death
The survivorship agreement is in effect a donation mortis causa made by the deceased
co-depositor during his lifetime but effective upon death because the acquisition by the
survivor of the remaining balance is a considered a bequest. BIR Rul. 10 03 dated
Sept. 8, 2003
o Example:
X, more than five years prior to his death, transfers a rental property (e.g., condominium
unit) to a trust under which (a) income is to be paid to his son, Y, for as long as Y lives,
and (b) upon the death of Y, the property is to be distributed or conveyed to Ys son, Z,
if living. Suppose X dies, survived by Y and Z. Is the property includible in his gross
estate?
No. Ys life interest takes effect immediately without regard to whether X is living or
dead. The same is true with Z, although not very apparent. Z can get possession or
enjoyment of the property even if X is living, provided Z survives Y
- Transfer with Retained Interest
o The decedent must have retained an interest in the property for a specified period
o Twofold test to determine whether decedent made a transfer with retained interest:

Marion Nerisse Kho
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Has the decedent retained an interest (i) for his life; or (ii) for a period not ascertainable
without reference to his death; or (iii) for a period that does not in fact end before his
death?
Did the decedent retain (i) possession or enjoyment of the property; or (ii) the right to
the income from the property; or (ii) the right to designate (either alone or in conjunction
with any other person) the person who shall possess or enjoy the property; or (iv) the
right to designate (either alone or in conjunction with any other person) the person who
shall receive the income?
o Illustrations: period
For life: decedent transfers property to a trust with the income therefore payable to
himself for as long as I live and, upon his death, the corpus shall be distributed to his
children
For a period not ascertainable without reference to the decedents death: decedent
transfers property to a trust, with income therefrom payable to himself quarterly for life
but, under the trust agreement, the decedent is to receive none of the trust income for
the calendar quarter in which he dies
For a period which does not in fact end before decedents death: decedent, aged 40,
transfers property to a trust with the trust agreement providing that decedent shall
receive the trust income for 10 years, at the end of which period, the trust terminates
and the corpus shall be distributed to the decedents children. The decedent dies,
however, within the 10year period
o Illustrations: interest retained
Possession or enjoyment of the property:
Decedent donated a Juan Luna painting to the National Museum but reserved
the right to keep it for life
Decedent sold his house and lot to his son (for a song), but reserved the right
to live in it for life
Rationale: with the transferor retaining for himself essentially full lifetime
benefits from the transferred property, the ultimate shifting of enjoyment upon
the death of the decedent is akin to a testamentary disposition of property,
hence, justifying the imposition of estate tax at that time
Right to the income from the property: decedent transfers property to a trust, with the
income payable to him for life, or to a dependent of the decedent whom the latter would
otherwise have to support (note: the decedent need not directly receive the income.
The income may also be paid to a third party in discharge of the decedents obligation
to the latter)
Right to designate person (either alone or in conjunction with any other person) who
shall possess or enjoy property or income therefrom:
Exercisable alone: the decedent transfers property to a trust, retaining for his
life the right to say who may enjoy the transferred property or the income
therefrom
Exercisable in conjunction . . .: the decedent creates a trust wherein B had the
right to the income but the decedent retains for life the right to designate, with
Bs consent, another person as an income beneficiary
o Tax policy: Congress wary of family transactions, which are always
suspected of tax avoidance motives
Exercisable in conjunction . . .: If decedent names a 3rd party as trustee and
gives the trustee the right to designate who shall enjoy the property or the
income, the decedent has not retained the prescribed control. BUT, if the
decedent has the right to discharge the trustee and name himself trustee with
the same right, he has indirectly retained the prescribed control
- Revocable Transfers
o Elements of 85(C)
Transfer of property was made (by trust or otherwise);
but, the enjoyment thereof was subject to change (at the date of decedents death);
through the exercise of a power (in whatever capacity exercisable and without regard
to when or from what source the decedent acquired the power);
by the decedent (alone or in conjunction with any other person);
power exercised is the power to alter, amend, revoke or terminate the transfer;
or where any such power is relinquished in contemplation of death

Marion Nerisse Kho
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o The kind of power which brings about inclusion, includes any power affecting the time or manner
of enjoyment of the property or its income, even though the decedent could not benefit from its
exercise and even though the identity of the beneficiary is unaffected
Example: A creates a trust to pay income to B for life, with remainder to C, but reserves
the right to invade corpus and accelerate enjoyment in Cs favor
Here C does not have full enjoyment and it is the retained power to accelerate the
enjoyment which results in inclusion
85(C) may overlap with 85(B) (transfers with retained interest)
If then decedent can change the beneficiary of the trust, the trust is still considered part
of the gross estate even if the decedent does not exercise such power. The fact that
he has that power will make the trust part of the gross estate because the law believes
that the property is still owned by the decedent
If he relinquishes the power before he dies, the trust will not be considered
part of the gross estate, except if he relinquishes in contemplation of death
o What is meant by subject to change in enjoyment?
If the decedent could take back until death property transferred, interests given are
subject to change
If the decedent could name another income beneficiary, even if subject to consent of
originally named beneficiaries
The enjoyment of the property transferred is subject to change if the decedent could
accelerate the beneficiarys enjoyment of the property
Example: under the trust, A shall receive income for 10 years, and at the end
of the period, the corpus shall go to A. The trust, however, provides that the
trustor may terminate the trust earlier and have the corpus delivered to A or
his estate
o Example of power to revoke:
A creates a trust to pay income to B for life, with remainder to C, but reserves the right
to take back the property altogether
o Examples of power to alter/amend:
Name new beneficiaries
Change proportionate interest s among beneficiaries
Remove the trustee and appoint himself
o Example of power to terminate:
D creates a trust, with income payable to B for life, remainder to C or Cs estate, but
reserves the right to terminate the trust, effecting an immediate distribution of corpus
to C
Here Bs enjoyment of the income is subject to change because the trust may
be terminated
Cs right to possess the property and enjoy the income thereof is subject to change
because his entitlement to the property may be accelerated
o Where power to alter, amend, etc. is relinquished in contemplation of death:
The relinquishment of the power results in the inclusion of the same interest in property
in the decedents gross estate
Except: if relinquishment was an adequate and full consideration in money or moneys
worth
Example: decedent relinquishes power to alter, amend, etc. upon realization that he is
terminally ill
Reason: since the law treats the power to alter, amend, etc. as equivalent to a property
interest, the relinquishment of said power in contemplation of death is no different from
a transfer of property in contemplation of death, hence, includable
- General Power of Appointment
o A power of appointment is the right to designate the person or persons who will succeed to, or
will become beneficial owners of, the property of a prior decedent. A power of appointment may
be a general power of appointment or a limited power of appointment
SPA or limited power of appointment will not result in inclusion, only general power of
appointment
o Personalities involved:
Prior decedent/donor the grantor of the power of appointment
Decedent the grantee of the power of appointment
Successor/s the person/s who will succeed to the property
o Illustration:

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A transfers property to a trust, with B as income beneficiary, and granted C the right to
direct the trustee, by will, to transfer the property to anybody whom C nominates. The
anybody could be C (i) himself, (ii) his creditors, (iii) his estate, (iv) the creditors of his
estate, or (v) anybody else in the world
A: prior decedent (grantor of power of appointment)
C: decedent (grantee of power of appointment)
Anybody: successors who will succeed to the property
Thus, if C (the decedent) exercised or released the general power of appointment by
will or by deed in certain instances, the property subject to the power will be included
in Cs gross estate
o Rationale for inclusion:
The right to determine who may become the beneficial owner of a property is such an
important attribute of outright ownership that a question may be raised whether for
estate tax purposes, it should be considered the equivalent of an ownership interest
includable in the decedents gross estate
If he can nominate anyone who will succeed to the property, it means it is as
if he owns the property
As a general rule, mere possession of a power of appointment over property is not
considered an interest in property. Therefore if the holder of the power dies possessed
of such power, there is no property in which the decedent had an interest in that would
result in its inclusion in gross estate
By the same token, if the holder/grantee exercised the power of appointment during his
lifetime, the holder/ grantee has made no transfer of an interest in property which may
be taxed under 85(A)
o Requisites for inclusion of property passing under GPA:
Existence of a general power of appointment;
An exercise of such power by the decedent by will or by deed in certain cases (i.e.,
lifetime transfer (i) in contemplation of death, or (ii) taking effect at death, or (iii) with
retained interest); and
The passing of the property by virtue of such exercise
o For exercise or release of GPA to result in inclusion, it must be by will or by a lifetime transfer
which if it were a transfer of actual property would result in its inclusion in gross estate as in
contemplation of death, or under the other lifetime transfer rules
o Property over which the decedent held a power of appointment is not includible in his gross
estate unless such power was general
A power is general when it authorizes the grantee/decedent (of the power of
appointment) to appoint anyone, possibly including himself, his estate, his creditors or
creditors of his estate.
A power is special where the grantee/decedent can appoint only a restricted or
designated class of persons other than himself. Property which passes under a special
power of appointment is not includible in the gross estate
Example: A leaves his property in trust for his son, B, for life and then in trust for such
children of B as B shall by will appoint
The power of appointment is a special power of appointment, thus the value
of the property is excludible from the gross estate of B
o If the decedent does not exercise the power, the property will not be included as part of his gross
estate. The question is who owns the property?
It will revert back to the original transferor. But if the original transferor is already dead,
it will revert back to the original transferors heirs
- Proceeds of Life Insurance
o Proceeds of insurance under policies taken out by the decedent upon his life shall be includable
if the beneficiary is:
The estate of the decedent, his executor or his administrator; or
A third person, unless the designation of the beneficiary is irrevocable
o When are proceeds of life insurance excludable?
When the beneficiary is a third person (e.g., wife or kids of the insured) and the
designation is irrevocable
II. VALUATION OF ESTATE AND AMOUN TO BE INCLUDED IN CASES COVERED BY 85(B), (C), AND (D)
A. Valuation of Taxable Transfers

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- In a (1) transfer in contemplation of death, (2) transfer taking effect at death, (3) transfer with retained
interest, (4) revocable transfer, and (5) property passing under a general power of appointment, the value
to include in gross estate shall be determined under the following rules:
o If the transfer was in the nature of bona fide sale for an adequate and full consideration in money
or moneys worth, no value shall be included in the gross estate
o If the consideration received on the transfer was insufficient, the value to include in the gross
estate shall be the excess of the FMV of the property at the time of the decedents death over
the consideration received
- If there was no consideration received on the transfer (as in donation mortis causa), the value includible
shall be the FMV of the property at the time of death
- Illustration:
FMV at the time of transfer 100,000 100,000 100,000
Consideration received 100,000 60,000 None
FMV at time of death 180,000 180,000 180,000
Amt. includable None 120,000 180,000
III. EXEMPT TRANSFERS

- What are the types of exempt transfers?
o The merger of usufruct in the owner of the naked title;
o The transmission or delivery of the inheritance or legacy of the fiduciary heir or legatee to the
fideicomissary
o The transmission from the first heir, legatee or donee in favor of another beneficiary, in
accordance with the will of the predecessor
o All bequests, devices, 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: provided not more than
30% of the said bequests, legacies or transfers shall be used by such institutions for
administration purposes
- Examples:
o P died leaving a piece of land to Q in usufruct (right to enjoy the fruits), and to R in naked
ownership (without the right to the fruits). The land is subject to estate tax in the estate of P.
Upon the death of Q, the usufruct shall be merged into the naked ownership of R, who shall then
become the absolute owner of the property. The transmission of the usufruct from Q to R shall
be exempt from estate tax
IV. DEDUCTIONS FROM GROSS ESTATE

- What are the deductions from the gross estate of a citizen and resident decedent?
1. ELITE (expenses, losses, indebtedness, taxes, etc.)
2. Vanishing Deduction
3. Transfers for Public Use
4. Family Home
5. Standard Deduction of 1M (always available as a deduction in addition to other deductions)
6. Medical Expenses
7. Benefits Received from Employer by Reason of Death
8. Share in the Conjugal Property
- What are the deductions from the gross estate of a nonresident alien decedent?
1. Prorated ELITE: [Phil. gross estate/worldwide gross estate] x [ELITE]
2. Vanishing Deduction
3. Transfers for Public Use
A. ELITE
- Funeral expense
a. Actual funeral expense
b. 5% of gross estate
c. P200,000
o Whichever is the lower of a, b, or c
o Rule of thumb: cut off point is the interment or burial; expenses incurred after the burial or
interment will not be deductible
o What are examples of funeral expense?
Mourning apparel of surviving spouse and minor children
Expenses during the wake (e.g., food and drinks)
Cost of obituary

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Telecommunication expenses incurred for informing relatives of the decedent (e.g.,

overseas calls)
Cost of burial plot, tombstone, monument or mausoleum (but not their upkeep)
Interment or cremation fees
All other expenses incurred for the performance of the rites and ceremonies incident to
the interment (expenses after the interment, such as prayers, masses, 9th day, 40th
day, etc., are not deductible)
- Expenses for testamentary or intestate proceedings
o Expenses incurred during the settlement of the estate (e.g., inventory taking, payment of debts
of the estate, distribution of estate to heirs)
o Cutoff point is the last day prescribed by law, or the extension thereof, for the filing of the estate
tax return
o Expenses incurred after the cutoff point are not deductible
o Examples:
Fees of executor or administrator
Attorneys fees
Court or filing fees
Accountants fees
Appraisers fees
Clerk hire
Cost of preserving and distributing the estate
Costs of storing or maintaining the property
Brokers fees/commissions for selling the property
- Claims Against the Estate
o To be deductible, claim must have been enforceable against the decedent if he were living
o If claim is a simple loan, there must be a debt instrument which was notarized
Practically, this is not followed
o If the loan was contracted within 3 years from the decedents death, the executor or administrator
is required to submit a statement showing the disposition of the proceeds of the loan
o Deductible amount of claim is valued as of the death of decedent irrespective of postdeath
developments
Thus where the claims are reduced or condoned through compromise agreements
entered into by the estate with its creditors resulting in the reduction of the amount
actually paid postdeath, the deductible claim would still be valued as of the date of
death. Dizon v. Court of Tax Appeals
The claim against the estate at the time of death is the value that will be deducted
- Claims Against Insolvent Persons provided the value of the decedents interest in the claim is included
in the gross estate
o These are receivables of the decedent
- Unpaid Debts/Mortgages Upon Property provided the decedent s interest in the property, undiminished
by the debt/mortgage, is included in the gross estate
- Taxes which have accrued as of the death but not yet paid; does not include income tax upon income
received after the death, property taxes not accrued before death, or the estate tax
o Income tax of the decedent may be deducted
- Casualty Losses
o Arising from fire, storm, shipwreck, or other casualties, or from robbery, theft or embezzlement
o Must not be compensated for by insurance or otherwise
o Must not have been deducted for income tax purposes
o Losses were incurred not later than the time required to pay the estate tax (6 mos.)
o This is the same as the deduction in income tax
B. Vanishing Deduction
- Rationale: to avoid or mitigate the effects of double taxation
- Property may change hands several times within a very short period of time by reason of death of the
owner shortly after receiving the property by gift or inheritance
o Example: father dies in 2010 leaving a house and lit, survived by an only son. The son inherits
the house and lot in 2011, the son died in a vehicular accident. The house and lot will form part
of the sons estate which will again be subject to estate tax
- This subjects the property to double taxation, because the tax is imposed on each transfer
- The vanishing deduction is meant to avoid or mitigate the effects of double taxation
- Conditions for deductibility:

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o The present decedent died within 5 years from receipt of the property from a prior decedent or
donor;
o The property on which vanishing deduction is being claimed must be located in the Philippines;
o The property must have formed part of the taxable estate of the prior decedent, or of the taxable
gift of the donor;
o The estate tax on the prior succession or the donors tax on the gift must have been finally
determined and paid;
o The property on which vanishing deduction is being taken must be identified as the one received
from the prior decedent, or from the donor, or something acquired in exchange therefore; and
o No vanishing deduction on the property was allowable to the estate of the prior decedent
- Amount deductible
o 100% of value: if prior decedent died within 1 year
o 80%: > 1 year > 2 years
o 60%: > 2 years > 3 years
C. Transfers for Public Use

- The amount of all bequests, legacies, devises or transfers to or for the use of the Government of the
Republic of the Philippines, or any political subdivision thereof, for exclusively public purposes
D. Family Home
- Dwelling house where a person and his family resides, and the land on which it is situated (follows
definition in the Family Code)
- To be deductible, must be certified to as such by Barangay Chairman where family home is located
- Total value is included in gross estate
- Amount deductible is the FMV or P1 million, whichever is lower
E. Standard Deduction
- Available as a deduction in addition to the other deductible items
- Amount deductible is P1 million
F. Medical Expenses
- Incurred within one year from death (whether paid or unpaid); cap is P500,000.00; must be substantiated
G. Death Benefits from Employer

- Any amount received by an official or employees heirs from the employer as a consequence of the death
of the said official or employee under NIRC 32(B)(6)(b)
H. Capital of Surviving Spouse

- Capital of the surviving spouse of a decedent (e.g., conjugal share) shall not form part of the gross estate
of the decedent
V. FOREIGN TAX CREDITS

- Purpose: the net taxable estate of a decedent who was a resident or citizen of the Philippines includes
his net taxable estate within and without the Philippines. It is possible that the decedents net estate
without the Philippines was subjected to transfer taxes as well by the country where the property is
located. There is therefore a possibility of double taxation of the same property.
- The purpose of the estate tax credit is to avoid or mitigate the effects of double taxation.
VI. ADMINISTRATIVE PROVISION

- Tax rate scheduler rate of 5% - 20%. Top rate of 20% apples to net estates with a value of P10M and
above
o Husband and wife. Husband died
o Conjugal real properties P5M; exclusive real property P2M (subject to P500k mortgage)
o Family home P6.5M (subject to P2M mortgage)
o Medical expense P500k
o Compute net taxable estate and estate tax due
Exclusive Conjugal Total
Real properties P2M P5M P7M
(excluding Family
Home)

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Personal -- -- --
properties
Family home -- 6.5M 6.5M
Taxable transfers -- -- --
GROSS ESTATE 2M 11.5M 13.5M
Less: Deductions (500k) (2M) (2.5M)
(ELITE, etc.)
Estate After 1.5M 9.5M 11M
Deductions
Less: Family home (1M) (1M)
Standard (1M) (1M)
deductions
Medical (500k) (500k)
expenses
Subtotal 7M
Less: share of (3.5M) (3.5M)
surviving spouse
(net conjugal
estate / 2)
NET TAXABLE 5M
ESTATE
ESTATE TAX
DUE
On first 135k
2M
On 330k
excess over P2M
Less: Tax credits/
payments
Foreign estate tax --
paid
Tax paid in return --
originally ruled, if
this is an amended
return
Total --
TAX PAYABLE P465k
- Notice of Death within 2 months

o Not followed in practice
- Estate Tax Return within 6 months; extendible for up to 30 days
- Payment of Estate Tax pay as you file; extendible for up to 2 (extrajudicial settlement) or 5 years (judicial
settlement), if payment would impose undue hardship upon estate or any of the heirs
- Consequences of NonPayment surcharge, interest, compromise penalty
DONORS TAX
A. Meaning of Gift
- CIR v. Duberstein
o Illustration of a non-taxable gift vs. taxable compensation for services rendered
o Court found that the Cadillac was a recompense for Dubersteins past services, or an
inducement for him to be of further service in the future
o When is a payment of non-taxable gift and when is a payment taxable compensation for services
rendered
Mere absence of a legal or moral obligation to make such a payment does not mean it
as a gift
If the payment proceeds primarily from the constraining force of any moral or legal
duty or from the economic nature, it is not a gift
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
- When conveyance of property is motivated by a sense of gratitude, or out of pure liberality, and not
additional compensation for past services rendered, the transfer is a gift subject to donors tax

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o Thus, the renunciation by a company of the proceeds of a life insurance policy in favor of the
heirs of a deceased officer out of gratitude for his past services is a gift subject to donors tax.
Pirovano v. CIR
B. Composition of Gross Gifts

- In case of a resident or citizen donor, the gross gifts would consist of: (all properties within or without the
Philippines)
1. Real property, regardless of location
2. Tangible personal property, regardless of location
3. Intangible personal property, regardless of location
- In case of a nonresident alien, the gross gift would consist of: (only properties located in the Philippines)
1. Real property located in the Philippines
2. Tangible personal property located in the Philippines
3. Intangible personal property located in the Philippines
- Reciprocity rule on intangible personal property
o General rule: intangible personal property located in the Philippines belonging to a nonresident
alien donor is included in gross gifts
o Exception: not includible under the reciprocity clause
if the donor at the time of the donation was a resident of a foreign country which at the
time of the donation did not impose a transfer tax of any character in respect of
intangible personal property of citizens of the Philippines not residing in that foreign
country; or
if the laws of the foreign country of which the donor was a resident at the time of
donation allows a similar exemption from transfer taxes of every character in respect
of intangible personal property owned by citizens of the Philippines not residing in that
foreign country
- Examples of intangible personal property located in the Philippines:
o Franchises which must be exercised in the Philippines;
o Shares, obligations or bonds issued by a domestic corporation;
o Shares, obligations or bonds issued by a foreign corporation 85% of the business of which is
located in the Philippines;
o Shares, obligations or bonds issued by a foreign corporation, if such shares, obligations or bonds
have acquired a business situs in the Philippines; and
o Shares or rights in any partnership, business or industry established in the Philippines
- Transfers for insufficient consideration (if transfer was effective during donors lifetime) excess of FMV
over consideration received considered a donation
o Example: father sold property to son way below the market value
o Controversial issue: cited in Rev. Regs. 6-2008 to justify donors tax on sale of shares were
the FMV exceeds the selling price
o Practical problem: parties to a sale of shares of stock held as capital assets are involved in an
intra-corporate dispute. To settle the protracted dispute, the parties agreed that one faction will
be bought out by the other for a consideration determined based on the agreed value of the
business which so happened to be less than net book value of the shares sold
o The selling shareholder, who already suffered considerable losses from the investment, will be
required by the BIR under the current rules to pay a 30% donors tax when the giving of gift is
farthest from the mind of the seller
o Sec. 100 copied from Sec. 503 of 1932 IRC
o Art. 8 of US Treas. Reg's., which implements Sec. 503, expressly excludes a sale, exchange
or other transfer of property made in the ordinary course of business from the deemed gift
provision on Sec. 503
o CIR v. Wemyss: Treasury Regulations make clear that no genuine business transaction comes
within the purport of the gift tax by excluding a sale, exchange, or other transfer of property
made in the ordinary course of business (a transaction which is bona de, at arms length, and
free from any donative intent)
o Bad bargains, sales for less than market, sales for less than adequate consideration in money
or moneys worth are made every day in the business world, for one reason or another; but no
one would think for a moment that any gift is involved, even in the broadest possible sense of
the term gift
o IRC 503 (NIRC 100) primarily an anti-tax avoidance measure to prevent simulated sales
intra-family donations

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o By simply adopting an inexible rule to determine the net book value of the shares, the Secretary
of Finance was able to convert Sec. 100 of the NIRC from a mere anti-tax avoidance provision
to primarily a taxing provision without an act of Congress.
C. Valuation of Gross Gift

- If a donation is made in property, FMV of such property at the time of donation shall be the value of the
gross gift
o In case of real property, value shall be:
Current FMV, as shown in schedule of values fixed by the local assessor; or
FMV as determined by CIR
o In case of personal property recently acquired by the donor, the purchase price may indicate the
FMV
o In the case of personal property not recently acquired by the donor, there should be some
evidence of FMV
D. Deductions from Gross Gifts

- Deductions allowed for resident or citizen donor, and nonresident alien donors:
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;
o Gifts in favor of an educational and/or charitable and/or religious corporation, institution,
foundation, trust or philanthropic organization or research institution or organization: provided,
however, that not more than 30% of said gifts shall be used by such donees for administration
purposes
- Deductions allowed for resident or citizen donors only:
o Dowries or gifts made on account of marriage and before its celebration, or within one year
thereafter, by parents to each of their legitimate, recognized natural or adopted children, to the
extent of the first P10,000
Question: Mr. and Mrs. H are making a joint gift of P40,000 out of community funds to
Mr. I, a legitimate child, on account of marriage and before its celebration. How much
is the deduction?
Answer: there are 2 donations, one by Mr. H, in the amount of P20,000 as gross gift,
from which he is entitled to a P10,000 deduction, and another by Mrs. H, in the amount
of P20,000 of gross gift, from which she is entitled to her own deduction of P10,000
E. Net Gifts and Imposition of Donors Tax

- The donors tax for each calendar year is computed on the basis of the total net gifts made during the
calendar year (NIRC 99(A) and 103(A))
- Donors tax return is filed within 30 days from the gift; payasyoufile (NIRC 103(B))
- Formula for computing the donors tax on the first donation for the calendar year
o Gross gifts made
Less: deductions
Net gifts made
- Formula for computing the donors tax on the subsequent donation for the same calendar year:
o Gross gifts made on this date
Less: deductions___________
Net gifts made on this date
Add: all prior net gifts within the year
Aggregate net gifts
Donors tax on aggregate net gifts

Less: donors tax on all prior net gifts within the year
Donors tax on the net gifts on this date
F. Donors Tax Rates

- Donee is not a stranger schedular rates
- Donee is a stranger flat rate of 30%
o A stranger is a person who is not a:
Brother, sister (whether by whole or half-blood), spouse, ancestor, lineal descendant
Relative by consanguinity in the collateral line within the 4th degree of relationship
G. Illustration

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- In 2009, Mr. and Mrs. X, both citizens and residents of PH, made donations of community properties, as
follows:
o Feb. 15, 2009: to Mr. J, a legitimate child, on account of marriage and before its celebration,
property with a cost of P200,000 and with a FMV of P360,000
o Nov. 12, 2009: To Mr. J, cash of P60,000
o Compute donors tax liability
Mr. X Mrs. X
Feb. 15, 2009
Gross gifts made:
Property to Mr. J 180k 180k
Less: deductions for (10k) (10k)
donation on account of
marriage
Net gifts made 170k 170k
Donors tax:
On 1st P100k (exempt) - -
On excess over 1.4k 1.4k
P100k (100,000x2%)
Nov. 12, 2009

Gross gifts made on this date:
Cash to Mr. J 30k 30k
Less: deduction - -
Net gifts made on this date 30k 30k
Add: prior net gifts made within 170k 170k
the year
Aggregate net gifts 200k 200k
Donors tax:
On 1st P100k (exempt) - -
On excess over 2k 2k
P100k (100kx2%)
Less: donors tax paid on prior (1.4k) (1.4k)
all net gifts made during the
year
Donors tax still due 600 600
VAT
I. Introduction
- The statutory taxpayer for VAT is the seller
- Essential Features of VAT:
o Tax on consumption tax is imposed on every sale of goods or services or importation of goods
o Limited to value added tax applies only to the value added at each stage by the seller as the
goods or services pass along the distribution chain
o It is an indirect tax although the seller is the person primarily and legally liable to pay the tax,
the seller by adding (or including) the tax to the selling price, shifts the burden of the tax to the
intermediate buyers and ultimately to the final consumer
- There is a regulation that the price in the menu must be VAT inclusive
- Method of collecting VAT through the tax credit method
o Input tax is credited against output tax to arrive at net VAT payable (net VAT payable is
effectively the tax on the value added)
o Illustration: tax credit method and tax on value added
Assume there are four firms (1) a logging concessionaire who also manufactures
lumber, (2) a furniture manufacturer, (3) a furniture wholesaler, and (4) a furniture
retailer who sells furniture to the end consumer, which is the household
Taxpayer Sales Value Output Input Tax VAT
Price Added Tax payable
Concessionaire 10.00 10.00 1.00 - 1.00
Manufacturer 25.00 15.00 2.50 1.00 1.50
Wholesaler 40.00 15.00 4.00 2.50 1.50

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Retailer 50.00 10.00 5.00 4.00 1.00

Household: purchase price (P50) + VAT (P5) = P55 5.00
For illustration purposes only, the VAT rate used in the example is 10% (the
rate now is 12%)
- Output and Input
o The VAT on the concessionaires sale of lumber is known as output tax
o The output tax, when it is passed on the purchaser who manufactures the lumber into furniture,
becomes the manufacturers input tax
o The sale of furniture by the manufacturer to the wholesaler is likewise subject to VAT (output
tax); however, he is entitled to deduct from such output tax, the input tax which is shifted to him
by the concessionaire
o General rule: if there is an excess input tax, you carry it over to the succeeding quarter. You
cannot ask for refund
Exception: There are only 2 instances when you can ask for refund for excess input tax
Input tax is attributable to zero-rated transaction
Taxpayer is undergoing dissolution or liquidating
- Basic formula:
o Output tax (12% or 0%)
Less: Input tax_________
VAT payable
II. Taxable Transactions

A. In General
- VATable transactions covered:
o Sale of goods or properties (in the course of T or B)
o Importation of goods (W/N in the course of T or B)
o Sale of services (in the course of T or B)
- General requirements (sale of goods and services) (if either is absent, no VAT)
1. There is a sale (of goods or services); AND
In order for a transaction to be subjected to VAT, it is essential that there is a sale of
goods or services
All importations are subject to VAT even if there is no sale or even if it is not made in
the course of trade or business
Illustrative cases
VAT Rul. No. 2697
Taxpayer shares the same building with 2 or more subsidiaries
o Being the nominal partylessee (i.e., lesseeofrecord), taxpayer
advances the payment of rent to the lessor, then seeks
reimbursement from its colessees (the subs) for their proportionate
share of the rent, without markup or profit element (i.e.,
reimbursementofcost basis)
o Same treatment for other expenses such as security, building
maintenance and utilities (taxpayer advances the expenses then
seeks reimbursement from the subs)
o Ruling: reimbursements not subject to VAT since taxpayer does not
sell, barter, exchange or lease goods or property or renders services
See also Tourist Trade and Travel Corp. v. CIR wherein reimbursements
received by a mall owner for advances it had made for the payment of electric,
water, and telephone bills and for the janitorial services provided were held to
be not subject to VAT since the taxpayer was not engaged in the business of
providing electricity, water, security and janitorial services to the lessees
o Court reasoned that it is not taxpayer who directly supplied electricity,
water and similar other goods to the lessees, neither did it render
security and janitorial services
See, however, VAT Rul. 1898, wherein an HMO was considered as engaged
in business as a service contractor and was held liable to pay VAT although
the actual health care services were rendered by independent health care
providers
In Tourist Trade, the taxpayer therein was neither selling electricity, water, etc.
nor rendering janitorial and security services

Marion Nerisse Kho
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In VAT Rul. 1898, the taxpayer therein sold health care services through
independent third parties who actually performed the service on the taxpayers
behalf
2. The sale is made in the course of trade or business
An important requirement for imposition of VAT is that the sale or transaction has been
entered into in the course of any business carried on by the taxpayer
The phrase in the course of trade or business means:
the regular conduct or pursuit of a commercial or an economic activity
o Transaction must be regular, repetitive, or significant
including transactions incidental thereto
o There are no clear guidelines on whether a transaction is incidental
regardless of W/N the person engaged therein is a nonstock, nonprofit
private organization (irrespective of the disposition of its net income and
whether or not it sells exclusively to members or their guests), or government
entity ( 105)
Thus the phrase in the course of trade or business connotes REGULARITY
Thus, a nonstock corporation whose primary purpose is to engage in
research activities and to provide services (for a fee) in community
organization, development planning and development livelihood,
development communication and rural resource management was held
subject to VAT. BIR Rul. 194, Jan. 4, 1994
On the other hand, the factor of regularity was absent in BIR Rul. 9897, Aug.
28, 1997, which involved a manufacturer and exporter of goods that received
a consideration for agreeing to preterminate its lease contract and to cancel
its purchase option over the leased premises. The BIR ruled that the lease
pretermination and cancellation of purchase option does not constitute a sale,
barter or exchange of goods or properties in the course of trade or business
of taxpayer which is engaged in the manufacture and exporting of goods
If services are rendered on a regular basis to only one client, does this mean that the
sale is not made in the course of trade or business?
Not necessarily. The sale is subject to VAT. W/N 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 considered as done in the regular course of business if
the same is done with the intent of carrying on a business
Even assuming that the taxpayers transaction with the buyer is isolated, it
does not detract from the fact that the same was entered into because it was,
as it is presently, its line of business. BIR Rul. 20790, Nov. 8, 1990
Is profit motive/element essential for taxability?
No. Thus, a company that intends to establish a consumer store for the benefit
of its employees where there will be no value added to the goods sold because
they will be sold at cost was held liable to VAT. The absence of profit and
value added to the goods sold does not make a person operating a consumer
store selling basic commodities at cost exempt from VAT. VAT Rul. No. 444
88, Sept. 13, 1988
In BIR Rul. 1098, Feb. 5, 1998, the BIR ruled that a taxpayer whose primary
purpose as set forth in its AOI is to provide technical, research, management
and personnel assistance to affiliates on a reimbursementofcost basis (i.e.,
no markup or profit element) is subject to VAT
o the phrase sale or exchange of services includes, among others,
the supply of technical service, assistance or services rendered in
connection with technical mgt or administration of any scientific,
industrial or commercial undertaking, project or scheme
CIR v. Commonwealth Mgt. & Services Corp.
o Taxpayer is an affiliate of Philamlife organized by the latter to perform
collection, consultative and other technical services, including
functioning as an internal auditor of Philamlife and its other affiliates
o Taxpayer assessed by the BIR for deficiency VAT
o Contentions of taxpayer:
It was not engaged in the business of providing services to
its affiliates since the services were on a no profit,

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reimbursementofcost basis only; not profit oriented = not

engaged in business
In fact it did not generate profit but suffered a net loss during
the tax year at issue
In the course of T or B requires that the business is carried
on with a view to profit or livelihood
o Issue: Whether taxpayer was engaged in the sale of service, thus
liable for VAT
o Held: Liable for VAT
o Even a nonstock, nonprofit organization or government entity is
liable to pay VAT on the sale of goods or services
o 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
o 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 profit oriented
o Hence, it is immaterial whether the primary purpose of a corporation
indicates that it receives payments for services rendered to its
affiliates on a reimbursementoncost basis only, without realizing
profit, for purposes of determining liability for VAT on services
rendered
o As long as the entity provides service for a fee, remuneration or
consideration, then the service rendered is subject to VAT
o The services of taxpayer do not fall within the 109 enumeration of
exempt transactions
Incidental vs. Isolated Transactions
By express provision of law ( 105), incidental transactions are considered
as undertaken in the course of business
o Incidental means depending upon or appertaining to something
else as primary; something necessary, appertaining to, or depending
upon another which is termed the principal
o Hence, the sale by a garments manufacturer of a motor vehicle
assigned to its GM is subject to VAT
The sale of the motor vehicle is an incidental transaction
because the vehicle was purchased and used in
furtherance of the taxpayers business. CS Garments v.
CIR, CTA Case
The decision implies that if the property sold is an
ordinary asset, the sale is deemed incidental
transaction, thus subject to VAT
Position adopted by BIR in RMO 15-2011 when it revoked
rulings exempting sale of company car from VAT
However, the BIR (and even the courts) in certain instances exempted from
VAT the sale of property used in business supposedly because the sale was
an isolated transaction
o See BIR Rul. 11398, where the BIR ruled that the sale by a telecom
company of its microwave backbone transmission network to
another wireless communications carrier is not in the course of the
taxpayers trade or business of selling telecommunication services
The BIR explained that the sale is not subject to VAT
because it is an isolated transaction; and that the
transaction does not necessarily follow the primary function
of selling telecom services
o See also Magsaysay Lines, Inc. v. CIR, where the court held that the
sale by a property lessor, a GOCC, of its vessels held out for lease
in line with the governments privatization program is not subject to
VAT
Court held that the sale was an isolated transaction; the
sale which was involuntary and made pursuant to the
declared policy of government for privatization could no

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longer be repeated or carried on with regularity; it should be

emphasized that the normal VATregistered activity of the
taxpayer is leasing personal property; the sale of the
vessels as such are not necessary to carry out the
taxpayers primary function of leasing personal properties
Without analysis, the court held that the sale was not
incidental to the taxpayers normal business of leasing
property ([t]he act of selling capital assets does not
necessarily follow the act of leasing these assets)
o Landpay Food Corp v. CIR
Interest income derived by a parent company from
intercompany loans to affiliates, as a form of financial
assistance, is considered services incidental to the parents
business and, thus, subject to VAT
o Mindanao II Geothermal Partnership v. CIR
However, it does not follow that an isolated transaction
cannot be an incidental transaction for purposes of VAT
liability
A reading of Section 105 of the 1997 Tax Code would show
that a transaction in the course of trade or business
includes transactions incidental thereto
Mindanao IIs business is to convert the steam supplied to
it by PNOC-EDC into electricity and to deliver the electricity
to NPC. In the course of its business, Mindanao II bought
and eventually sold a Nissan Patrol. Prior to the sale, the
Nissan Patrol was part of Mindanao IIs property, plant, and
equipment. Therefore, the sale of the Nissan Patrol is an
incidental transaction made in the course of Mindanao IIs
business which should be liable for VAT
The mere fact that a transaction is isolated will not necessarily disqualify it
from being made incidentally in the course of trade or business
Thus, an isolated transaction if at the same time is an incidental
transaction will be characterized as entered into in the course of trade or
business, hence, subject to VAT
B. Sale of Goods or Properties

- Sec. 106: there shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a value-added tax equivalent to 12% of the gross selling price
o If sale of services, gross receipts
- What are the taxable transactions covered by 106?
1. Actual sales
A sale is a transfer of goods to another either (a) for cash or on credit, or (b) partly for
cash and partly for credit
Covers sales, barters and exchanges
E.g., if an actress enters into a contract with Bello Cosmetics where the
actress will become the face of Bello. In exchange, the actress gets free
services from Angelo (e.g., liposuction)
VAT accrues upon consummation of the sale, regardless of the terms of payment
between the contracting parties (implicit in the definition of gross selling price, which
includes money or money equivalent which the purchaser is obligated to pay); unlike
sale of services wherein VAT accrues only upon payment of consideration (when the
gross receipts are actually or constructively received by the seller)
VAT is reckoned on a quarterly basis
Once there has been delivery of goods, sale of goods is already consummated
even though the payment will be given after. Thus, if the delivery happened in
first quarter, but payment happened in second quarter, pay tax during the first
quarter
o Accrual basis
In case of sale of services, the event that will trigger the VAT is the receipt of
the gross receipts, when they are actually or constructively received
o Example, law firm performs services during first quarter, but paid
during the second quarter. Pay VAT during second quarter

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o It is possible that the payment is given before the services are

rendered. Pay VAT on the quarter payment was received
o Cash basis
There is no constructive receipt on a postdated check
Sale of goods sales invoice is given
Sale of services official receipt is given
2. Deemed sale transactions
VAT on goods and properties not limited to actual sales; also covers certain
transactions which the law deems as if it was an actual sale, hence, subject to VAT
What are the deemed sale transactions?
a. Transfer, use or consumption not in the course of business of goods or
properties originally intended for sale or use in the course of business
b. Distribution or transfer to (i) shareholders or investors as share in the profits
of the VATregistered taxpayer; or (ii) creditors in payment of debt
c. Consignment of goods if actual sale is not made within 60 days
d. Retirement from or cessation of business with respect to inventories of taxable
goods existing as of such retirement or cessation ( 106(B))
Rationale for taxing deemed sale transactions:
To recapture/recoup claimed input tax attributable to the taxable goods
withdrawn for personal or nonbusiness use
Illustration of input tax recapture:
Taxpayer bought merchandise (say 10 tshirts) for P1,000; VAT of P100 was
passed on to him by the store that sold him the tshirts (total purchase price
therefore is P1,100); taxpayer intends to sell the tshirts @ P220 each for a
total of P2,200 (VAT inclusive). For the sale of the tshirts, taxpayer has a VAT
payable of P100 (P200 output less P100 input)
Instead of selling everything, taxpayer withdraws for his personal use 3 tshirts
and sold the remaining 7 tshirts; without the deemed sale provisions,
taxpayer has a VAT payable only of P40 (output of P140 less input of P100)
Without deemed sale provisions, government foregoes P60 of VAT revenue
With the deemed sale provisions, government is restored to P100 VAT
position
Examples of deemed sale transactions:
106(B)(1) Mr. K sells household furniture; he removes from his store a
living room set for use in his residential house
106(B)(2)(a) J Co. declared a property dividend out of inventory
106(B)(2)(b) M Co. is indebted to N Co. for raw materials; when M Co.
could not pay in money, N Co. agreed to a dacion of the finished goods in
payment of the indebtedness
106(B)(3) taxpayer sold goods on consignment to A, with title to the goods
passing only upon sale to a buyer; 65 days after consignment, goods still
unsold by A
106(B)(4) P & Co. was a taxable partnership; P & Co. was dissolved and
Q & Co. was formed to continue the business of P & Co; at the time that P &
Co. was dissolved, its books of accounts showed a merchandise inventory of
P100,000; the inventory is deemed sold by P & Co. upon dissolution
3. Changes in or cessation of status of a VAT registered person
VAT also applies to goods disposed of or existing as of a certain under certain
circumstances
Example: change of business activity from VATtaxable status to VATexempt
status
o Illustration: VATregistered person engaged in a taxable activity like
wholesaler or retailer who decides to discontinue such activity and
engages instead in life insurance business or in any other business
not subject to VAT
o Goods existing as of the change in status from VATable to VAT
exempt become subject to VAT even in the absence of an actual sale
Rationale: same as deemed sale transactions (input tax recapture)
- Taxable base; Gross selling price
o Taxable base means the amount or the value on which the VAT rate will be applied in
computing the output tax

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For a taxable person who sells goods or properties, the taxable base is the gross
selling price
Gross selling price means the total amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or
exchange of the goods or properties, excluding VAT. The excise tax, if any, on such
goods or properties shall form part of the gross selling price.
Special rules for sale of real property (FMV or zonal value, whichever is higher; taxable
base for VAT may be accounted for under the installment method)
o Timing issues; when VAT accrues computation of taxable base for sales of goods or properties
is different from that of supply of services
Sale of goods or properties generally requires the use of the accrual method on the
basis of the statutory definition of gross selling price (total amount of money or its
equivalent that the purchaser pays or is obligated to pay to the seller)
Sale of services cash method of accounting, which means the consideration is
taxable only upon actual or constructive receipt, regardless of W/N the service has
been rendered (see statutory definition of gross receipts)
o Sales Discount, Returns, & Allowance
Sales discounts and returns and allowances as allowable deductions from gross selling
price
For sales discounts discount must be indicated in the invoice at the time of
sale, the grant of which is not dependent upon the happening of a future event
o Illustration: taxpayer grants discounts to ice cream houses in the
form of rebates for meeting monthly sales quota; rebates are
determined only at the end of the month
o Answer: Deduction not allowed. Discounts conditioned upon the
subsequent happening of an event or fulfillment of certain conditions,
such as prompt payment or attainment of sales goals, shall not be
allowed as deductions. Only discounts granted and determined at
the time of sale which are indicated in the invoice are allowed as
deductions from the gross selling price. BIR Rul. No. 20490
For sales returns and allowances proper credit or refund was made during
the month or quarter to the buyer for sales previously recorded as taxable
sales
o Deemed Sales, Retirement and Cessation, Below Market GSP
Transactions deemed sale output tax shall be based on the market value of the goods
deemed sold as of the time of the occurrence of the deemed sale transactions
enumerated in Sec. 4.1067(a)(1), (2), and (3)
Retirement or cessation of business tax base shall be the acquisition cost or the
current market price of the goods or properties, whichever is lower
Sale where the gross selling price is unreasonably lower than FMV the actual market
value shall be the tax base
Meaning of unreasonably lower if GSP 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
C. Importation of Goods
- In general VAT is imposed on goods brought into the Philippines, whether for use in business or not
- Tax base VAT is based on the total value used by the BOC in determining tariff and customs duties,
plus customs duties, excise tax, if any, and other charges, such as postage, commission, and similar
charges, prior to the release of the goods from customs custody (landed cost)
- If duties based on volume or quantity landed cost shall be the basis for computing VAT. Landed cost
consists of the invoice amount, customs duties, freight, insurance and other charges. If the goods
imported are subject to excise tax, the excise tax shall form part of the tax base
- Technical importations same rule applies to technical importation of goods sold by a person located in
a Special Economic Zone to a customer located in a customs territory
- Importation of 109(1) exempt goods no VAT
- Time for payment prior to release from customs custody
D. Sales of Services
- Meaning of sale or exchange of services
o Sale or exchange of services means the performance of:
all kinds of services

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in the Philippines
for others for a fee, remuneration or consideration, whether in kind or in cash
including those performed or rendered by certain persons and those involving certain
transactions enumerated under the law (see enumeration; enumeration is not
exclusive; see Lhuiller v. CIR)
Enumeration in Section 108 is not exclusive
and similar services regardless of whether or not the performance thereof calls for the
exercise or use of the physical or mental faculties
- Requirements for taxability
o What are the requirements for the taxability of sale of services?
The service must be in the course of trade or business;
Note: services rendered in the Philippines by non-resident foreign persons are
considered as having been rendered in the course of trade or business
The service must be performed in the Philippines; and
The consideration is actually or constructively received
o Place of Performance Rule
As a statutory principle, all kinds of services performed in the Philippines are subject to
VAT at the rate of 12% or 0%
Services performed outside the Philippines, even if undertaken in the course of
business, are beyond the scope of VAT, therefore, not subject to VAT
The place where the service is performed determines the jurisdiction to
impose VAT (place of payment is immaterial since the situs of the service is
determined by the place where the service is performed)
Thus, marketing activities of a realty broker in the U.S. to entice OFWs to buy
condo units in the Philippines held not subject to VAT since services were
rendered outside the Philippines. BIR Rul. 11097
Legal services performed by a U.K. law firm in the U.K. and in the U.S. for the
Republic of the Philippines in an arbitration case in Washington, DC not
subject to VAT. ITAD Rul. 15402
- Taxable base; Gross receipts actually and constructively received
o Definition of gross receipts
refers to the total amount of money or its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials supplied with the services and deposits
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 Although taxable transaction is past, present, or future performance of service tax accrues
upon actual or constructive receipt
o Tax accounting cash method (not accrual method)
o Constructive receipt occurs when the money consideration or its equivalent is placed at the
control of the person who rendered the service without restrictions by the payor. Examples:
Deposit in banks which are made available to the seller of services without restrictions;
Issuance by the debtor of a notice to offset any debt or obligation and acceptance
thereof by the seller as payment for services rendered; and
Transfer of the amounts retained by the payor to the account of the contractor
o Inclusions and Exclusions
Includes:
1. Contract price, compensation, service fee, rentals or royalties
2. Amount charged for materials supplied with the services
3. Deposits and advance payments
Thus, gross receipts include amounts billed to clients intended to recover costs and
expenses (e.g., salaries and wages due to employees, due the government,
depreciation of equipment, supplies, overhead, etc.) as well as the profit markup. VAT
Rul. No. 11188
Includes management fee (based on profits of managed company), expenses incurred
in connection with services rendered, and reimbursement by managed company of
salaries and fringe benefits of seconded employee. VAT Rul. No. 20590
Excludes, however, receivables (i.e., portion of the contract price not yet actually or
constructively received). BIR Rul. No. 19589

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Also excludes amounts earmarked for payment to third parties as well as

reimbursement of outofpocket expenses (under certain conditions)
Thus, amounts received by a local travel agent from foreign tourist agencies
which formed part of the package fee paid by the tourists but were intended
or earmarked for hotel room accommodations and accordingly paid by the
local travel agency to the hotels not subject to VAT
Gross receipts do not include monies or receipts entrusted to the taxpayer
which do not belong to them and do not redound to the taxpayers benefit. CIR
v. Tours Specialists, Inc.
III. Relief from VAT

A. Zero Rating vs. Exemption
- Basic principle: a seller who is directly and legally liable for the payment of VAT on goods and services is
not necessarily the person who ultimately bears the burden of the tax
o It is the final purchaser or consumer of such goods and services who ultimately bears the burden
of the VAT (VAT being an indirect tax)
- From the perspective of the final consumer, VAT zero-rating and VAT exemption both offer some relief
from the burden of taxation, but the degree or extent of relief is different
- VAT exemption offers partial relief from the VAT incidence, while VAT zerorating offers total relief from
the VAT incidence (see CIR v. Seagate Tech)
- Why is the degree of relief different?
o VAT exemption (partial relief)
the transaction is not subject to VAT (output tax)
but the seller is not allowed any tax credit of VAT (input tax) on purchases
o VAT zerorating (total relief)
the zerorated sale of goods or services (by a VAT-registered person) is a taxable
transaction for VAT purposes, but shall not result in any output tax (because the output
tax rate is 0%)
However, the input tax on purchases of goods, properties or services related to such
zerorated sale shall be available as tax credit or refund
- Illustration: assume there are 3 sellers A, B, C and a final purchaser, D
B. Zero-Rated Transactions
- Objective of zero-rating: to make exporters competitive internationally through VAT relief
- Two ways to grant relief
o Exporters sale is subject to 0% rate and is allowed a refund or credit of input tax passed on to
exporter by his supplier (automatic zero rating)
o Supplier of exporter is eectively zero-rated where his sale to the exporter is subject to 0% rate
- Automatic zero-rating
o
- Effectively zero-rating

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o
o Effectively the privilege of zero-rating is extended to suppliers of the exporter
- Sale of Goods:
1. Actual export sale ( 106(A)(2)(a)(1)) consideration in FX, accounted for in accordance with
BSP rules and regs.
2. Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export oriented enterprise ( 106(A)(2)(a)(2)) consideration in FX, accounted for in
accordance with BSP rules and regs.
3. Sale of raw/packaging materials to exportoriented enterprises ( 106(A)(2)(a)(3)) export sales
must exceed 70% of total annual prodn
4. Sale of gold to BSP ( 106(A)(2)(a)(4))
5. Those considered export sales under the Omnibus Investments Code ( 106(A)(2)(a)(5))
6. Sale of goods, supplies, equipment and fuel to international vessels or air carriers (
106(A)(2)(a)(6))
7. Foreign currency denominated sale ( 106(A)(2)(b)) e.g., sale of locally manufactured car to
OFWs for delivery to Philippine residents (e.g., family of OFWs in the Phils.)
8. Sale of goods assembled or manufactured in the Phil. for delivery to a Phil. resident
E.g., sale of locally manufactured car to OFWs for delivery to Philippine residents (e.g.,
family of OFWs in the Phil.)
9. Sales to persons or entities whose exemption under special laws or intl agreements effectively
subjects such sales to 0% rate ( 106(A)(2)(c)) (e.g., SMBA, PEZA, ADB, IRRI)
- Sale of Services
1. Processing, mfg. or repacking goods for other persons doing business outside the Philippines
which goods are subsequently exported ( 108(B)(1)) consideration in FX, accounted for in
accordance with BSP rules and regs.
2. Services other than those mentioned in no. 1 rendered to nonresidents ( 108(B)(2))
consideration in FX, accounted for in accordance with BSP rules and regs.
CIR v. AMEX
CIR v. Burmeister & Wain Scandinavian
3. Services rendered to persons or entities whose exemption under special laws or intl agreements
effectively subjects such services to 0% rate ( 108(B)(3))
4. Services rendered to international vessels or air carriers, including leases of property (
108(B)(4))
5. Services performed by contractors or subcontractors in processing, converting, or manufacturing
goods for exportoriented enterprises ( 108(B)(5)) export sales must exceed 70% of total
annual prodn
6. Transport of passengers and cargo by international carriers ( 108(B)(6))
7. Sale of power or fuel generated through renewable sources of energy ( 108(B)(7))
- Accounted for in Accordance with BSP Regs
o What is meant by accounted for in accordance with the rules and regs. of the BSP?
Per CB Circ. No. 1389, not required that consideration is inwardly remitted and
converted to Php (required under old VAT law)
At taxpayers option, FX may be
sold for Php to AABs or outside the banking system, or
retained, or deposited in foreign currency accounts, whether in the Philippines
or abroad and may be used freely for any purpose. BIR Rul. No. 17694, VAT
Rul. No. 4700
C. Exempt Transactions
- See enumeration under 109(1) (memorize!)
o Sale or importation of marine or food products in their original state
Brown sugar is considered as raw material, thus exempt
o Sale or importation of fertilizer; seeds, seedlings and ngerlings; etc.
o Importation of personal and household eects of returning residents
o Services subject to percentage tax

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o Medical, dental, hospital and veterinary services, except those rendered by professionals (e.g.,
doctors, dentists, vet, etc.)
o Educational services rendered by private educational institutions
o Services rendered by RHQ
o Transactions exempt under special law
o Sale of low cost housing, etc.
- What is the coverage of the exemption?
o General rule:
Exemption covers only taxes for which party favored by the exemption is directly liable;
exemption does not extend to indirect taxes like VAT
Being an indirect tax, once VAT is shifted to the buyer, it is no longer a tax but an
additional cost which becomes a part of the amount of the contract price to be paid by
the buyer. Phil. Acetylene Co., Inc. v. CIR; Phil. Natl Police MultiPurpose Cooperative,
Inc. v. CIR; BIR Rul. No. 15598; BIR Rul. No. 4799
o Exceptions:
When the law itself provides for exemption from indirect taxes. CIR v. John Gotamco &
Sons, Inc. (involving the exemption of the WHO from indirect taxes)
When the history of statutes clearly indicates the grant of indirect tax exemption.
Maceda v. Macaraig, Jr. (confirming NPCs exemption from direct and indirect taxes
following an examination of the evolution of NPCs charter)
IV. Tax Credits and Refund

A. Input Tax Credit
- What is input tax?
o Means the VAT due on or paid by a VATregistered person on importation of goods or local
purchases of goods, properties, or services, including lease or use of properties, in the course
of his trade or business.
o Also includes the transitional input tax and the presumptive input tax determined in accordance
with Sec. 111 of the Tax Code
o Must be evidenced by a VAT invoice or VAT O/R issued by a VATregistered person
- Who can avail of input tax credit?
o VATregistered importer of goods
o VATregistered purchaser of local goods or properties
o VATregistered purchaser of services or lessee or licensee
- What types of input tax are creditable?
1. Purchase or importation of goods:
for sale
for conversion into or intended to form part of a finished product for sale, including
packaging materials
for use as supplies in the course of business
for use as raw materials supplied in the sale of services
for use in trade or business for which deduction for depreciation or amortization is
allowed
2. Purchase of real properties for which a VAT has actually been paid
3. Purchase of services for which a VAT has actually been paid
4. Transactions deemed sale
5. Transitional input tax
6. Presumptive input tax
- Excess output or input tax
o Basic formula:
Output tax (12% or 0%)
Less: input tax
VAT Payable
o Per 110(B), if at the end of the taxable quarter, output tax exceeds input tax VATregistered
person pays the excess
o On the other hand, if input tax exceeds output tax:
General rule: carryover excess input to the succeeding quarter or quarters
Exception: if the unutilized input is attributable to zero-rated sales, the VATregistered
taxpayer has 3 options:
Carryover excess input tax
Refund unutilized input tax
Credit unutilized input tax vs. other internal revenue taxes (i.e., TCC)

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- Amortization of input tax on capital goods

o Capital expenditures expenditures for more than a year
o Input tax on purchase or importation of depreciable goods must be spread evenly over the month
of acquisition and the 59 succeeding months if the aggregate acquisition cost, excluding the VAT
component, exceeds P1M
This is the only instance when you spread out input tax (when you spend capital
expenditures)
o If the estimated useful life of the capital good is less than 5 years, the input VAT shall be spread
over such shorter period
o The aggregate acquisition cost of a depreciable asset in any calendar month refers to the total
price agreed upon for one or more assets acquired and not on the payments actually made
during the calendar month. Thus, an asset acquired on installment for an acquisition cost of
more than P1M will be subject to the amortization of input tax despite the fact that the monthly
payment/installment does not exceed P1M
o Question: will the amortization rule apply to selfconstructed assets of the taxpayer (e.g.,
taxpayer builds its own factory)?
Answer: No. Amortization rule applies only to existing or finished depreciable capital
goods purchased or imported during any calendar month (see 4.1103, RR 162005).
If the selfconstructed assets are later on sold to another taxpayer, the rule will apply
to the buyer
Thus, the entire input tax attributable to construction in progress (CIP), which is not
subject to depreciation until the asset being constructed is finished, could be credited
against output tax
o Illustration: On January 1, 2006, taxpayer purchased machinery for P5M, paying input tax of
P500T
For the 1st quarter of 2006, taxpayer can only claim P25T input tax from purchased
machinery (500/60 x 3 = 25)
B. Transitional Input Tax

- Who is entitled to the transitional input tax?
o A person who becomes liable to VAT or any person who elects to be a VATregistered person
(e.g., taxpayers who exceed the P1.5 M threshold or taxpayers who elect VAT coverage even if
their turnover does not exceed P1.5 M)
- How much is the transitional input tax?
o Transitional input tax credit is 2% of the value of the beginning inventory on hand as of the
effectivity of the VATregistration, or the actual VAT paid, whichever is higher
C. Presumptive Input Tax

- Who is entitled to the presumptive input tax?
o Persons or firms engaged in the processing of sardines, mackerel, and milk, and in
manufacturing refined sugar, cooking oil and packed noodlebased instant meals
o These taxpayers have small input tax because their raw materials are agricultural materials.
They are given presumptive input tax because they do not have input tax to credit from their
output tax
o The articles here are socio sensitive products. Thus, in order to keep the price low, the
government gives them presumptive input tax
- How much is the presumptive input tax?
o 4% of the gross value in money of the taxpayers purchases of primary agricultural products
which are used as inputs to their production
D. Final Withholding VAT

- When does it apply?
o The 5% final withholding VAT applies to sales of goods or services to the government or to
GOCCs
- When does the obligation to withhold arise?
o Before making payment on account of the purchase, the government entity or the GOCC shall
deduct and withhold the 5% final VAT based on the gross payment thereof
- What does the 5% final withholding VAT represent?
o It represents the net VAT payable of the seller
- What is the effect of the 5% final withholding VAT on the sellers input tax attributable to the sale to the
government or the GOCC?

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o It essentially limits the amount of input VAT that the seller may credit against the 12% output tax
to only 7% (12% output 5% net VAT payable = 7% standard input)
- If the sellers actual input tax exceeds 7% of gross payments, can the seller carryover the excess?
o No. The excess cannot be used to reduce the sellers output tax in other VAT transactions. The
excess shall form part of the sellers cost or expense
o On the other hand, if actual input VAT is less than 7%, the difference must be credited against
cost or expense (the effect is to reduce the sellers deductible cost or expense)
E. Claims for Refund or Tax Credit

- When can a VATregistered taxpayer claim a refund or tax credit for unutilized input VAT?
o In only 2 instances:
Zerorated or effectively zerorated sales ( 112(A)) unutilized input VAT must be
attributable to the zerorated sales (i.e., either directly attributable or allocable to zero
rated sales)
Cancellation of VAT registration ( 112(B)) due to retirement from or cessation of
business, or due to changes in or cessation of status under 106(C)
- What is the period within which the CIR should act on the claim?
o Within 120 days from submission of complete documents in support of the application
If there is an inaction on the part of BIR, the taxpayer can go to CTA within 30 days
from lapse of 120 days
Can the taxpayer elect to wait for the decision of the BIR before appealing to the CTA?
Bello: the taxpayer should have an option
But the SC in an obiter said that once the 120 days expire, the taxpayer does
not have any option but to go to CTA within 30 days (Apollo case)
In case of inaction, and the two-year period is near expiring, can the taxpayer go to the
CTA immediately?
No, you have to wait for the lapse of the 120-day period, even though it falls
outside the 2-year period, before you can you go to the CTA
Thus, the judicial claim may be filed outside the 2-year period
- What is the prescriptive period for filing the claim for refund or TCC?
o In the case of zerorated sales:
Administrative claim must be made within 2 years from the filing of the quarterly VAT
return. Atlas Consolidated Mining and Devt Corp. v. CIR, citing ACCRAIN and TMX
Sales. (Note: 112(A) states from the close of the taxable quarter)
The two-year period is only relevant in administrative claim.
In VAT, file the VAT return 25 days from the close of taxable quarter. Count
the 2-year period from the close of taxable quarter and not the day of filing.
Judicial claim
Within 30 days from denial of claim or from the lapse of the 120-day period
without any action from the BIR ( 112(A))
In all cases, must be made within 2 years from the filing of the quarterly VAT
return (generally within 25 days from close of taxable quarter) ( 229)
- What is the prescriptive period for filing the claim for refund or TCC?
o In the case of cancellation of VAT registration:
Administrative claim must be made within 2 years from the date of cancellation
Judicial claim same
V. Compliance Requirements
A. BIR Registration
- Mandatory registration generally, any person whose sale of goods and services are subject to VAT is
required to register as a VAT taxpayer with the appropriate RDO (and pay annual registration fee of
P500). VAT registration is mandatory if:
o Taxpayers gross sales or receipts for the past 12 mos. (other than exempt sales) exceed
P1,919,500
o Taxpayer has reasonable grounds to believe that his gross sales or receipts for the next 12 mos.
(other than exempt sales) will exceed P1,919,500
- Optional registration Taxpayer may elect to register as a VAT taxpayer in the following instances:
o Taxpayers annual gross sales or receipts do not exceed P1,919,500
o Taxpayer with mixed transactions (taxable and exempt), may elect that exempt transactions be
subject to VAT

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o Franchise grantees of radio and TV broadcasting whose annual gross receipts of the preceding
year do not exceed P10M
- Consequences of non-registration
o Taxpayer liable for VAT
o But disqualified to claim input VAT credits
- Cancellation of VAT registration
o Taxpayer is previously VAT-registered but whose annual gross sales or receipts fall below
P1,919,500
o Retirement from business subject to VAT
B. Record Keeping Requirement

- Requirement to keep subsidiary sales journal and subsidiary purchase journal
C. Invoices and Receipts

- Issue VAT invoice for sale of goods
- Issue VAT O/R for sale of services
- Information contained in VAT invoice/OR
o TIN-V
o Total amount due (inclusive of VAT)
o VAT as a separate item
o Zero-rated sale written or printed prominently
o Break down for mixed transactions
o Date, quantity, unit cost and description/nature
o If sale is P1,000 or more, indicate name, address and TIN of VAT-registered buyer
- Consequence or erroneous issuance of VAT invoice/OR
o If taxpayer is not VAT-registered and issues invoice/OR indicating TIN-V:
Liable for VAT in addition to percentage tax
Disqualified from input VAT credit attributable to the sale
50% surcharge
Purchaser, however, eligible to claim input VAT
Break down for mixed transactions
o If taxpayer is VAT-registered and issues VAT invoice/OR for exempt transaction liable for VAT
as if not exempt
LOCAL TAXATION
I. General Principles
A. Local Autonomy
- What is the nature and source of local taxing power?
o Mactan Cebu Intl Airport Authority v. Marcos the power to tax is primarily vested in Congress;
however, in our jurisdiction, it may be exercised by local legislative bodies, no longer by virtue
of a valid delegation as before, but pursuant to direct authority conferred by 5, art. X of the
Constitution. Under the latter, the exercise of the power may be subject to such guidelines and
limitations as the Congress may provide which, however, must be consistent with the basic policy
of local autonomy
Currently, Titles I (Local Taxation) and II (RPT) of Book II, LGC prescribe the
guidelines and limitations of local taxing power
o Meralco v. Laguna 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. Accordingly,
inasmuch as the power to tax may be exercised by local legislative bodies no longer by valid
delegation of said power by Congress, but by direct authority conferred by 5, art. X of the
Constitution, in interpreting statutory provisions on municipal fiscal powers, doubts will have to
be resolved in favor of municipal corporations
B. Fundamental Principles
- What are the fundamental principles that govern the exercise of taxing and other revenue-raising powers
of LGUs? (Memorize!)
1. Uniformity in taxation
2. Local exactions shall (i) be equitable and based on taxpayers ability to pay, (ii) be for public
purposes, (iii) not be unjust, excessive, oppressive or confiscatory, (iv) not be contrary to law,
public policy, national economic policy, or in the restraint of trade

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3. Collection shall not be let to private persons*

4. Revenue collections shall accrue exclusively to LGUs**
5. System of taxation must be progressive
- Cases:
o Pepsi Cola Bottling Co. of the Phils., Inc. v. Mun. of Tanauan - where the SC held that a tax of
one centavo (P0.01) on each gallon of volume capacity on all soft drinks, produced or
manufactured, or an equivalent of 1-1/2 centavos per case, cannot be considered unjust and
unfair.
An increase in the tax alone would not support the claim that the tax is oppressive,
unjust and confiscatory. Municipal corporations are allowed much discretion in
determining the rates of imposable taxes.
This is in line with the constitutional policy of according the widest possible autonomy
to local governments in matters of local taxation, an aspect that is given expression in
the Local Tax Code (PD No. 231, July 1, 1973).
Unless the amount is so excessive as to be prohibitive, courts will go slow in writing off
an ordinance as unreasonable
o Ormoc Sugar Co., Inc. v. Mun. Board of Ormoc City - where the SC, in upholding the validity of
a municipal tax ordinance, held that the grant of the power to tax to chartered cities under section
2 of the then Local Autonomy Act is sufficiently plenary to cover 'everything, excepting those
which are mentioned' therein, subject only to the limitation that the tax so levied is for public
purposes, just and uniform
As to the allegation that the local taxing ordinance is in restraint of trade, it is for the
taxpayer to prove. An objection of a generalized character to the effect that a local
imposition is in restraint of trade will not nullify a taxing ordinance which is otherwise
valid
o Matalin Coconut Co. v. Mun. Council of Malabang where the SC struck down a municipal
ordinance imposing a police inspection fee of P0.30 per sack of cassava starch flour shipped
out of the municipality for the ff. reasons:
Imposition is unjust and unreasonable - the only service rendered by the LGU, by way
of inspection, is for the policeman to verify from the driver of the trucks of the taxpayer
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 collected
The imposition is excessive and confiscatory the taxpayers marginal average
profit/bag of cassava starch flour is only P0.40 (the police inspection fee is P0.30/bag)
C. Common Limitations on Taxing Power

- What are the common limitations on the taxing power of LGUs? Exercise of taxing power of LGUs
(province, cities, municipalities, barangay) shall not extend to the following (Sec. 133): (memorize)
Income tax, except on banks and other nancial institution
DST
Transfer taxes (estate and donors tax)
Customs fees and other charges
Taxes, fees and charges (TFC) on goods passing through territorial jurisdiction of
LGU
TFC on agricultural or aquatic products when sold by marginal farmers or shermen
Business tax on BOI-, PEZA-, SBMA-registered entities, etc.
Excise tax and TFC on petroleum products
VAT or any percentage tax
Common carriers tax
Taxes on reinsurance premiums
TFC on registration of motor vehicles, except tricycles
TFC on export products
TFC on Countryside and Bgy. Business Enterprises or Cooperatives duly registered
with CDA
TFC on the national government or LGUs
- Common limitations are off limits to LGUs
o Cases:
Prov. of Bulacan v. CA where SC held that provinces may not levy excise taxes on
articles already taxed by the NIRC (the LGU assessed taxpayer P2.5M for extracting
limestone, shale and silica from several parcels of private land in the province; said
minerals are quarry resources already subject to excise tax under the NIRC)

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Phil. Petroleum Corp. v. Mun. of Pililla which upheld the imposition of a local tax on
the business of manufacturing petroleum products, despite the fact that the NIRC
imposes excise taxes on manufactured petroleum products. In so holding, the SC ruled
that a tax on business is distinct from a tax on the article itself
Note that under 133(h), LGUs are prohibited from imposing excise taxes on
articles enumerated under the NIRC and taxes, fees or charges on petroleum
products. It would seem that under Pililla, the 133(h) limitation applies only
when what is being taxed is the article itself, and not the business in which
said article is manufactured
Note, however, that under the IRR of 133(h), the prohibition extends to the
imposition of a tax on the business of manufacturing petroleum products
See, however, Petron Corp. v. Tiangco (2008), holding that LGU may not
impose business taxes on entities engaged in sale of petroleum products
San Miguel Corp. v. Mun. Council of Mandaue holding that a graduated quarterly
fixed tax based on the gross value of money or actual market value at the time of
removal of the manufactured articles from their factories is essentially a percentage tax
based on sales, therefore, beyond the authority of the LGU to enact
A percentage tax is imposed when there is a set ratio between the amount of
the tax and the volume of sales
See 133(i) limitation
II. Scope of Taxing Powers of LGUs

A. Provinces
- What are the taxes, fees and charges that provinces may levy and collect?
1. Tax on transfer of real property ownership ( 135)
Coverage: sale, donation, barter, or any other mode of transferring ownership or title of
real property
Rate and base: not more than 50% of 1% of total consideration or FMV (if monetary
consideration is not substantial), whichever is higher
When payable: within 60 days from execution of deed or death of decedent
2. Printers or publishers tax ( 136)
Coverage: persons engaged in the printing and/or publication of books, cards, posters,
leaflets, handbills, etc.
Rate and base: not more than 50% of 1% of gross annual receipts for preceding
calendar year
3. Franchise tax ( 137)
Coverage: businesses enjoying a franchise
Rate and base: not exceeding 50% of 1% of the gross annual receipts for the preceding
calendar year based on the incoming receipts, or realized within its territorial jurisdiction
(1/20 of 1% of capital investment if newly started business)
4. Tax on sand, gravel and other quarry resources ( 138)
Coverage - ordinary stones, sand, gravel, earth, and other quarry resources extracted
from public lands or from the beds of seas, lakes, rivers, streams, creeks and other
public waters within the provinces territorial jurisdiction
Rate and base: not more than 10% of FMV/cubic meter
5. Professional tax ( 139)
Coverage: persons engaged in the exercise or practice of a profession requiring
government examination (professionals exclusively employed by govt are exempt)
Rate and base: not to exceed P300 annually
When payable: Jan. 31
6. Amusement tax ( 140)
Coverage: proprietors, lessees, or operators of theaters, cinemas, concert halls,
circuses, boxing stadia and other places of amusement (exempt: holding of operas,
concerts, dramas, recitals, painting and art exhibitions, flower shows, musical
programs, literary and oratorical presentations, except pop, rock or similar concerts
Rate and base: not more than 30% of gross receipts from admission fees
7. Fixed tax on delivery trucks and vans ( 141)
Coverage: annual tax on every truck, van or vehicle used in the delivery or distribution
of merchandise
Rate and base: not exceeding P500
8. Service fees and charges for services rendered ( 153)
E.g., sanitary, or health services, garbage collection

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9. Public utility charges ( 154) - for the operation of public utilities owned, operated and maintained
by provinces within their jurisdiction
10. Toll fees or charges ( 155) - for the use of any public road, pier, or wharf, waterway, bridge,
ferry or telecommunication system funded and constructed by the province
B. Municipalities
- What is the scope of taxing powers of municipalities?
o Generally, municipalities may levy taxes, fees, and charges not otherwise levied by provinces (
142)
- What are the taxes, fees and charges that municipalities may levy and collect?
o Business taxes on --
1. Manufacturers, assemblers, re-packers, processors, brewers, distillers, rectifiers, and
compounders of liquors, distilled spirits and wines or manufacturers of any article of
commerce of whatever kind and nature ( 143(a))
Rate and base: graduated annual fixed tax based on taxpayers gross sales
or receipts for preceding year
However, when gross sales or receipts amount to P6.5M or more, tax ceases
to be a fixed tax; instead, a percentage tax of 37.5% of 1% is imposed
2. Wholesalers, distributors or dealers in any article of commerce of whatever kind and
nature ( 143(b))
Rate and base: graduated annual fixed tax based on taxpayers gross sales
or receipts for preceding year
However, when gross sales or receipts amount to P2M or more, tax ceases
to be a fixed tax; instead, a percentage tax of 50% of 1% is imposed
3. Exporters and manufacturers, millers, producers, wholesalers, distributors, dealers or
retailers of essential commodities like rice, corn, wheat or cassava flour, cooking oil,
laundry soap, etc. ( 143(c)) at a rate not exceeding of the rates for sales of articles
mentioned in (a) and (b) above
4. Retailers tax is not a graduated annual fixed tax but an annual percentage tax based
on gross sales or receipts for the preceding calendar year ( 143(d))
Note: barangays have exclusive power to tax retailers whose gross sales or
receipts for the preceding calendar year do not exceed P50,000 (for
barangays in cities) or P30,000 (for barangays in municipalities)
5. Contractors and other independent contractors ( 143(e)) graduated annual fixed tax
based on gross receipts for preceding calendar year. However, if gross receipts amount
to P2M or more, contractors tax becomes a percentage tax at the rate of 50% of 1%
6. Banks and other financial institutions ( 143(f)) tax is 50% of 1% of gross receipts of
preceding calendar year derived from interests, commissions and discounts from
lending activities, income from financial leasing, dividends, rentals on property and
profit from exchange or sale of property, insurance premium
7. Peddlers engaged in sale of mdse or article of commerce ( 143(g)) rate not to exceed
P50 per peddler annually
8. On any business not otherwise specified above, SB concerned may impose tax it
deems proper ( 143(g))
In the case, however, of businesses subject to excise, value-added or pct. tax,
the rate shall not exceed 2% of gross sales or receipts for the preceding
calendar year
Note: municipalities within Metro Manila may levy taxes at rates which shall not exceed
by 50% the maximum rates in (1) to (8) above ( 144)
o Fees and charges
1. Municipalities authorized also to impose and collect such reasonable fees and charges
on business and occupation and on the practice of any profession or calling (other than
professional tax, which only provinces or cities may impose) before any person may
engage in such business, occupation or practice of such profession (e.g., mayors
permit) ( 147)
The fees and charges, however, should be commensurate with the cost of
regulation, inspection and licensing (i.e., must not be revenue-generating)
2. Service fees and charges ( 153)
3. Public utility charges ( 154)
4. Toll fees or charges ( 155)
C. Cities

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- What are the taxes, fees and charges that cities may levy and collect?
o Taxes, fees and charges which provinces or municipalities may levy and collect (151)
o The rates of taxes that cities may levy may exceed the maximum rates allowed for provinces or
municipalities by not more than 50%, except the rates of professional and amusement taxes
D. Barangays
- What are the taxes, fees and charges that barangays may levy and collect?
1. Taxes on stores or retailers with fixed business establishments with gross sales or receipts for
the preceding calendar year of P50,000 or less (for barangays in cities) and P30,000 or less (for
barangays in municipalities) at a rate not exceeding 1% of such gross sales or receipts
2. Service fees or charges for services rendered in connection with the regulation or the use of
barangay-owned properties or service facilities such as palay, copra or tobacco dryers
3. Barangay clearance for purposes of mayors/business permit application/renewal
4. Other fees and charges on commercial breeding of fighting cocks, cockfights and cockpits; on
places of recreation charging admission fees; on billboards, etc.
III. Community Tax Certificate

A. Who are Liable?
- Who are authorized to levy and collect community taxes?
o Cities or municipalities ( 156)
- Who are liable?
1. Individuals ( 157):
18 years or over (i) regularly employed on a wage or salary basis for at least 30
consecutive working days during any calendar year; or (ii) engaged in business or
occupation; or (iii) own real property with FMV of P1,000 or more; or (iv) required to file
ITR
Rate and base: annual tax of P5, plus P1/P1,000 income
2. Juridical persons ( 158):
Every corporation engaged in or doing business in the Philippines
Rate and base: annual tax of P500 and an annual additional tax based on FMV of real
property and gross receipts (the additional tax, however, shall not exceed P10,000)
B. Exemptions from Community Tax

- Who are exempt from community tax ( 159)?
o Diplomatic and consular representatives
o Transient visitors
C. Place and Time of Payment of Tax

- Where shall the community tax be paid?
o Residence of individual
o Place where principal office of juridical entity is located
- When shall community tax be paid?
o On or before last day of Feb.
o Special rules for individuals and corporations who become liable for community tax during the
year
IV. Time, Manner, and Place of Payment of Local Business Tax

A. Time of Payment
- Tax period generally calendar year basis ( 165)
- Manner of payment may be made quarterly ( 165)
- Accrual of tax generally Jan. 1; in case of new ordinance levying new tax or increasing rates 1st day
of quarter next following effectivity of ordinance ( 166)
- Time of payment generally first 20 days of Jan. or quarter, as the case may be ( 167);
o In case of retirement from business if the tax paid during the year be less than the tax due on
said gross sales or receipts of the current year, the difference shall be paid before the business
is considered officially retired ( 145)
- Basis is the gross sales or receipts of the previous year
B. Place of Payment (Situs Rules)

- Where should local business taxes be paid?
o First, check if there is a branch or sales office.
If there is, pay there

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If none, pay in the place where principal office is located

o Branch or Sales Office Rule
Any revenue of a branch or sales office shall be paid in the LGU where the branch or
sales office is located
E.g., SMs principal office is in Pasay. But SM malls located all over the
Philippines shall pay their local business tax in the place where they
respectively operate
LGU where branch or sales office is located all sales made in a locality where there
is a branch or sales office or warehouse shall be recorded in said branch or sales office
or warehouse and the tax shall be payable to the city or municipality where the same
is located
Branch or sales office a fixed place in a locality which conducts operations
of the business as an extension of the principal office; offices used only as
display areas of the products where no stocks or items are stored for sale,
although orders for the products may be received thereat, are not branch or
sales office. A warehouse which accepts orders and/or issues sales invoices
independent of a branch with sales office shall be considered as a sales office
o If the warehouse cannot issue sales invoice, it is not considered as
branch or sales office
In case where there is no such branch, sales office or warehouse in the locality where
the sale is made, the sale shall be recorded in the principal office along with the sales
made by said principal office and the tax shall accrue to the city or municipality where
said principal office is located
Principal office head of main office appearing in the AOI or DTI registration
o Allocation Rule
Impt.: allocation rule applies only manufacturers, assemblers, contractors,
producers and exporters with factories, project offices, plants and plantations in
the pursuit of business
30% of all sales recorded in the principal office shall be taxable by the city or
municipality where the principal office is located, and 70% of all sales recorded in the
principal office shall be taxable by the city or municipality where the factory, project
office, plant or plantation is located
Example: Del Monte PH. Principal office is in BGC. It has a plant in CDO. Pay
70% in CDO and 30% in BGC
In case of a plantation located at a place other the place where the factory is located,
said 70% metioned above shall be divided as follows:
60% (of the 70%) to the city or municipality where the factory is located; and
40% (of the 70%) to the city or municipality where the plantation is located
In case where a manufacturer, assembler, producer, exporter or contractor has 2 or
more factories, project oces, plants or plantations located in dierent localities, the
70% sales allocation shall be pro-rated among the localities where the factories, project
oces, plants or plantations are located in proportion to their respective volumes of
production during the period for which the tax is due. In the case of project oces of
service or other independent contractors, production = cost of projects undertaken
during the tax period
o Sales Made by Route Trucks, Vans or Vehicles
For route sales made in locality where a manufacturer, producer, wholesaler, retailer
or dealer has a branch or sales office or warehouse, the sale shall be recorded in the
branch or sales office or warehouse and the tax due thereon shall be paid to the city or
municipality where such branch or sales office or warehouse is located
For route sales made in locality where a manufacturer, producer, wholesaler, retailer
or dealer has no branch or sales office or warehouse, the sale shall be recorded in the
branch or sales office or warehouse from where the route trucks withdraw their products
for sale, and the tax due thereon shall be paid to the city or municipality where such
branch or sales office or warehouse is located
V. Enactment of Tax Ordinances and Other Revenue Measures

A. Public Hearing and Publication of Tax Ordinances
- What are the procedural requirements for the enactment of tax ordinances?
o Public hearing and publication
- 186 and 187 state that no ordinance levying taxes, fees and charges shall be enacted without public
hearing; this is a mandatory requirement

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o Figuerres v. CA SC confirmed that the holding of a public hearing is a mandatory requirement

for the enactment of a tax ordinance; the SC however upheld the validity of the assailed
ordinance for failure of the taxpayer to adduce evidence that the requisite public hearings were
not conducted by the LGU (presumption of validity of ordinances)
- What is the procedure for the publication of tax ordinances?
o Within 10 days from approval, certified true copies of the ordinance shall be published for 3
consecutive days in a newspaper of local circulation
o In LGUs where there are no newspapers of local circulation, the tax ordinance may be posted in
at least 2 conspicuous and publicly accessible places
B. Appeal of Tax Ordinances

- What is the procedure for the appeal of tax ordinances? (Direct attack)
o Secretary of Justice
Any question on the constitutionality or legality of tax ordinances or revenue measures
may be raised on appeal within 30 days from the effectivity thereof to the Secretary of
Justice
Secretary of Justice must render a decision on the appeal within 60 days from receipt
of appeal
Pendency of the appeal does not suspend the effectivity of ordinance or accrual and
payment of taxes, fees and charges levied thereon
Drilon v. Lim Secretary of Justice declared a Manila tax ordinance illegal because of
certain ultra vires provisions and noncompliance with the prescribed procedure for
enactment thereof; RTC declared 187 unconstitutional because said provision
violates constitutional provision on local autonomy; SC held that no constitutional rule
on local autonomy was violated because no control, but only supervision was exercised
by the Sec. of Justice in declaring as illegal the assailed ordinance
Hagonoy Market Vendor Assoc. v. Mun. of Hagonoy, Bulacan where an appeal to the
Secretary of Justice more than 1 year after the effectivity of the ordinance in question
was held to be time-barred on the ground that the periods stated in 187 are mandatory
o Court of competent jurisdiction (RTC) within 30 days from receipt of adverse decision or from
the lapse of the 60-day period without the Sec. of Justice acting on the appeal, aggrieved party
may file appropriate proceedings with a court of competent jurisdiction
o After RTC, go to CTA
- For indirect or collateral attack, taxpayer should protest the assessment and raise as a defense the
invalidity of the ordinance
o Protest with the treasurer first
o Then after treasurer, go to CTA
VI. Remedies of Local Government and Taxpayer

- What are the remedies of LGUs in the collection of taxes and revenues?
1. Examination of taxpayers books of accounts ( 171)
2. Issuance of deficiency assessment ( 194 - 195)
3. Imposition of surcharge and interest ( 168 - 169)
4. Summary remedies for the collection of taxes:
Distraint of personal property ( 175)
Levy on real property ( 176, 178-182)
Further distraint and levy ( 184)
5. Judicial action for collection of taxes ( 183)
- What are the remedies of taxpayers?
o Protest the assessment ( 195):
File protest with local treasurer within 60 days from receipt of assessment, otherwise
assessment becomes final and executory (CMC, Inc. v. City of Las Pias, CTA case);
local treasurer has 60 days to decide on the protest
For local business tax protest, payment under protest is not required (unlike
in RPT protest)
Appeal to court of competent jurisdiction (RTC) within 30 days from receipt of denial of
protest or from lapse of the 60-day period without the local treasurer acting on the
protest
o Claim for refund or tax credit (196)
REAL PROPERTY TAXATION

I. General Principles and Definition

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- What are the fundamental principles governing the appraisal, assessment, levy and collection of real
property tax (RPT)? (Memorize)
o Real property shall be appraised at its current and fair market value;
o Real property shall be classified for assessment purposes on the basis of its actual use;
o Real property shall be assessed on the basis of a uniform classification within each LGU;
o The appraisal, assessment, levy and collection of RPT shall not be let to any private person; and
o The appraisal and assessment of real property shall be equitable.
- Cases:
o Reyes v. Almanzor properties subject to the rent control law should not be equated with
properties that are not covered by the rent control law because the former have a much lesser
market value because of the rental restrictions. The appraisal was held excessive
o Meralco v. CBAA where oil storage tanks made of steel plates welded and assembled on the
spot were held taxable improvements even if not attached to any part of the foundation by balls,
screws or similar devices
o Meralco Securities Ind. Corp. v. CBAA - where Meralcos cylindrical steel pipes embedded in the
soil and that carry oil from Batangas to Manila were held subject to RPT
o Caltex Phils. Inc. v. CBAA where underground tanks, elevated water tanks, gasoline pumps,
computing pumps, water pumps, car washer, car hoists, truck hoists, air compressors and
tireflators installed by Caltex in its gasoline station located on leased land were held subject to
RPT
o Mindanao Bus Co. v. City Assessor and Treasurer where tools and rolling equipment
maintained by the transportation company in its premises were held merely incidental to its
business and not immobilized by destination, hence, not subject to RPT
o Benguet Corporation v. CBAA where tailings dam and submerged lands were considered as
improvements subject to RPT
o Province of Nueva Ecija v. Imperial Mining Co., Inc., where it was held that the policy of taxing
real property is on the basis of actual use even if the user is not the owner. Hence, govt property
leased to a private person becomes taxable
o Ty v. Trampe where the SC declared illegal the 400% to 570% increase in real estate taxes
imposed on landowners in Pasig
o Lopez v. City of Manila where the SC enumerated the procedural steps in computing real
property tax, as follows: (1) ascertain assessment level; (2) multiply the FMV by the applicable
assessment level; and (3) find the tax rate corresponding to the class (use) of the property and
multiply the assessed value by that rate; where the SC also enumerated the steps for the
mandatory conduct of general revision of real property assessments
II. Appraisal and Assessment of Real Property

- Assessment is the act or process of determining the value of a property, or a proportion thereof, subject
to tax. Includes discovery, listing, classication, and appraisal of properties
o An assessment may refer to the whole process or the notice
- Appraisal is the act or process of determining the value of property as of a specied date for a specic
purpose
- Steps:
o Preparation of schedule of FMV ( 212)
o Declaration of value ( 202, 204)
o Appraisal/valuation and classication ( 220)
o Listing of property in assessment roll ( 205)
o Notication of new or revised assessment ( 223)
A. Schedule of FMV
- Preparation of Schedule of FMV
o Assessor shall prepare Schedule of FMV for enactment by ordinance of sanggunian. Schedule
shall be published in newspaper of general circulation or posted in the capitol/hall and in two
other conspicuous places ( 212)
o Assessor may take evidence ( 213)
o Amendment to Schedule of FMV may be made to correct errors in valuation; to be conrmed by
SB in an ordinance enacted within 90 days from assessors recommendation ( 214)
Amendment is different from revision. Revision value does up
- General revision of real property assessment
o Assessor shall prepare a revised Schedule of FMV in connection with an ongoing general
revision every 3 years ( 219)
o Revisions is always political thus the every 3 years revision is not done

Marion Nerisse Kho
Page 133
B. Declaration of FMV
- Declaration of true value of real property
o Voluntary by the owner (every three years) (202)
o Involuntary by the assessor (204)
C. Appraisal/ Valuation/ Classification

- What is the applicable rule regarding the appraisal of real property (land, buildings and other
improvements)?
o Real property, whether taxable or exempt, shall be appraised at the current and FMV prevailing
at the locality where the property is located (schedule of fair market values) ( 201)
o Real property shall be classied, valued and assessed on the basis of actual use regardless of
location and owner/ user of property ( 217)
- What is the applicable rule regarding the appraisal of machinery? ( 224) by destination, machinery is
considered as real property
o If machinery is brand new FMV is acquisition cost
o If machinery is imported FMV is total landed cost
- Appraisal/valuation/classication of real property may be made in cases (i) where property is declared
and listed for taxation purposes for the rst time; (ii) there is an ongoing general revision; and (iii) a request
is made by the person in whose name the property is declared ( 220)
- Assessment of real property shall not be increased oftener than once every 3 years, except in case of
new improvements substantially increasing the value of said property ( 220)
- Classication real property shall be classied and assessment level applied on the basis of actual use
( 217)
- What are the classes of real property for assessment purposes?
o Residential, agricultural, commercial, industrial, mineral, timberland or special
- What are the special classes real property?
o Lands, buildings, and other improvements thereon actually, directly and exclusively used for
hospitals, cultural, or scientic 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
o They are generally exempt
- What is an assessment level?
o It is the percentage applied to the FMV (depending on the class of real property) to determine
the taxable value of the property ( 218)
- What are the steps in determining the assessed value of real property?
o Determine FMV
o Determine classication
o Apply assessment level to determine assessed value or taxable value
o Determine RPT due by multiplying the rate against assessed value
D. Listing
- Listing of real property in the assessment roll (205)
o If real property is exempt, declarant shall le with the assessor documentary evidence on
exemption within 30 days from declaration (206)
E. Notice of New/ Revised Assessment

- Notication of new or revised assessment ( 223)
o Written notice of such new or revised assessment (through a new Tax Declaration) shall be
given to the person in whose name the property is declared within 30 days
o Important for purposes of determining when the 60- day period to appeal the new or revised
assessment to the LBAA pursuant to 226
- When does the assessment or re-assessment take eect ( 220 - 222)?
o Gen. rule: Jan. 1 of the following year (prospective application)

Marion Nerisse Kho
Page 134
o Exception: the reassessment of real property due to its (i) partial or total destruction, or to a (ii)
major change in its actual use, or to any great (iii) and sudden ination or deation of real
property values, or to the (iv) gross illegality of the assessment when made or to any other
abnormal cause, shall be made within 90 days from the date any such cause or causes occurred,
and shall take eect at the beginning of the quarter next following the reassessment
o Exception: for previously undeclared real property (property being declared for the rst time),
eectivity of assessment retroacts to the period during which it would have been liable (max. of
10 years)
III. Real Property Tax and Additional or Special Levies

- What are the taxes that LGUs may levy on real property?
o Basic RPT ( 233)
1% for provinces
2% for cities and municipalities within MMA
o 1% special education fund (SEF) ( 235)
o 5% tax on idle lands ( 236 - 237)
Agricultural lands more than 1 hectare in area
Lands other than agricultural more than 1,000 sqm.
Residential lots in subdivisions regardless of land area
o Special levy due to improvements ( 240 - 243)
Lands specially benefited by public works projects or improvements funded by the LGU
concerned
Special levy shall not exceed 60% of the cost of the project or improvement
IV. Exemption for RPT

- What is the procedure for claiming exemption from RPT?
o File documentary evidence in support of claimed exemption with the local assessor within 30
days from date of declaration of real property ( 206)
- What types of real property are exempt from RPT ( 234)?
o Property owned by Govt or any of its political subdivisions
LRTA v. CBAA where the SC held that the LRT carriageways and terminal stations
are not exclusively for public use but rather patrimonial property, and therefore are
subject to RPT notwithstanding that LRTA is a GOCC
o Those actually, directly and exclusively used for religious, charitable or educational purposes,
and nonprofit or religious cemeteries
BLGF Opinion dated Nov. 20, 1992 addressed to the Mun. Assessor of Tuguegarao,
Cagayan where only real properties owned by the Phil. Union College which are a/d/e/
used for educational purposes are exempt, including the student dormitories,
cafeterias, and the food services building. The guardhouses garages, perimeter fences,
water tanks and pumps, generator houses, stockrooms and faculty/personnel
residential quarters are not exempt
BLGF Opinion dated March 15, 1993 addressed to Mr. Elmer Lee of QC where the
real properties of the Chinese General Hospital were held exempt because the only
purpose for which it was formed was for charitable, benevolent, civic, and educational
purposes
BLGF Opinion dated April 22, 1999 where the Andres Soriano Training Center,
owned and operated by SMC, was held subject to RPT although it was used for
educational purposes because (a) it also caters to other private offices who wish to
avail of their training courses, (b) its courses are not the regular subjects offered in
schools or universities, and (c) it is not accredited by DECS
o Machineries and equipment a/d/e used by local water districts and GOCCs in the supply and
distribution of water and electricity
Machineries and equipment used by a private power plant not exempt
o Real properties owned by cooperatives duly registered with the CDA and in accordance with the
provisions of RA 6938
o Machinery and equipment used for pollution control and environmental protection
V. Payment of RPT and Special Levies

- When does RPT accrue?
o January 1 ( 246)
- When does a special levy accrue?

Marion Nerisse Kho
Page 135
o On the first day of the quarter next following the effectivity of the ordinance imposing such levy
( 245)
- For taxpayers electing to pay RPT and SEF in installments, what are the due dates for payment of the
installments?
o 4 equal installments payable on March 31, June 30, Sept. 30 and Dec. 31 ( 250)
- Is there a tax discount for advanced prompt payment of RPT and SEF?
o Yes, if RPT and SEF are paid in advance of March 31, June 30, Sept. 30 and Dec. 31, SB
concerned may grant discount not exceeding 20% of annual tax due ( 251)
VI. Remedies of Local Government

- What are the remedies of LGUs in the collection of RPT?
1. Posting of notice of delinquency ( 254)
2. Imposition of interest ( 255)
3. Administrative remedies ( 256 - 257)
4. Judicial action for collection ( 256, 266, 270)
5. Unpaid tax constitutes a lien ( 257)
VII. Remedies of Taxpayer

- What are the remedies of taxpayers?
o Dispute the assessment
o Pay under protest
o Claim for refund or credit
- What are the procedures for disputing an assessment?
o Appeal to LBAA ( 226) within 60 days from receipt of assessment
Callanta v. Office of the Ombudsman - where it was ruled that filing with the local
assessor of a request for a review or readjustment of an assessment is not a proper
remedy, but instead an appeal should have been lodged with the LBAA
Appeal will not suspend collection, thus you have to pay under protest
o Appeal to CBAA within 30 days, if LBAA denies appeal (229(c))
o Appeal to CTA within 30 days, if CBAA denies appeal ( 7, RA 1125, as amended by RA 9282)
- LBT v. RPT
LBT RPT
File protest with local treasurer within 60 days from Appeal to LBAA within 60 days from receipt of
receipt of assessment assessment or reassessment
Local treasurer has 60 days to act on protest Appeal to CBAA within 30 days, if LBAA denies appeal
Appeal to RTC within 30 days from receipt of denial or Appeal to CTA within 30 days if CBAA denies appeal
protest or from lapse of 60-day period
Payment under protest not required Payment under protest required (or post surety bond)
- What is an erroneous assessment?

o An erroneous assessment presupposes that the taxpayer is subject to the tax but is disputing
the correctness of the amount assessed. With an erroneous assessment, the taxpayer claims
that the local assessor erred in determining any of the items for computing the real property tax,
i.e., the value of the real property or the portion thereof subject to tax and the proper assessment
levels
- What is an illegal assessment?
o On the other hand, an assessment is illegal if it was made without authority under the law (e.g.,
taxpayer is not subject to RPT in the rst place)
- What is the remedy of the taxpayer in case of an illegal assessment?
o In case of an illegal assessment, the taxpayer may directly resort to judicial action without paying
under protest the assessed tax and ling an appeal with the LBAA/CBAA:
File complaint for injunction with RTC
Appeal RTC decision to CTA (City of Lapu-Lapu v. PEZA)
- What is the effect of an appeal of an assessment?
o It does not suspend collection of RPT
- What is the requirement if taxpayer wishes to protest the collection of RPT?
o Taxpayer must pay the disputed RPT under protest
- National Power Corp. v. Prov. of Quezon and Mun. of Pagbilao, CTA Case/ CBAA case payment under
protest applies only if taxpayer is questioning the reasonableness of the amount assessed, and not when
the taxpayer is questioning the very legality of the assessment

Marion Nerisse Kho

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Taxation Review Atty. Bello

great a proportion of the population of the State is affected to such an extent

D. Theory and Basis of Taxation

E. Principles of Sound Tax System

F. Power of Taxation Compared with Other State Powers

Taxation Review Atty. Bello

G. Inherent limitations of Taxation

Taxation Review Atty. Bello

H. Constitutional Limitations of Taxation

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Taxation Review Atty. Bello

K. Construction of Tax Statutes

L. Escape from Taxation

Taxation Review Atty. Bello

- Escape from taxation; shifting

Factors considered in disregarding intermediate sale to Altonaga:

Taxation Review Atty. Bello

MEANING OF INCOME AND REALIZATION PRINCIPLE

- Gross Income: starting point to determine income tax liability

Taxation Review Atty. Bello

o Not income based on Macomber because it is not derived from

o Not an income under Macomber because it is neither derived from

Taxation Review Atty. Bello

Taxpayers contention: 2/3 of the damage awards (punitive portion) constituted

Taxation Review Atty. Bello

Taxation Review Atty. Bello

C. Imputed Income vs. Taxable Barter

Taxation Review Atty. Bello

F. Tax Benefit Principle

Taxation Review Atty. Bello

Taxation Review Atty. Bello

They are compensation but by administrative practice before, and now

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Application of in lieu of doctrine: in lieu of what were the damages awarded?

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Taxation Review Atty. Bello

o Kuenzle & Streiff, Inc. v. Collector

Taxation Review Atty. Bello

Taxation Review Atty. Bello

Tax benefit of P0.62 interest expense is P0.186

Taxation Review Atty. Bello

Taxation Review Atty. Bello

To grant PICOs claimed deduction would be to permit PICO to purchase a tax

Taxation Review Atty. Bello

H. Charitable and other Contributions

Taxation Review Atty. Bello

the general purpose of the dissolved

o Donation to certain foreign institutions or internal organizations

K. Additional Requirements for Deductibility

L. Optional Standard Deduction

Taxation Review Atty. Bello

- Individuals earning compensation income under an employer-employee relationship:

- Domestic corporations; in general

- Resident foreign corporations; in general

GENERAL PRINCIPLES OF INCOME TAXATION (23 memorize!)

Taxation Review Atty. Bello

- Nonresident citizen (22(E))