TAXATION II levied, assessed, collected and paid upon the shall be levied, assessed, collected and paid

A. Transfer Taxes transfer of the net estate as determined in upon the transfer of the net estate as
accordance with Sections 85 and 86 of every determined in accordance with Sections 85
a. Estate Tax decedent, whether resident or nonresident of the and 86 of every decedent, whether resident
Philippines, a tax based on the value of such or nonresident of the Philippines, a tax at
- is an excise tax imposed upon the privilege of transmitting property at the time of net estate, as computed in accordance with the the rate of six percent (6%) based on
death and on the privilege that a person is given in controlling to a certain extent the following schedule: the value of such NET ESTATE.”
disposition of his property to take effect upon death.
If the net estate is:
Nature of Estate Tax:
- It is not a tax on property because their imposition does not rest upon general ownership
but rather they are privilege tax since they are imposed on the act of passing ownership of Over But Not The Plus Of
property Over Tax Shall the Excess
- A tax imposed on the privilege to transmit property at death. Be Over
P 200,000 Exempt
Characteristics of Estate Tax (t e p n d a g ) P 200,000 500,000 0 5% P 200,000
1. It is a transfer tax. 500,000 2,000,000 P15,000 8% 500,000
2. It is an excise tax. 2,000,000 5,000,000 135,000 11% 2,000,000
3. It is a progressive tax. 5,000,000 10,000,000 456,000 15% 5,000,000
4. It is a national tax.
10,000,000 And Over 1,215,000 20% 10,000,000
5. It is a direct tax.
6. It is an ad valorem tax. SEC. 85. Gross Estate. - the value of the gross estate of the decedent shall be determined by
7. It is a general tax. including the value at the time of his death of all property, real or personal, tangible or intangible,
wherever situated: Provided, however, that in the case of a nonresident decedent who at the
Requisites for the imposition of Estate Tax [DAD] time of his death was not a citizen of the Philippines, only that part of the entire gross estate
1. Death of decedent; which is situated in the Philippines shall be included in his taxable estate.
2. Successor is Alive at the time of decedent’s death;
3. Successor is not Disqualified to inherit. (A) Decedent's Interest. - To the extent of the interest therein of the decedent at the time of
his death;
Classification of Decedent
(B) Transfer in Contemplation of Death. - To the extent of any interest therein of which the
The following are the individuals who are liable to pay estate tax: decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended
1. Resident decedent to take effect in possession or enjoyment at or after death, or of which he has at any time made
a. Resident citizen a transfer, by trust or otherwise, under which he has retained for his life or for any period which
b. Non-resident citizen does not in fact end before his death (1) the possession or enjoyment of, or the right to the
c. Resident alien income from the property, or (2) the right, either alone or in conjunction with any person, to
2. Non-resident decedent designate the person who shall possess or enjoy the property or the income therefrom; except in
a. Non-resident alien case of a bona fide sale for an adequate and full consideration in money or money's worth.

NOTE: Domestic and foreign corporations are subject only to donor’s tax and not to estate tax (C) Revocable Transfer. -
because it is not capable of death but may enter into a contract of donation.
(1) To the extent of any interest therein, of which the decedent has at any time made a
i. Section 84-97 NIRC as amended by the TRAIN law transfer (except in case of a bona fide sale for an adequate and full consideration in
money or money's worth) by trust or otherwise, where the enjoyment thereof was
subject at the date of his death to any change through the exercise of a power (in
NIRC TRAIN LAW
whatever capacity exercisable) by the decedent alone or by the decedent in conjunction
SEC. 84. Rates of Estate Tax. - There shall be “Sec. 84. Rate of Estate Tax. — There
with any other person (without regard to when or from what source the decedent

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 1
 acquired such power), to alter, amend, revoke, or terminate, or where any such power SEC. 86. Computation of Net Estate. - For the Sec. 86. Computation of Net Estate.— For
is relinquished in contemplation of the decedent's death. purpose of the tax imposed in this Chapter, the the purpose of the tax imposed in this
value of the net estate shall be determined: Chapter, the value of the net estate shall be
(2) For the purpose of this Subsection, the power to alter, amend or revoke shall be determined:
considered to exist on the date of the decedent's death even though the exercise of the (A) Deductions Allowed to the Estate of Citizen or
power is subject to a precedent giving of notice or even though the alteration, a Resident. - In the case of a citizen or resident of “(A) Deductions Allowed to the Estate of a
amendment or revocation takes effect only on the expiration of a stated period after the the Philippines, by deducting from the value of the Citizen or a Resident.— In the case of a
exercise of the power, whether or not on or before the date of the decedent's death gross estate - citizen or resident of the Philippines, by
notice has been given or the power has been exercised. In such cases, proper deducting from the value of the gross
adjustment shall be made representing the interests which would have been excluded (1) Expenses, Losses, Indebtedness, and Taxes. - estate—
from the power if the decedent had lived, and for such purpose if the notice has not Such amounts -
been given or the power has not been exercised on or before the date of his death, such “(1) Standard Deduction.— An
notice shall be considered to have been given, or the power exercised, on the date of (a) For actual funeral expenses or in an amount amount equivalent to Five million
death. equal to five percent (5%) of the gross estate, pesos (₱5,000,000).
whichever is lower, but in no case to exceed Two
(D) Property Passing Under General Power of Appointment. - To the extent of any property hundred thousand pesos (P200,000); “(2) For claims against the estate:
passing under a general power of appointment exercised by the decedent: (1) by will, or (2) by Provided, That at the time the
deed executed in contemplation of, or intended to take effect in possession or enjoyment at, or (b) For judicial expenses of the testamentary or indebtedness was incurred the debt
after his death, or (3) by deed under which he has retained for his life or any period not intestate proceedings; instrument was duly notarized and,
ascertainable without reference to his death or for any period which does not in fact end before if the loan was contracted within
his death (a) the possession or enjoyment of, or the right to the income from, the property, or (c) For claims against the estate: Provided, That three (3) years before the death of
(b) the right, either alone or in conjunction with any person, to designate the persons who shall at the time the indebtedness was incurred the the decedent, the administrator or
possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an debt instrument was duly notarized and, if the executor shall submit a statement
adequate and full consideration in money or money's worth. loan was contracted within three (3) years before showing the disposition of the
the death of the decedent, the administrator or proceeds of the loan.
(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the executor shall submit a statement showing the
deceased, his executor, or administrator, as insurance under policies taken out by the decedent disposition of the proceeds of the loan; “(3) For claims of the deceased
upon his own life, irrespective of whether or not the insured retained the power of revocation, or against insolvent persons where
to the extent of the amount receivable by any beneficiary designated in the policy of insurance, (d) For claims of the deceased against insolvent the value of decedent’s interest
except when it is expressly stipulated that the designation of the beneficiary is irrevocable. persons where the value of decedent's interest therein is included in the value of
therein is included in the value of the gross the gross estate.
(F) Prior Interests. - Except as otherwise specifically provided therein, Subsections (B), (C) and estate; and
(E) of this Section shall apply to the transfers, trusts, estates, interests, rights, powers and “(4) For unpaid mortgages upon, or
relinquishment of powers, as severally enumerated and described therein, whether made, (e) For unpaid mortgages upon, or any any indebtedness in respect to,
created, arising, existing, exercised or relinquished before or after the effectivity of this Code. indebtedness in respect to, property where the property where the value of
value of decedent's interest therein, undiminished decedent’s interest therein,
(G) Transfers for Insufficient Consideration. - If any one of the transfers, trusts, interests, by such mortgage or indebtedness, is included in undiminished by such mortgage or
rights or powers enumerated and described in Subsections (B), (C) and (D) of this Section is the value of the gross estate, but not including indebtedness, is included in the
made, created, exercised or relinquished for a consideration in money or money's worth, but is any income tax upon income received after the value of the gross estate, but not
not a bona fide sale for an adequate and full consideration in money or money's worth, there death of the decedent, or property taxes not including any income tax upon
shall be included in the gross estate only the excess of the fair market value, at the time of accrued before his death, or any estate tax. The income received after the death of
death, of the property otherwise to be included on account of such transaction, over the value of deduction herein allowed in the case of claims the decedent, or property taxes not
the consideration received therefor by the decedent. against the estate, unpaid mortgages or any accrued before his death, or any
indebtedness shall, when founded upon a promise estate tax. The deduction herein
(H) Capital of the Surviving Spouse. - The capital of the surviving spouse of a decedent shall or agreement, be limited to the extent that they allowed in the case of claims
not, for the purpose of this Chapter, be deemed a part of his or her gross estate. were contracted bona fide and for an adequate against the estate, unpaid
and full consideration in money or money's worth. mortgages or any indebtedness

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 2
There shall also be deducted losses incurred
during the settlement of the estate arising from
fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement, when such
losses are not compensated for by insurance or
otherwise, and if at the time of the filing of the
return such losses have not been claimed as a
deduction for the income tax purposes in an
income tax return, and provided that such losses
were incurred not later than the last day for the
payment of the estate tax as prescribed in
Subsection (A) of Section 91.
(2) Property Previously Taxed. - An amount equal
to the value specified below of any property
forming a part of the gross estate situated in the
Philippines of any person who died within five (5)
years prior to the death of the decedent, or
transferred to the decedent by gift within five (5)
years prior to his death, where such property can
be identified as having been received by the
decedent from the donor by gift, or from such
prior decedent by gift, bequest, devise or
inheritance, or which can be identified as having
been acquired in exchange for property so
received:
One hundred percent (100%) of the value, if the
prior decedent died within one (1) year prior to
the death of the decedent, or if the property was
transferred to him by gift within the same period
prior to his death;
Eighty percent (80%) of the value, if the prior
decedent died more than one (1) year but not
more than two (2) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
Sixty percent (60%) of the value, if the prior
decedent died more than two (2) years but not
more than three (3) years prior to the death of
the decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
shall, when founded upon a
promise or agreement, be limited
to the extent that they were
contracted bona fide and for an
adequate and full consideration in
money or money’s worth. There
shall also be deducted losses
incurred during the settlement of
the estate arising from fires,
storms, shipwreck, or other
casualties, or from robbery, theft or
embezzlement, when such losses
are not compensated for by
insurance or otherwise, and if at
the time of the filing of the return
such losses have not been claimed
as a deduction for the income tax
purposes in an income tax return,
and provided that such losses were
incurred not later than the last day
for the payment of the estate tax
as prescribed in Subsection (A) of
Section 91.
“(5) Property Previously Taxed.—
An amount equal to the value
specified below of any property
forming part of the gross estate
situated in the Philippines of any
person who died within five (5)
years prior to the death of the
decedent, or transferred to the
decedent by gift within five (5)
years prior to his death, where
such property can be identified as
having been received by the
decedent from the donor by gift, or
from such prior decedent by gift,
bequest, devise or inheritance, or
which can be identified as having
been acquired in exchange for
property so received:
“One hundred percent (100%) of
the value, if the prior decedent
died within one (1) year prior to
the death of the decedent, or if the
Forty percent (40%) of the value, if the prior
decedent died more than three (3) years but not
more than four (4) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
Twenty percent (20%) of the value, if the prior
decedent died more than four (4) years but not
more than five (5) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
These deductions shall be allowed only where a
donor's tax or estate tax imposed under this Title
was finally determined and paid by or on behalf of
such donor, or the estate of such prior decedent,
as the case may be, and only in the amount finally
determined as the value of such property in
determining the value of the gift, or the gross
estate of such prior decedent, and only to the
extent that the value of such property is included
in the decedent's gross estate, and only if in
determining the value of the estate of the prior
decedent, no deduction was allowable under
paragraph (2) in respect of the property or
properties given in exchange therefor. Where a
deduction was allowed of any mortgage or other
lien in determining the donor's tax, or the estate
tax of the prior decedent, which was paid in whole
or in part prior to the decedent's death, then the
deduction allowable under said Subsection shall
be reduced by the amount so paid. Such
deduction allowable shall be reduced by an
amount which bears the same ratio to the
amounts allowed as deductions under paragraphs
(1) and (3) of this Subsection as the amount
otherwise deductible under said paragraph (2)
bears to the value of the decedent's estate.
Where the property referred to consists of two or
more items, the aggregate value of such items
shall be used for the purpose of computing the
deduction.
(3) Transfers for Public Use. - The amount of all
the bequests, legacies, devises or transfers to or
property was transferred to him by
gift, within the same period prior to
his death;
“Eighty percent (80%) of the value,
if the prior decedent died more
than one (1) year but not more
than two (2) years prior to the
death of the decedent, or if the
property was transferred to him by
gift within the same period prior to
his death;
“Sixty percent (60%) of the value,
if the prior decedent died more
than two (2) years but not more
than three (3) years prior to the
death of the decedent, or if the
property was transferred to him by
gift within the same period prior to
his death;
“Forty percent (40%) of the value,
if the prior decedent died more
than three (3) years but not more
than four (4) years prior to the
death of the decedent, or if the
property was transferred to him by
gift within the same period prior to
his death; and
“Twenty percent (20%) of the
value, if the prior decedent died
more than four (4) years but not
more than five (5) years prior to
the death of the decedent, or if the
property was transferred to him by
gift within the same period prior to
his death.
“These deductions shall be allowed
only where a donor’s tax, or estate
tax imposed under this Title was
finally determined and paid by or
on behalf of such donor, or the
estate of such prior decedent, as
the case may be, and only in the
Page 3
for the use of the Government of the Republic of
the Philippines, or any political subdivision
thereof, for exclusively public purposes.
(4) The Family Home. - An amount equivalent to
the current fair market value of the decedent's
family home: Provided, however, That if the said
current fair market value exceeds One million
pesos (P1, 000,000), the excess shall be subject
to estate tax. As a sine qua non condition for the
exemption or deduction, said family home must
have been the decedent's family home as certified
by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent
to One million pesos (P1, 000,000).
(6) Medical Expenses. - Medical Expenses incurred
by the decedent within one (1) year prior to his
death which shall be duly substantiated with
receipts: Provided, That in no case shall the
deductible medical expenses exceed Five Hundred
Thousand Pesos (P500, 000).
(7) Amount Received by Heirs Under Republic Act
No. 4917. - Any amount received by the heirs
from the decedent - employee as a consequence
of the death of the decedent-employee in
accordance with Republic Act No. 4917: Provided,
That such amount is included in the gross estate
of the decedent.
(B) Deductions Allowed to Nonresident Estates. -
In the case of a nonresident not a citizen of the
Philippines, by deducting from the value of that
part of his gross estate which at the time of his
death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. -
That proportion of the deductions specified in
paragraph (1) of Subsection (A) of this Section
which the value of such part bears to the value of
his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal
to the value specified below of any property
forming part of the gross estate situated in the
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
amount finally determined as the
value of such property in
determining the value of the gift,
or the gross estate of such prior
decedent, and only to the extent
that the value of such property is
included in the decedent’s gross
estate, and only if in determining
the value of the estate of the prior
decedent, no deduction was
allowable under paragraph (5) in
respect of the property or
properties given in exchange
therefor. Where a deduction was
allowed of any mortgage or other
lien in determining the donor’s tax,
or the estate tax of the prior
decedent, which was paid in whole
or in part prior to the decedent’s
death, then the deduction
allowable under said Subsection
shall be reduced by the amount so
paid. Such deduction allowable
shall be reduced by an amount
which bears the same ratio to the
amounts allowed as deductions
under paragraphs (2), (3), (4), and
(6) of this Subsection as the
amount otherwise deductible under
said paragraph (5) bears to the
value of the decedent’s estate.
Where the property referred to
consists of two or more items, the
aggregate value of such items shall
be used for the purpose of
computing the deduction.
“(6) 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.
“(7) The Family Home.— An
amount equivalent to the current
Philippines of any person who died within five (5)
years prior to the death of the decedent, or
transferred to the decedent by gift within five (5)
years prior to his death, where such property can
be identified as having been received by the
decedent from the donor by gift, or from such
prior decedent by gift, bequest, devise or
inheritance, or which can be identified as having
been acquired in exchange for property so
received:
One hundred percent (100%) of the value if the
prior decedent died within one (1) year prior to
the death of the decedent, or if the property was
transferred to him by gift, within the same period
prior to his death;
Eighty percent (80%) of the value, if the prior
decedent died more than one (1) year but not
more than two (2) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
Sixty percent (60%) of the value, if the prior
decedent died more than two (2) years but not
more than three (3) years prior to the death of
the decedent, or if the property was transferred to
him by gift within the same period prior to his
death;
Forty percent (40%) of the value, if the prior
decedent died more than three (3) years but not
more than four (4) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death; and
Twenty percent (20%) of the value, if the prior
decedent died more than four (4) years but not
more than five (5) years prior to the death of the
decedent, or if the property was transferred to
him by gift within the same period prior to his
death.
These deductions shall be allowed only where a
donor's tax, or estate tax imposed under this Title
fair market value of the decedent’s
family home: Provided, however,
That if the said current fair market
value exceeds Ten million pesos
(₱10,000,000), the excess shall be
subject to estate tax.
“(8) Amount Received by Heirs
Under Republic Act No. 4917.—
Any amount received by the heirs
from the decedent’s employee as a
consequence of the death of the
decedent-employee in accordance
with Republic Act No. 4917:
Provided, That such amount is
included in the gross estate of the
decedent.
“(B) Deductions Allowed to Nonresident
Estates.— In the case of a nonresident not a
citizen of the Philippines, by deducting from
the value of that part of his gross estate
which at the time of his death is situated in
the Philippines:
“(1) Standard Deduction.— An
amount equivalent to Five hundred
thousand pesos (₱500,000);
“(2) That proportion of the
deductions specified in paragraphs
(2), (3), and (4) of Subsection (A)
of this Section which the value of
such part bears to the value of his
entire gross estate wherever
situated;
“(3) Property Previously Taxed.— x
xx
“(4) 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.
Page 4
is finally determined and paid by or on behalf of
such donor, or the estate of such prior decedent,
as the case may be, and only in the amount finally
determined as the value of such property in
determining the value of the gift, or the gross
estate of such prior decedent, and only to the
extent that the value of such property is included
in that part of the decedent's gross estate which
at the time of his death is situated in the
Philippines; and only if, in determining the value
of the net estate of the prior decedent, no
deduction is allowable under paragraph (2) of
Subsection (B) of this Section, in respect of the
property or properties given in exchange
therefore. Where a deduction was allowed of any
mortgage or other lien in determining the donor's
tax, or the estate tax of the prior decedent, which
was paid in whole or in part prior to the
decedent's death, then the deduction allowable
under said paragraph shall be reduced by the
amount so paid. Such deduction allowable shall be
reduced by an amount which bears the same ratio
to the amounts allowed as deductions under
paragraphs (1) and (3) of this Subsection as the
amount otherwise deductible under paragraph (2)
bears to the value of that part of the decedent's
gross estate which at the time of his death is
situated in the Philippines. Where the property
referred to consists of two (2) or more items, the
aggregate value of such items shall be used for
the purpose of computing the deduction.
(3) 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.
(C) Share in the Conjugal Property. - the net
share of the surviving spouse in the conjugal
partnership property as diminished by the
obligations properly chargeable to such property
shall, for the purpose of this Section, be deducted
from the net estate of the decedent.
(D) Miscellaneous Provisions. - No deduction shall
be allowed in the case of a nonresident not a
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
“(C) Share in the Conjugal Property.— The
net share of the surviving spouse in the
conjugal partnership property as diminished
by the obligations properly chargeable to
such property shall, for the purpose of this
Section, be deducted from the net estate of
the decedent.
“(D) Tax Credit for Estate Taxes Paid to a
Foreign Country.—
“(1) In General.— The tax imposed
by this Title shall be credited with
the amounts of any estate tax
imposed by the authority of a
foreign country.
“(2) Limitations on Credit.— The
amount of the credit taken under
this Section shall be subject to
each of the following limitations:
“(a) The amount of the
credit in respect to the tax
paid to any country shall
not exceed the same
proportion of the tax
against which such credit
is taken, which the
decedent’s net estate
situated within such
country taxable under this
Title bears to his entire
net estate; and
“(b) The total amount of the credit shall not
exceed the same proportion of the tax
against which such credit is taken, which the
decedent’s net estate situated outside the
Philippines taxable under this Title bears to
his entire net estate.”
citizen of the Philippines, unless the executor,
administrator, or anyone of the heirs, as the case
may be, includes in the return required to be filed
under Section 90 the value at the time of his
death of that part of the gross estate of the
nonresident not situated in the Philippines.
(E) Tax Credit for Estate Taxes paid to a Foreign
Country. -
(1) In General. - The tax imposed by this Title
shall be credited with the amounts of any estate
tax imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the
credit taken under this Section shall be subject to
each of the following limitations:
(a) The amount of the credit in respect to the tax
paid to any country shall not exceed the same
proportion of the tax against which such credit is
taken, which the decedent's net estate situated
within such country taxable under this Title bears
to his entire net estate; and
(b) The total amount of the credit shall not
exceed the same proportion of the tax against
which such credit is taken, which the decedent's
net estate situated outside the Philippines taxable
under this Title bears to his entire net estate.
ESTATE TAX FORMULA:
Page 5
 considered as well as the value assigned to preferred shares, if there are any. On
this note, the valuation of unlisted shares shall be exempt from the provisions of
RR No. 06 -2013, as amended. Commented [FN1]:

For shares which are listed in the stock exchanges, the fair market value shall be the Insert:
arithmetic mean between the highest and lowest quotation at a date nearest the date of
death, if none is available on the date of death itself.

The fair market value of units of participation in any association, recreation or amusement
club (such as golf, polo, or similar clubs), shall be the bid price nearest the date of death
ii. Revenue Regulations 12-2018
published in any newspaper or publication of general circulation.
RR 12-2018:
To determine the value of the right to usufruct, use or habitation, as well as that of annuity,
there shall be taken into account the probable life of the beneficiary in accordance with the
SEC 2. RATE OF ESTATE TAX . – The net estate of every decedent, whether
latest basic standard mortality table, to be approved by the Secretary of Finance, upon
resident or non-resident of the Philippines, as determined in accordance with the NIRC,
recommendation of the Insurance Commissioner
shall be subject to an estate tax at the rate of six percent (6%).

Illustration: (PANGUTANA ANI!! PLEASE LANG!)

Add Sec 4.

If listed:
IF Unlisted: Capital Gains Tax
1. Valuation of Gross Estate

RR 12-2018: RR No. 06-2013:

SEC. 5. VALUATION OF THE GROSS ESTATE. –The properties comprising the gross A= 1M
estate shall be valued according to their fair market value as of the time of decedent’s L= 500,000
death. E= 500,00
50,000
If the property is a REAL PROPERTY, the appraised value thereof as of the time of Book Value= 10/share
death shall be, whichever is the higher of –
(1) The fair market value as determined by the Commissioner, or FMV:
(2) The fair market value as shown in the schedule of values fixed by the provincial
and city assessors, whichever is higher.
2. Computation of the Net Estate of a Decedent Who is Either a
For purposes of prescribing real property values, the Commissioner is authorized to divide Citizen or Resident of the Philippines
the Philippines into different zones or areas and shall, upon consultation with competent
appraisers, both from the private and public sectors, determine the fair market value of real
RR 12-2018:
properties located in each zone or area.
SEC 6. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS EITHER A
In the case of shares of stocks, the fair market value shall depend on whether the shares
CITIZEN OR RESIDENT OF THE PHILIPPINES -The value of the net estate of a citizen
are listed or unlisted in the stock exchanges. Unlisted common shares are valued based
or resident alien of the Philippines shall be determined by deducting from the value of the
on their book value while unlisted preferred shares are valued at par value. In
gross estate the following items of deduction:
determining the book value of common shares, appraisal surplus shall not be

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 6
1. Standard deduction. – A deduction in the amount of Five Million Pesos (P5,000,000)
shall be allowed without need of substantiation. The full amount of P5,000,000 shall
be allowed as deduction for the benefit of the decedent. The presentation of such deduction
in the computation of the net taxable estate of the decedent is properly illustrated in these
Regulations.
2. Claims against the estate.–The word “claims” is generally construed to mean
debts or demands of a pecuniary nature which could have been enforced against the
deceased in his lifetime and could have been reduced to simple money judgements. Claims
against the estate or indebtedness in respect of property may arise out of:
(1) Contract; (2) Tort; or (3) Operation of Law.
2.1. Requisites for Deductibility of Claims Against the Estate-
2.1.1. The liability represents a personal obligation of the deceased existing at
the time of his death;
2.1.2. The liability was contracted in good faith and for adequate and full
consideration in money or money’s worth;
2.1.3. The claim must be a debt or claim which is valid in law and enforceable
in court;
2.1.4. The indebtedness must not have been condoned by the creditor or the
action to collect from the decedent must not have prescribed.
2.2. Substantiation Requirements.- All unpaid obligations and liabilities of the
decedent at the time of his death are allowed as deductions from gross estate.
Provided, however, that the following requirements/documents are complied
with/submitted:
2.2.1. In case of simple loan (including advances):
2.2.2. If the unpaid obligation arose from purchase of goods or services:
2.2.1.1 The debt instrument must be duly notarized at the time the
indebtedness was incurred, such as promissory note or contract of loan,
except for loans granted by financial institutions where notarization is not part
of the business practice/policy of the financial institution - lender;
2.2.1.2. Duly notarized Certification from the creditor as to the
unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn certification should be
signed by the President, or Vice-President, or other principal officer of the
corporation. If the creditor is a partnership, the sworn certification should be
signed by any of the general partners. In case the creditor is a bank or other
financial institutions, the Certification shall be executed by the branch
manager of the bank/financial institution which monitors and manages the
loan of the decedent-debtor. If the creditor is an individual, the sworn
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
certification should be signed by him. In any of these cases, the one who
should certify must not be a relative of the borrower within the fourth civil
degree, either by consanguinity or affinity, except when the requirement
below is complied with.
When the lender, or the President/Vice-president/principal officer of the
creditor-corporation, or the general partner of the creditor-partnership is a
relative of the debtor in the degree mentioned above, a copy of the
promissory note or other evidence of the indebtedness must be filed with the
RDO having jurisdiction over the borrower within fifteen days from the
execution thereof.
2.2.1.3. In accordance with the requirements as prescribed in existing or
prevailing internal revenue issuances, proof of financial capacity of the
creditor to lend the amount at the time the loan was granted, as well as its
latest audited balance sheet with a detailed schedule of its receivable showing
the unpaid balance of the decedent-debtor. In case the creditor is an
individual who is no longer required to file income tax returns with the
Bureau, a duly notarized Declaration by the creditor of his capacity to lend at
the time when the loan was granted without prejudice to verification that may
be made by the BIR to substantiate such declaration of the creditor. If the
creditor is a non-resident, the executor/administrator or any of the le
gal heirs must submit a duly notarized declaration by the creditor of his
capacity to lend at the time when the loan was granted, authenticated or
certified to as such by the tax authority of the country where the non-resident
creditor is a resident;
2.2.1.4. A statement under oath executed by the administrator or
executor of the estate reflecting the disposition of the proceeds of
the loan if said loan was contracted within three (3) years prior to
the death of the decedent;
2.2.2.1. Pertinent documents evidencing the purchase of goods or service,
such as sales invoice/delivery receipt (for sale of goods), or contract for the
services agreed to be rendered (for sale of service), as duly acknowledged,
executed and signed by decedent debtor and creditor, and statement of
account given by the creditor as duly received by the decedent debtor;
2.2.2.2. Duly notarized Certification from the creditor as to the
unpaid balance of the debt, including interest as of the time of
death. If the creditor is a corporation, the sworn Certification should be
signed by the President, or Vice-President, or other principal officer of the
corporation. If the creditor is a partnership, the sworn certification should be
signed by any of the general partners. If the creditor is a sole proprietorship,
the sworn certification should be signed by the owner of the business. In any
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 of these cases, the one who issues the certification must not be a relative of
the decedent-debtor within the fourth civil degree, either by consanguinity or
affinity, except when the requirement below is complied with. When the
lender, or the President/Vice-President/principal officer of the creditor-
corporation, or the general partner of the creditor-partnership is a relative of
the debtor in the degree mentioned above, a copy of the note or other
evidence of the indebtedness must be filed with the RDO having jurisdiction
over the borrower within fifteen days from the execution thereof.
2.2.2.3. Certified true copy of the latest audited balance sheet of the
creditor with a detailed schedule of its receivable showing the
unpaid balance of the decedent-debtor. Moreover, a certified true copy
of the updated latest subsidiary ledger/records of the debt of the debtor-
decedent, (certified by the creditor, i.e., the officers mentioned in the
preceding paragraphs) should likewise be submitted.
2.2.3. Where the settlement is made through the Court in a testate or
intestate proceeding, pertinent documents filed with the Court evidencing
the claims against the estate, and the Court Order approving the said
claims, if already issued, in addition to the documents mentioned in the
preceding paragraphs.
3. Claims of the deceased against insolvent persons as defined under R.A. 10142
and other existing laws, where the value of the decedent’s interest therein is
included in the value of the gross estate.
4. Unpaid mortgages, taxes and casualty losses.
4.1. Unpaid mortgages upon, or any indebtedness in respect to, property where the
value of the decedent’s interest therein, undiminished by such mortgage or
indebtedness, is included in the value of the gross estate. The deduction herein allowed
in the case of claims against the estate, unpaid mortgages or any indebtedness shall,
when founded upon a promise or agreement, be limited to the extent that they were
contracted bonafide and for an adequate and full consideration in money or money’s
worth.
4.2. Taxes which have accrued as of the death of the decedent which were unpaid as
of the time of death. This deduction will not include income tax upon income received
after death, or property taxes not accrued before his death, or the estate tax due from
the transmission of his estate.
4.3. There shall also be deducted losses incurred during the settlement of the
state arising from fires, storms, shipwreck, or other casualties, or from
robbery, theft or embezzlement, when such losses are not compensated for by
insurance or otherwise, and if at the time of the filing of the return such losses have
not been claimed as a deduction for income tax purposes in an income tax return, and
provided that such losses were incurred not later than the last day for the payment of
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
the estate tax as prescribed in Subsection (A) of Section 91.
In case unpaid mortgage payable is being claimed by the estate, verification must be
made as to who was the beneficiary of the loan proceeds. If the loan is found to be
merely an accommodation loan where the loan proceeds went to another person, the
value of the unpaid loan must be included as a receivable of the estate. If there is a
legal impediment to recognize the same as receivable of the estate, said unpaid
obligation/mortgage payable shall not be allowed as a deduction from the gross estate.
In all instances, the mortgaged property, to the extent of the decedent’s interest
therein, should always form part of the gross taxable estate.
5. Property previously taxed.–An amount equal to the value specified below of any
property forming part of the gross estate situated in the Philippines of any person who died
within five (5) years prior to the death of the decedent, or transferred to the
decedent by gift within five (5) years prior to his death, where such property can be
identified as having been received by the decedent from the donor by gift, or from such
prior decedent by gift, bequest, devise or inheritance, or which can be identified as having
been acquired in exchange for property so received:
a. One hundred percent (100%) of the value if the prior decedent died within one (1)
year prior to the death of the decedent, or if the property was transferred to him by
gift, within the same period prior to his death;
b. Eighty percent (80%) of the value, if the prior decedent died more than one (1) year
but not more than two (2) years prior to the death of the decedent, or if the property
was transferred to him by gift within the same period prior to his death;
c. Sixty percent (60%) of the value, if the prior decedent died more than two (2) years
but not more than three (3) years prior to the death of the decedent, or if the property
was transferred to him by gift within the same period prior to his death;
d. Forty percent (40%) of the value, if the prior decedent died more than three (3)
years but not more than four (4) years prior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his death; and
e. Twenty percent (20%) of the value, if the prior decedent died more than four (4)
years but not more than five (5) years prior to the death of the decedent, or if the
property was transferred to him by gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or estate tax imposed under
Title III of the NIRC was finally determined and paid by or on behalf of such donor,
or the estate of such prior decedent, as the case may be, and only in the amount finally
determined as the value of such property in determining the value of the gift, or the gross
estate of such prior decedent, and only to the extent that the value of such property is
included in the decedent's gross estate, and only if, in determining the value of the net
estate of the prior decedent, no deduction is allowable under this Item, in respect of the
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property or properties given in exchange therefore. Where a deduction was allowed of any
mortgage or other lien in determining the donor's tax, or the estate tax of the prior
decedent, which was paid in whole or in part prior to the decedent's death, then the
deduction allowable under this Item shall be reduced by the amount so paid. Such
deduction allowable shall be reduced by an amount which bears the same ratio to the
amounts allowed as deductions under Items 2, 3, 4 and 6 of this Subsection as the amount
otherwise deductible under this Item bears to the value of the decedent's estate. Where the
property referred to consists of two (2) or more items, the aggregate value of such items
shall be used for the purpose of computing the deduction
Illustration (Recording)
2014 2015 2016 2017 2018 2019
X (heir) Died on 2019
6. 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
7.The Family Home.– An amount equivalent to the current fair market value of the
decedent’s family home: Provided, however , that if the said current fair market value
exceeds Ten million pesos (P10,000,000), the excess shall be subject to estate tax.
7.1. Definition of terms
Family home –The dwelling house, including the land on which it is situated,
where the husband and wife, or a head of the family, and members of their family
reside, as certified to by the Barangay Captain of the locality. The family home is
deemed constituted on the house and lot from the time it is actually occupied as a
family residence and is considered as such for as long as any of its beneficiaries
actually resides therein. (Arts. 152 and 153, Family Code)
For purposes of these Regulations, however, actual occupancy of the house or
house and lot as the family residence shall not be considered interrupted or
abandoned in such cases as the temporary absence from the constituted family
home due to travel or studies or work abroad, etc.
In other words, the family home is generally characterized by permanency,
that is, the place to which, whenever absent for business or pleasure, one still
intends to return.
The family home must be part of the properties of the absolute
community or of the conjugal partnership, or of the exclusive properties of
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
either spouse depending upon the classification of the property (family home) and
the property relations prevailing on the properties of the husband and wife. It
may also be constituted by an unmarried head of a family on his or her own
property. (Art. 156, Ibid.)
For purposes of availing of a family home deduction to the extent allowable, a
person may constitute only one family home. (Art.161, Ibid.)
Husband and Wife – Legally married man and woman.
Unmarried Head of a Family– An unmarried or legally separated man or woman
with one or both parents, or with one or more brothers or sisters, or with one or
more legitimate, recognized natural or legally adopted children living with and
dependent upon him or her for their chief support, where such brothers or sisters
or children are not more than twenty one (21) years of age, unmarried and not
gainfully employed or where such children, brothers or sisters, regardless of age
are incapable of self -support because of mental or physical defect, or any of the
beneficiaries mentioned in Article 154 of the Family Code who is living in the family
home and dependent upon the head of the family for legal support.
The beneficiaries of a family home are:
(1) The husband and wife, or the head of a family; and
(2) Their parents, ascendants, descendants including legally adopted
children, brothers and sisters, whether the relationship be legitimate or
illegitimate, who are living in the family home and who depend upon the head of
the family for legal support. (Art. 154, Ibid)
7.2. Conditions for the allowance of family home as deduction from the gross estate:
7.2.1. The family home must be the actual residential home of the decedent and
his family at the time of his death, as certified by the Barangay Captain of the
locality where the family home is situated;
7.2.2. The total value of the family home must be included as part of the gross
estate of the decedent; and
7.2.3. Allowable deduction must be in an amount equivalent to the current fair
market value of the family home as declared or included in the gross estate, or the
extent of the decedent’s interest (whether conjugal/community or exclusive
property), whichever is lower, but not exceeding P10,000,000.
8. Amount received by heirs under Republic Act No. 4917 (Separation Benefits). - Commented [FN2]: CHECK
Any amount received by the heirs from the decedent’s employer as a consequence of the
death of the decedent-employee in accordance with Republic Act No. 4917 is allowed as a
deduction provided that the amount of the separation benefit is included as part of the
gross estate of the decedent.
Page 9
9. Net share of the surviving spouse in the conjugal partnership or community
property.- After deducting the allowable deductions appertaining to the conjugal or
community properties included in the gross estate, the share of the surviving spouse must The allowable deduction under this subsection shall be computed using the following
be removed to ensure that only the decedent’s interest in the estate is taxed formula:

Commented [FN3]:

COPY THE FULL RR 12-2018

EX: Gross Estate XX 3.Property previously taxed.
Less: Allowable Deduction:
Standard Deduction (5,000,000.00) 4.Transfers for public use.
Claims against the estate (xxxxxxx)
5. Net share of the surviving spouse in the conjugal property or community property.
PPT (xxxxxxx)
TPU (xxxxx) Unless otherwise provided in this section, the rules for the availment of deductions in the
FH (in excess of 10M) (20,000,000) – QUIZ preceding section shall apply.

- NO FAMILY HOME because he/she is an NRA

4. Allowable Deduction (Refer above)

3. Computation of the Net Estate of a Decedent Who is a Non- a. Standard deduction
Resident Alien of the Philippines b. Claims against estate
c. Unpaid mortgages/indebtedness
RR 12-2018 d. Property previously taxed
e. Transfers for Public Use
SEC. 7. COMPUTATION OF THE NET ESTATE OF A DECEDENT WHO IS A NON- f. Family Home
RESIDENT ALIEN OF THE PHILIPPINES. - The value of the net estate of a g. Amount Received under RA 4917
decedent who is a non - resident alien in the Philippines shall be determined by deducting
from the value of that part of his gross estate which at the time of his 5. Time and Place of Filing Estate Tax Return and Payment of Estate
death is situated in the Philippines the following items of deductions:
RR 12-2018:
1.Standard deduction.–A deduction in the amount of Five Hundred Thousand Pesos
(P500,000) shall be allowed without need of substantiation. The full amount of SEC. 9 . TIME AND PLACE OF FILING ESTATE TAX RETURN AND
P500,000 shall be allowed as deduction for the benefit of the decedent. PAYMENT OF ESTATE TAX DUE. –

2. The proportion of the total losses and indebtedness which the value of such
part bears to the value of his entire gross estate wherever situated. Losses and
indebtedness shall include the following:
2.1. Claims against the estate.
2.2. Claims of the deceased against insolvent persons where the value of the
interest therein is included in the value of the gross estate.
2.3. Unpaid mortgages, taxes and casualty losses.
1. Estate Tax Returns . - In all cases of transfers subject to the tax imposed
herein, or regardless of the gross value of the estate, where the said estate consists of
registered or registrable property such as real property, motor vehicle, shares of
stock or other similar property for which a Certificate Authorizing Registration from the
Bureau of Internal Revenue is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee, the executor, or the administrator, or any
of the legal heirs, as the case may be, shall file a return under oath.
Estate tax returns showing a gross value exceeding Five million pesos
(P5,000,000) shall be supported with a statement duly certified to by a Certified Public

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 10
Accountant containing the following:
1.1 Itemized assets of the decedent with their corresponding gross value at the time of his
death, or in the case of a nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
1.2. Itemized deductions from gross estate allowed in Section 86; and
1.3. The amount of tax due whether paid or still due and outstanding.
2. Time for filing estate tax return.- For purposes of determining the estate tax, the
estate tax return shall be filed within one (1) year from the decedent’s death.
The Court approving the project of partition shall furnish the Commissioner with a certified
copy thereof and its order within thirty (30) days after promulgation of such order.
3. Extension of time to file estate tax return.- The Commissioner or any Revenue
Officer authorized by him pursuant to the NIRC shall have authority to grant, in
meritorious cases, a reasonable extension, not exceeding thirty (30) days, for filing the
return. The application for the extension of time to file the estate tax return must be filed
with the Revenue District Office (RDO) where the estate is required to secure its Taxpayer
Identification Number (TIN) and file the tax returns of the estate, which RDO, likewise, has
jurisdiction over the estate tax return required to be filed by any party as a result of the
distribution of the assets and liabilities of the decedent.
4. Time for payment of the estate tax.– As a general rule, the estate tax imposed
under the NIRC shall be paid at the time the return is filed by the executor, administrator
or the heirs.
5. Extension of time to pay estate tax.– When the Commissioner finds that the
payment of the estate tax or of any part thereof would impose undue hardship upon the
estate or any of the heirs, he may extend the time for payment of such tax or any part
thereof not to exceed five (5) years in case the estate is settled through the courts, or two
(2) years in case the estate is settled extra judicially. In such case, the amount in respect
of which the extension is granted shall be paid on or before the date of the expiration of
the period of the extension, and the running of the statute of limitations for deficiency
assessment shall be suspended for the period of any such extension.
Where the request for extension is by reason of negligence, intentional disregard of
rules and regulations, or fraud on the part of the taxpayer, no extension will be granted by
the Commissioner.
If an extension is granted, the Commissioner or his duly authorized
representative may require the executor, or administrator, or beneficiary, as the case may
be, to furnish a bond in such amount, not exceeding double the amount of the tax and
with such sureties as the Commissioner deems necessary, conditioned upon the
payment of the said tax in accordance with the terms of the extension. Any amount paid
after the statutory due date of the tax, but within the extension period, shall be subject to
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
interest but not to surcharge.
6. Payment of the estate tax by installment and partial disposition of estate.– In
case of insufficiency of cash for the immediate payment of the total estate tax due , the
estate may be allowed to pay the estate tax due through the following options , including
the corresponding terms and conditions:
6.1. Cash installment
i. The cash installments shall be made within two (2) years from the date of
filing of the estate tax return ;
ii. The estate tax return shall be filed within one year from the date of decedent’s
death;
iii. The frequency (i.e., monthly, quarterly, semi-annually or annually), deadline
and amount of each installment shall be indicated in the estate tax return,
subject to the prior approval by the BIR;
iv. In case of lapse of two years without the payment of the entire tax due, the
remaining balance thereof shall be due and demandable subject to the
applicable penalties and interest reckoned from the prescribed deadline for
filing the return and payment of the estate tax ; and
v. No civil penalties or interest may be imposed on estates permitted to pay the
estate tax due by installment. Nothing in this subsection, however, prevents the
Commissioner from executing enforcement action against the estate after the due
date of the estate tax provided that all the applicable laws and required
procedures are followed/observed.
6.2. Partial disposition of estate and application of its proceeds to the estate tax due
i. The disposition, for purposes of this option, shall refer to the conveyance of
property, whether real, personal or intangible property, with the equivalent
cash consideration;
ii. The estate tax return shall be filed within one year from the date of decedent’s
death;
iii. The written request for the partial disposition of estate shall be approved by the
BIR. The said request shall be filed, together with a notarized undertaking that the
proceeds thereof shall be exclusively used for the payment of the total estate tax
due;
iv. The computed estate tax due shall be allocated in proportion to the value of
each property;
v. The estate shall pay to the BIR the proportionate estate tax due of the property
Page 11
 intended to be disposed of;
vi. An electronic Certificate Authorizing Registration (eCAR) shall be issued
upon presentation of the proof of payment of the proportionate estate tax due of
the property intended to be disposed. Accordingly, eCARs shall be issued as many
as there are properties intended to be disposed to cover the total estate tax due,
net of the proportionate estate tax(es) previously paid under this option; and
vii. In case of failure to pay the total estate tax due out from the proceeds of the
said disposition, the estate tax due shall be immediately due and demandable
subject to the applicable penalties and interest reckoned from the prescribed
deadline for filing the return and payment of the estate tax, without prejudice of
withholding the issuance of eCAR(s) on the remaining properties until the
payment of the remaining balance of the estate tax due, including the penalties
and interest.
7. Request for Extension of Time, Installment Payment and Partial Disposition of
Estate. – For purposes of these Regulations, the request for extension of time to file the
return, extension of time to pay estate tax and payment by installment shall be filed with
the Revenue District Officer (RDO) where the estate is required to secure its TIN
and file the estate tax return. This request shall be approved by the Commissioner or his
duly authorized representative.
8. Place of filing the return and payment of the tax. – In case of a resident
decedent, the administrator or executor shall register the estate of the decedent and
secure a new TIN therefor from the Revenue District Office where the decedent was
domiciled at the time of his death and shall file the estate tax return and pay the
corresponding estate tax with the Accredited Agent Bank (AAB), Revenue District
Officer or Revenue Collection Officer having jurisdiction on the place where the decedent
was domiciled at the time of his death, whichever is applicable, following prevailing
collection rules and procedures.
In case of a non-resident decedent, whether non-resident citizen or non-resident
alien, with executor or administrator in the Philippines, the estate tax return shall
be filed with and the TIN for the estate shall be secured from the Revenue District Office
where such executor or administrator is registered: Provided, however, that in case
the executor or administrator is not registered, the estate tax return shall be filed with and
the TIN of the estate shall be secured from the Revenue District Office having
jurisdiction over the executor or administrator’s legal residence. Nonetheless, in case the
non-resident decedent does not have an executor or administrator in the
Philippines, the estate tax return shall be filed with and the TIN for the estate shall be
secured from the Office of the Commissioner through RDO No. 39-South Quezon
City.
The foregoing provisions notwithstanding, the Commissioner of Internal Revenue
may continue to exercise his power to allow a different venue/place in the filing of
tax returns.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
9. Liability for payment .– The estate tax imposed under the NIRC shall be paid by the
executor or administrator before the delivery of the distributive share in the inheritance to
any heir or beneficiary. Where there are two or more executors or administrators, all of
them are severally liable for the payment of the tax. The eCAR pertaining to such estate
issued by the Commissioner or the Revenue District Officer (RDO) having jurisdiction
over the estate, will serve as the authority to distribute the
remaining/distributable properties/s hare in the inheritance to the heir or beneficiary.
The executor or administrator of an estate has the primary obligation to pay the estate tax
but the heir or beneficiary has subsidiary liability for the payment of that portion of
the estate which his distributive share bears to the value of the total net estate. The extent
of his liability, however, shall in no case exceed the value of his share in the inheritance.
iii. Cases and Rulings
RAFAEL ARSENIO S. DIZON, in his capacity as the Judicial Administrator of the
Estate of the deceased JOSE P. FERNANDEZ, vs. COURT OF TAX APPEALS and
COMMISSIONER OF INTERNAL REVENUE, Respondents.
G.R. No. 140944, April 30, 2008
Quick Facts: A case regarding the estate of a Jose Fernandez. Case dealt with the
deductibility of condoned credits from the gross estate, and also an issue regarding
evidence in CTA.
Facts: Jose P. Fernandez (Jose) died. Thereafter, a petition for the probate of his will was
filed with Branch 51 of the Regional Trial Court (RTC) of Manila (probate court).
The probate court then appointed retired Supreme Court Justice Arsenio P. Dizon (Justice
Dizon) and petitioner, Atty. Rafael Arsenio P. Dizon (petitioner) as Special and Assistant
Special Administrator, respectively, of the Estate of Jose (Estate).
In a letter dated, Justice Dizon informed respondent Commissioner of the Bureau of Internal
Revenue (BIR) of the special proceedings for the Estate.
Petitioner alleged that several requests for extension of the period to file the required estate
tax return were granted by the BIR since the assets of the estate, as well as the claims
against it, had yet to be collated, determined and identified.
Justice Dizon authorized Atty. Gonzales to sign and file on behalf of the Estate the required
estate tax return and to represent the same in securing a Certificate of Tax Clearance.
Atty. Gonzales wrote a letter addressed to the BIR Regional Director and filed the estate tax
return with the same BIR Regional Office, showing therein a NIL estate tax liability.
Subsequently, Justice Dizon died.
Page 12
IR Regional Director issued Certification stating that the taxes due on the transfer of real
and personal properties of Jose had been fully paid and said properties may be transferred
to his heirs.
Petitioner Atty. Dizon requested the probate court's authority to sell several properties
forming part of the Estate, for the purpose of paying its creditors. However, the Assistant
Commissioner for Collection of the BIR, issued Estate Tax Assessment Notice demanding the
payment of P66,973,985.40 as deficiency estate tax.
Atty. Gonzales moved for the reconsideration of the said estate tax assessment but the BIR
Commissioner denied the request. So petitioner filed a petition for review before the CTA,
but the petition was denied. Upon petition with the Court of Appeals, the decision of the
CTA was upheld, hence this petition.
During the course of the proceedings, it is admitted that the claims of the Estate's
aforementioned creditors have been condoned.
Issue (1): Whether or not the claims of the creditors which have been condoned may be
considered as allowable deductions from the Gross Estate?
Held (1): YES, some of the claims which have been condoned or reduced may still
be claimed as an allowable deduction in full, applying the date-of-death
valuation principle.
Philippine Tax Laws were patterned upon US Federal Tax laws, hence, pursuant to
established rules of statutory construction, the decisions of American courts construing the
federal tax code are entitled to great weight in the interpretation of our own tax laws.
It is noteworthy that even in the United States, there is some dispute as to whether the
deductible amount for a claim against the estate is fixed as of the decedent's death which is
the general rule, or the same should be adjusted to reflect post-death developments, such
as where a settlement between the parties results in the reduction of the amount actually
paid. On one hand, the U.S. court ruled that the appropriate deduction is the
value that the claim had at the date of the decedent's death.
In the case of Propstra v. U.S., where a lien claimed against the estate was certain and
enforceable on the date of the decedent's death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting the entire amount of
the claim for estate tax purposes. These pronouncements essentially confirm the
general principle that post-death developments are not material in determining
the amount of the deduction.
We express our agreement with the date-of-death valuation rule (made pursuant to the
ruling of the U.S. Supreme Court in Ithaca Trust Co. v. United States which was affirmed by
Propstra v. US)
First. There is no law, nor do we discern any legislative intent in our tax
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
laws, which disregards the date-of-death valuation principle and particularly
provides that post-death developments must be considered in determining the net
value of the estate. It bears emphasis that tax burdens are not to be imposed, nor
presumed to be imposed, beyond what the statute expressly and clearly imports,
tax statutes being construed strictissimi juris against the government. Any doubt
on whether a person, article or activity is taxable is generally resolved against
taxation.
Second. Such construction finds relevance and consistency in our Rules on
Special Proceedings wherein the term "claims" required to be presented against a
decedent's estate is generally construed to mean debts or demands of a pecuniary
nature which could have been enforced against the deceased in his lifetime, or
liability contracted by the deceased before his death.
Therefore, the claims existing at the time of death are significant to, and should be
made the basis of, the determination of allowable deductions.
[G.R. No. 118671. January 29, 1996]
THE ESTATE OF HILARIO M. RUIZ, EDMOND RUIZ, Executor, petitioner, vs. THE
COURT OF APPEALS (Former Special Sixth Division), MARIA PILAR RUIZ-
MONTES, MARIA CATHRYN RUIZ, CANDICE ALBERTINE RUIZ, MARIA ANGELINE
RUIZ and THE PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF PASIG,
BRANCH 156, respondents.
Relevant Syllabus:
3. ID.; ID.; ID.; ID.; WHEN DISTRIBUTION OF ESTATE PROPERTIES CAN
BE MADE. In settlement of estate proceedings, the distribution of the estate
properties can only be made: (1) after all the debts, funeral charges, expenses of
administration, allowance to the widow, and estate tax have been paid; or (2)
before payment of said obligations only if the distributees or any of them gives a
bond in a sum fixed by the court conditioned upon the payment of said obligations
within such time as the court directs, or when provision is made to meet those
obligations.
4. ID.; ID.; ID.; PAYMENT OF ESTATE TAX; AN OBLIGATION THAT MUST BE
PAID BEFORE THE DISTRIBUTION OF ESTATE. The estate tax is one of those
obligations that must be paid before distribution of the estate. If not yet paid, the
rule requires that the distributees post a bond or make such provisions as to meet
the said tax obligation in proportion to their respective shares in the inheritance.
Facts: Hilario M. Ruiz executed a holographic will naming as his heirs his only son, Edmond
Ruiz, his adopted daughter, private respondent Maria Pilar Ruiz Montes, and his three
granddaughters, private respondents Maria Cathryn, Candice Albertine and Maria Angeline,
all children of Edmond Ruiz. The testator bequeathed to his heirs substantial cash, personal
Page 13
and real properties and named Edmond Ruiz executor of his estate.
On April 12, 1988, Hilario Ruiz died. For unknown reasons, Edmond, the named executor,
did not take any action for the probate of his father’s holographic will. Four years after
the testators death, it was private respondent Maria Pilar Ruiz Montes who filed
before the RTC of Pasig, a petition for the probate and approval of Hilario Ruizs
will and for the issuance of letters testamentary to Edmond Ruiz.
One of the properties of the estate - the house and lot at No. 2 Oliva Street, Valle Verde
IV, Pasig which the testator bequeathed to Maria Cathryn, Candice Albertine and Maria
Angeline - was leased out by Edmond Ruiz to third persons. The probate court
ordered Edmond to deposit with the Branch Clerk of Court the rental deposit and
payments totalling P540,000.00 representing the one-year lease of the Valle Verde
property, to which Edmond complied.
In March 1993, Edmond moved for the release of P50,000.00 to pay the real estate
taxes on the real properties of the estate. The probate court approved the release of
P7,722.06
Edmond withdrew his opposition to the probate of the will. Consequently, the probate court,
on May 18, 1993, admitted the will to probate and ordered the issuance of letters
testamentary to Edmond conditioned upon the filing of a bond in the amount of P50,000.00.
The letters testamentary were issued on June 23, 1993.
Petitioner Testate Estate of Hilario Ruiz as executor, filed an Ex-Parte Motion for Release of
Funds. It prayed for the release of the rent payments deposited with the Branch Clerk of
Court. Respondent Montes opposed the motion and concurrently filed a Motion
for Release of Funds to Certain Heirs and Motion for Issuance of Certificate of
Allowance of Probate Will. Montes prayed for the release of the said rent payments to
the granddaughters and for the distribution of the testators properties, specifically the Valle
Verde property and the Blue Ridge apartments, in accordance with the provisions of the
holographic will.
The probate court denied petitioners motion for release of funds but granted
respondent Montes motion in view of petitioner’s lack of opposition. It thus
ordered the release of the rent payments to the respondents. It further ordered the delivery
of the titles to and possession of the properties bequeathed to the three granddaughters
and respondent Montes upon the filing of a bond of P50,000.00.
Petitioner moved for reconsideration alleging that he actually filed his opposition to
respondent Montes motion for release of rent payments which opposition the court failed to
consider. Petitioner likewise reiterated his previous motion for release of funds. Despite
petitioners manifestation, the probate court ordered the release of the funds to Edmond but
only such amount as may be necessary to cover the espenses of administration and
allowanceas for support of the testators three granddaughters subject to collation and
deductible from their share in the inheritance.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
The court, however, held in abeyance the release of the titles to respondent Montes and the
three granddaughters until the lapse of six months from the date of firast publication of the
notice to creditors
Issue: Whether the probate court, after admitting the will to probate but before
payment of the estates debts and obligations, had the authority to order the release
of the titles to certain heirs and to grant possession of all properties of the estate to the
executor of the will?
Held: NO. Rule 90 provides that:
Sec. 1. When order for distribution of residue made. - When the debts,
funeral charges, and expenses of administration, the allowance to the widow, and
inheritance tax, if any, chargeable to the estate in accordance with law, have been
paid, the court, on the application of the executor or administrator, or of a person
interested in the estate, and after hearing upon notice, shall assign the residue of
the estate to the persons entitled to the same, naming them and the proportions,
or parts, to which each is entitled, and such persons may demand and recover
their respective shares from the executor or administrator, or any other person
having the same in his possession. If there is a controversy before the court as to
who are the lawful heirs of the deceased person or as to the distributive shares to
which each person is entitled under the law, the controversy shall be heard and
decided as in ordinary cases.
No distribution shall be allowed until the payment of the obligations
above-mentioned has been made or provided for, unless the distributees,
or any of them, give a bond, in a sum to be fixed by the court,
conditioned for the payment of said obligations within such time as the
court directs.
In settlement of estate proceedings, the distribution of the estate properties can only be
made: (1) after all the debts, funeral charges, expenses of administration, allowance to the
widow, and estate tax have been paid; or (2) before payment of said obligations only if the
distributees or any of them gives a bond in a sum fixed by the court conditioned upon the
payment of said obligations within such time as the court directs, or when provision is made
to meet those obligations.
In the case at bar, the probate court ordered the release of the titles to the Valle Verde
property and the Blue Ridge apartments to the private respondents after the lapse of six
months from the date of first publication of the notice to creditors. The questioned order
speaks of notice to creditors, not payment of debts and obligations.
Hilario Ruiz allegedly left no debts when he died but the taxes on his estate had not
hitherto been paid, much less ascertained. The estate tax is one of those
obligations that must be paid before distribution of the estate. If not yet paid,
the rule requires that the distributees post a bond or make such provisions as to
meet the said tax obligation in proportion to their respective shares in the
Page 14
inheritance. Notably, at the time the order was issued the properties of the estate had not 1. Donation inter vivos - a donation made between living persons. Its perfection is at the
yet been inventoried and appraised. moment when the donor knows the acceptance of the donee. It is subject to donor’s tax.

2. Donation mortis causa - a donation which takes effect upon the death of the donor. It is
1. Computation of Proper Estate Tax Due, BIR Ruling No. 010-00
subject to estate tax.
(January 5, 2000)

ESTATE TAX; Family Home

DONATION INTER VIVOS DONATION MORTIS CAUSA
- For purposes of the estate tax, the value of the house and lot shall be
As to consideration It is not made out of the It is made in consideration
included as part of the gross estate. The one-half share of the surviving spouse in
donor’s generosity, although of death, without the
the conjugal dwelling is then deducted from the total gross estate to arrive at the total
the subject matter is not donor’s intention to lose the
net estate of the decedent. Thereafter, the one-half share of the decedent to the family
delivered at once, or the thing conveyed or its free
home (house and lot) is allowed as a deduction from the net estate provided that if the
delivery is to be made post disposal in case of survival.
current fair market value of that one-half portion exceeds one million pesos, the excess
mortem, which is a simple
shall be subject to estate tax. As a sine qua non condition for the exemption or deduction,
matter of form and does not
said family home must have been the decedent's family home as certified by the barangay
change the nature of the
captain of the locality pursuant to Section 86(A)(4). (BIR Ruling No. 010-2000 dated
act.
January 5, 2000)
As to Form It is perfected upon Being testamentary in
knowledge of the donor of nature, it should be
2. Request for Extension of Time to File Estate Tax Return and to Pay
the acceptance of the embodied in a last will and
Estate Tax (Doninga A. Villaluz), BIR Ruling No. 344-16, [June 29,
donee. Such contract is testament (Art. 728, Civil
2016]) Commented [FN4]:
consensual in nature. Code).
INSERT
Personal property – oral
3. Estate of Concordia C. Paredes, BIR Ruling No 475-17 (October 12,
or in writing
2017) Commented [FN5]:
If value exceeds 5K, the
donation and acceptance
b. Donor’s Tax INSERT
must be in writing
Real property – must be in
Donation is an act of liberality whereby a person (donor) disposes gratuitously of a thing or right in
a public instrument
favor of another (donee) who accepts it (Art. 725, Civil Code).
As to effectivity The effect is produced while The transfer conveys no title
the donor is still alive. or ownership to the
Donor’s tax is an excise tax imposed on the privilege of transferring property by way of a gift inter
transferee before the death
vivos based on pure act of liberality without any or less than adequate consideration and without any
of the transferor, or the
legal compulsion to give.
transferor retains the
ownership, full or naked, of
Subject of donor’s tax:
the property conveyed; it is
- The subject of donor’s tax is the gift or donation. Article 725 of the Civil Code defines a gift or
the donor’s death that
donation as “an act of liberality whereby a person disposes gratuitously of a thing or right in
determines the acquisition of
favor of another who accepts it.”
or the right to the property.
-
The law in force at the time of the perfection/completion of the donation governs the imposition of
donor’s tax (Sec. 11, R.R. 2-2003). As to irrevocability The transfer is irrevocable. The transfer is revocable
before the transferor’s death
Kinds of donations: and revocability may be
provided indirectly by means

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 of a reserved power in the purpose of this tax, a 'stranger', is a person
donor to dispose of the who is not a:
property conveyed.
As to acceptance Acceptance is a Being in the form of a will, it (1) Brother, sister (whether by whole or half-
requirement. is never accepted by the blood), spouse, ancestor and lineal
donee during the donor’s descendant; or
lifetime.
(2) Relative by consanguinity in the collateral
line within the fourth degree of relationship.
i. Section 98 to 104 as amended by TRAIN Law

NIRC TRAIN LAW (C) Any contribution in cash or in kind to any

SEC. 98. Imposition of Tax. - candidate, political party or coalition of parties
for campaign purposes shall be governed by
(A) There shall be levied, assessed, collected and paid upon the transfer by any person, the Election Code, as amended.
resident or nonresident, of the property by gift, a tax, computed as provided in Section 99. SEC. 100. Transfer for Less Than “Sec. 100. Transfer for Less Than
Adequate and Full Consideration. - Where Adequate and Full Consideration.—
(B) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is property, other than real property referred to Where property, other than real property
direct or indirect, and whether the property is real or personal, tangible or intangible. in Section 24(D), is transferred for less than referred to in Section 24(D), is transferred
SEC. 99. Rates of Tax Payable by “Sec. 99. Rate of Tax Payable by an adequate and full consideration in money for less than an adequate and full
Donor. - Donor.— or money's worth, then the amount by which consideration in money or money’s worth,
the fair market value of the property exceeded then the amount by which the fair market
“(A) In General— The tax for each the value of the consideration shall, for the value of the property exceeded the value
(A) In General. - The tax for each calendar purpose of the tax imposed by this Chapter, of the consideration shall, for the purpose
year shall be computed on the basis of the calendar year shall be six percent (6%)
computed on the basis of the total gifts in be deemed a gift, and shall be included in of the tax imposed by this Chapter, be
total net gifts made during the calendar year computing the amount of gifts made during deemed a gift, and shall be included in
in accordance with the following schedule: excess of Two hundred fifty thousand
pesos (₱250,000) exempt gift made the calendar year. computing the amount of gifts made
during the calendar year. during the calendar year: Provided,
If the net gift is: however, That a sale, exchange, or other
“(B) Any contribution in cash or in kind to transfer of property made in the ordinary
Over But Not The Tax Plus Of the any candidate, political party or coalition course of business (a transaction
Over Shall be Excess Over of parties for campaign purposes shall be which is a bona fide, at arm’s length,
P 100,000 Exempt governed by the Election Code, as and free from any donative intent),
P 100,000 200,000 0 2% P100,000 amended.” will be considered as made for an
200,000 500,000 2,000 4% 200,000 adequate and full consideration in money
500,000 1,000,000 14,000 6% 500,000 or money’s worth.”
1,000,000 3,000,000 44,000 8% 1,000,000 SEC. 101. Exemption of Certain Gifts. - The “Sec. 101. Exemption of Certain
3,000,000 5,000,000 204,000 10% 3,000,000 following gifts or donations shall be exempt Gifts.— The following gifts or
5,000,000 10,000,000 404,000 12% 5,000,000 from the tax provided for in this Chapter: donations shall be exempt from the
10,000,000 1,004,000 15% 10,000,000 tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -
“(A) In the Case of Gifts Made by a
(1) Dowries or gifts made on account of Resident.—
(B) Tax Payable by Donor if Donee is a marriage and before its celebration or within
Stranger. - When the donee or beneficiary is one year thereafter by parents to each of their “(1) Gifts made to or for the use of the
stranger, the tax payable by the donor shall be legitimate, recognized natural, or adopted National Government or any entity
thirty percent (30%) of the net gifts. For the children to the extent of the first Ten thousand created by any of its agencies which is not

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pesos (P10,000):
(2) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivision of the said
Government; and
(3) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, accredited
nongovernment organization, trust or
philanthropic organization or research
institution or organization: Provided, however,
That not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes. For the purpose of
this exemption, a 'non-profit educational
and/or charitable corporation, institution,
accredited nongovernment organization, trust
or philanthropic organization and/or research
institution or organization' is a school, college
or university and/or charitable corporation,
accredited nongovernment organization, trust
or philanthropic organization and/or research
institution or organization, incorporated as a
non-stock entity, paying no dividends,
governed by trustees who receive no
compensation, and devoting all its income,
whether students' fees or gifts, donation,
subsidies or other forms of philanthropy, to
the accomplishment and promotion of the
purposes enumerated in its Articles of
Incorporation.
(B) In the Case of Gifts Made by a
Nonresident not a Citizen of the Philippines. -
(1) Gifts made to or for the use of the National
Government or any entity created by any of its
agencies which is not conducted for profit, or
to any political subdivision of the said
Government.
(2) Gifts in favor of an educational and/or
charitable, religious, cultural or social welfare
corporation, institution, foundation, trust or
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
conducted for profit, or to any political
subdivision of the said Government; and
“(2) Gifts in favor of an educational
and/or charitable, religious, cultural or
social welfare corporation, institution,
accredited nongovernment organization,
trust or philanthropic organization or
research institution or organization:
Provided, however, That not more than
thirty percent (30%) of said gifts shall be
used by such donee for administration
purposes. For the purpose of this
exemption, a ‘non-profit educational
and/or charitable corporation, institution,
accredited nongovernment organization,
trust or philanthropic organization and/or
research institution or organization’ is a
school, college or university and/or
charitable corporation, accredited
nongovernment organization, trust or
philanthropic organization and/ or
research institution or organization,
incorporated as a nonstock entity, paying
no dividends, governed by trustees who
receive no compensation, and devoting all
its income, whether students’ fees or
gifts, donation, subsidies or other forms of
philanthropy, to the accomplishment and
promotion of the purposes enumerated in
its Articles of Incorporation.
“x x x.”
philanthropic organization or research
institution or organization: Provided, however,
That not more than thirty percent (30%) of
said gifts shall be used by such donee for
administration purposes.
(C)Tax Credit for Donor's Taxes Paid to a
Foreign Country. -
(1) In General. - The tax imposed by this
Title upon a donor who was a citizen or a
resident at the time of donation shall be
credited with the amount of any donor's tax of
any character and description imposed by the
authority of a foreign country.
(2) Limitations on Credit. - The amount of
the credit taken under this Section shall be
subject to each of the following limitations:
(a) The amount of the credit in respect to the
tax paid to any country shall not exceed the
same proportion of the tax against which such
credit is taken, which the net gifts situated
within such country taxable under this Title
bears to his entire net gifts; and
(b) The total amount of the credit shall not
exceed the same proportion of the tax against
which such credit is taken, which the donor's
net gifts situated outside the Philippines
taxable under this title bears to his entire net
gifts.
SEC. 102. Valuation of Gifts Made in Property. - If the gift is made in property, the
fair market value thereof at the time of the gift shall be considered the amount of the gift.
In case of real property, the provisions of Section 88(B) shall apply to the valuation thereof.
SEC. 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual who makes any transfer by gift (except those which,
under Section 101, are exempt from the tax provided for in this Chapter) shall, for the
purpose of the said tax, make a return under oath in duplicate. The return shall set forth:
(1) Each gift made during the calendar year which is to be included in computing
net gifts;
(2) The deductions claimed and allowable;
Page 17
 (3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and regulations made
pursuant to law.
(B) Time and Place of Filing and Payment - The return of the donor required in this
Section shall be filed within thirty (30) days after the date the gift is made and the tax due
thereon shall be paid at the time of filing. Except in cases where the Commissioner
otherwise permits, the return shall be filed and the tax paid to an authorized agent bank,
the Revenue District Officer, Revenue Collection Officer or duly authorized Treasurer of the
city or municipality where the donor was domiciled at the time of the transfer, or if there be
no legal residence in the Philippines, with the Office of the Commissioner. In the case of
gifts made by a nonresident, the return may be filed with the Philippine Embassy or
Consulate in the country where he is domiciled at the time of the transfer, or directly with
the Office of the Commissioner.
SEC. 104. Definitions. - For purposes of this Title, the terms 'gross estate' and 'gifts'
include real and personal property, whether tangible or intangible, or mixed, wherever
situated: Provided, however, That where the decedent or donor was a nonresident alien at
the time of his death or donation, as the case may be, his real and personal property so
transferred but which are situated outside the Philippines shall not be included as part of his
'gross estate' or 'gross gift': Provided, further, That franchise which must be exercised in
the Philippines; shares, obligations or bonds issued by any corporation or sociedad anonima
organized or constituted in the Philippines in accordance with its laws; shares, obligations or
bonds by any foreign corporation eighty-five percent (85%) of the business of which is
located in the Philippines; shares, obligations or bonds issued by any foreign corporation if
such shares, obligations or bonds have acquired a business situs in the Philippines; shares
or rights in any partnership, business or industry established in the Philippines, shall be
considered as situated in the Philippines: Provided, still further, that no tax shall be
collected under this Title in respect of intangible personal property:
(a) if the decedent at the time of his death or the donor at the time of the
donation was a citizen and resident of a foreign country which at the time of his
death or 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
(b) if the laws of the foreign country of which the decedent or donor was a citizen
and resident at the time of his death or donation allows a similar exemption from
transfer or death taxes of every character or description in respect of intangible
personal property owned by citizens of the Philippines not residing in that foreign
country.
The term 'deficiency' means:
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
(a) the amount by which tax imposed by this Chapter exceeds the amount shown
as the tax by the donor upon his return; but the amount so shown on the return
shall first be increased by the amount previously assessed (or Collected without
assessment) as a deficiency, and decreased by the amounts previously abated,
refunded or otherwise repaid in respect of such tax, or
(b) if no amount is shown as the tax by the donor, then the amount by which the tax
exceeds the amounts previously assessed, (or collected without assessment) as a
deficiency, but such amounts previously assessed, or collected without assessment, shall
first be decreased by the amount previously abated, refunded or otherwise repaid in respect
of such tax.
ii. Revenue Regulations 12-2018 Commented [FN6]:
INSERT: SECTION 12
iii. Filing of Returns and Payment of Donors Tax
SEC. 15. FILING OF RETURNS AND PAYMENT OF DONOR’S TAX. –
(A) Requirements.– Any person making a donation (whether direct or indirect), unless
the donation is specifically exempt under the NIRC or other special laws, is
required, for every donation, to accomplish under oath a donor’s tax return in
duplicate. The return shall set forth:
1. Each gift made during the calendar year which is to be included in gifts
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same calendar year;
4. The name of the donee; and
5. Such further information as the Commissioner may require.
(B) Time and place of filing and payment. – The donor’s tax return shall be filed
within thirty (30) days after the date the gift is made or completed and the tax due
thereon shall be paid at the same time that the return is filed. Unless the Commissioner
otherwise permits, the return shall be filed and the tax paid to an AAB , the Revenue
District Officer and Revenue Collection Officer having jurisdiction over the place where
the donor is domiciled at the time of the transfer, or if there be no legal residence in the
Philippines, with the Office of the Commissioner. In the case of gifts made by a non-
resident, the return may be filed with the Philippine Embassy or Consulate in the country
where he is domiciled at the time of the transfer, or directly with the Office of the
Commissioner. For this purpose, the term “OFFICE OF THE COMMISSIONER” shall refer to
the Revenue District Office (RDO) having jurisdiction over the BIR - National Office Building
which houses the Office of the Commissioner, or presently, to the Revenue District Office
No. 39 – South Quezon City.
Page 18
 charitable corporation, accredited nongovernment organization, trust or philanthropic
(C) Notice of donation by a donor engaged in business. – In order to be exempt from organization and/or research institution or organization, incorporated as a non-stock entity,
donor’s tax and to claim full deduction of the donation given to qualified - donee institutions paying no dividends, governed by trustees who receive no compensation, and devoting all
duly accredited, the donor engaged in business shall give a notice of donation on every its income, whether students' fees or gifts, donation, subsidies or other forms of
donation worth at least Fifty Thousand Pesos (P50,000) to the Revenue District Office philanthropy, to the accomplishment and promotion of the purposes enumerated in its
(RDO) which has jurisdiction over his place of business within thirty (30) days after receipt Articles of Incorporation.
of the qualified donee institution’s duly issued Certificate of Donation, which shall be
attached to the said Notice of Donation, stating that not more than thirty percent (30%) of
the said donation/gifts for the taxable year shall be used by such accredited non-stock,
non-profit corporation/NGO institution (qualified- donee institution) for administration
purposes pursuant to the provisions of Section 101(A)(3) and (B)(2) of the NIRC No. L-19201. June 16, 1965.
. REV. FR. CASIMIRO LLADOC, petitioner, vs. The COMMISSIONER OF INTERNAL
REVENUE and The COURT OF TAX APPEALS, respondents.

iv. Transfer for Less Than Adequate and Full Consideration
RR 12-2018
SEC.16. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION. –
Where property, other than real property referred to in Section 24(D), is transferred for less
than an adequate and full consideration in money or money's worth, then the amount by
which the fair market value of the property exceeded the value of the consideration shall,
for the purpose of the tax imposed by this Chapter, be deemed a gift, and shall be included
in computing the amount of gifts made during the calendar year: Provided, however , that
a sale, exchange, or other transfer of property made in the ordinary course of business (a
transaction which is a bona fide, at arm’s length, and free from any donative intent) will be
considered as made for an adequate and full consideration in money or money’s worth.
v. Exemption of Certain Gifts
Short Summary:
A donation was made for the construction of a new Catholic Church in Negros Occidental.
The donor, MB Estate, filed the donor’s tax return but was assesed with a donor’s tax
against the parish plus surcharge, interest and compromise for the late filing of return.
Facts:
Sometime in 1957, the M.B. Estate, Inc., of Bacolod City, donated P10,000.00 in cash to
Rev. Fr. Crispin Ruiz, then parish priest of Victorias, Negros Occidental, and predecessor of
herein petitioner, for the construction of a new Catholic Church in the locality. The total
amount was actually spent for the purpose intended.
On March 3, 1958, the donor M.B. Estate, Inc., filed the donor’s gift tax return. Under date
of April 29, 1960, the respondent Commissioner of Internal Revenue issued an assessment
for donee’s gift tax against the Catholic Parish of Victorias, Negros Occidental, of which
petitioner was the priest. The tax amounted to P1,370.00 including surcharges, interests of
1% monthly from May 15, 1958 to June 15, 1960, and the compromise for the late filing of
the return.

SEC . 17 . EXEMPTION OF CERTAIN GIFTS. – The following are exempt from the
donor’s tax:
1. Gifts made to or for the use of the National Government or any entity created by any of
its agencies which is not conducted for profit, or to any political subdivision of the said
Government; and
2. Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited nongovernment organization, trust or philanthropic
organization or research institution or organization: Provided, however, That not more than
thirty percent (30%) of said gifts shall be used by such donee for administration purposes.
For the purpose of this exemption, a 'non-profit educational and/or charitable corporation,
institution, accredited nongovernment organization, trust or philanthropic organization
and/or research institution or organization ' is a school, college or university and/or
Rev. Fr. Casimiro Lladoc claimed, among others, that at the time of the donation, he was
not the parish priest in Victorias; that there is no legal entity or juridical person known as
the “Catholic Parish Priest of Constitution.
Issue:
(1) Whether petitioner should be held liable for donor’s tax for the donation made for the
construction of the Victorias Parish Church
Held:
Yes.
Section 22(3), Art. VI of the Constitution of the Philippines, exempts from taxation
cemeteries, churches and parsonages or convents, appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious purposes. The exemption is only
from the payment of taxes assessed on such properties enumerated, as property taxes, as

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contradistinguished from excise taxes.
In the present case, what the Collector assessed was a donee’s gift tax; the assessment
was not on the properties themselves. It did not rest upon general ownership; it was an
excise upon the use made of the properties, upon the exercise of the privilege of receiving
the properties (Phipps vs. Com. of Int. Rec., 91 F2d 627). Manifestly, gift tax is not within
the exempting provisions of the section just mentioned.
A gift tax is not a property tax, but an excise tax imposed on the transfer of property by
way of gift inter vivos, the imposition of which on property used exclusively for religious
purposes, does not constitute an impairment of the Constitution. As well observed by the
learned respondent Court, the phrase “exempt from taxation,” as employed in the
Constitution (supra) should not be interpreted to mean exemption from all kinds of taxes.
And there being no clear, positive or express grant of such privilege by law, in favor of
petitioner, the exemption herein must be denied.
Issue:
(2) Who should be called upon to pay the gift tax?
Held:
Petitioner Lladoc should not be personally liable, because at the time of the donation he
was not the priest of Victorias.
On April 30; 1965, in a resolution, the Supreme Court ordered the Head of the Diocese to
present whatever legal issues and/or defenses he might wish to raise, to which resolution
counsel for petitioner, who also appeared as counsel for the Head of the Diocese, the
Roman Catholic Bishop of Bacolod, manifested that it was submitting itself to the
jurisdiction and orders of the SC and that it was presenting, by reference, the brief of
petitioner Rev. Fr. Casimiro Lladoc, as its own and for all purposes.
In view thereof and as stated, the assessment at bar had been properly made and the
imposition of the tax is not a violation of the constitutional provision exempting churches,
parsonages or convents, etc. (Art. VI, sec. 22[3], Constitution), the Head of the Diocese,
to which the parish Victorias pertains, is liable for the payment thereof.
Hence, insofar as tax liability is concerned, petitioner is not personally liable for the said gift
tax, and that the Head of the Diocese, the present case’s substitute petitioner, should pay
the said gift tax, without special pronouncement as to costs.
THE PHILIPPINE AMERICAN LIFE AND GENERAL INSURANCE COMPANY,
petitioner, vs. THE SECRETARY OF FINANCE and THE COMMISSIONER OF
INTERNAL REVENUE, respondents.
Short Summary:
Philamlife, in a bid to divest itself of its interests in the health maintenance organization
industry, offered to sell its shareholdings in PhilamCare through competitive bidding. It was
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
able to sell the said shares less than an adequate consideration. The necessary capital gains
tax and documentary stamp taxes were paid. Later, it applied for a tax clearance but was
informed that it needed to secure a ruling relating to a potential donor’s tax liability. The
CIR, however, claimed that the difference between the book value and selling price
constitutes a taxable donation.
Facts:
The Philippine American Life and General Insurance Company (Philamlife) used to own
498,590 Class A shares in Philam Care Health Systems, Inc. (PhilamCare), representing
49.89% of the latter’s outstanding capital stock. In 2009, petitioner, in a bid to divest itself
of its interests in the health maintenance organization industry, offered to sell its
shareholdings in PhilamCare through competitive bidding. Thus, on September 24, 2009,
petitioner’s Class A shares were sold for USD2,190,000, or Php104,259,330 based on the
prevailing exchange rate at the time of the sale, to STI Investments, Inc., who emerged as
the highest bidder.
After the sale was completed and the necessary documentary stamp and capital gains taxes
were paid, Philamlife filed an application for a certificate authorizing registration/tax
clearance with the Bureau of Internal Revenue (BIR) Large Taxpayers Service Division to
facilitate the transfer of the shares. Months later, petitioner was informed that it needed to
secure a BIR ruling in connection with its application due to potential donor’s tax liability. In
compliance, petitioner, on January 4, 2012, requested a ruling4 to confirm that the sale was
not subject to donor’s tax, pointing out, in its request, the following: that the transaction
cannot attract donor’s tax liability since there was no donative intent and, ergo, no taxable
donation, citing BIR Ruling [DA-(DT-065) 715-09] dated November 27, 2009;5 that the
shares were sold at their actual fair market value and at arm’s length; that as long as the
transaction conducted is at arm’s length –– such that a bona fide business arrangement of
the dealings is done in the ordinary course of business –– a sale for less than an adequate
consideration is not subject to donor’s tax; and that donor’s tax does not apply to sale of
shares sold in an open bidding process.
However, the Commissioner ruled that the difference between the book value and the
selling price in the sales transaction is taxable donation subject to a 30% donor’s tax under
Section 99(B) of the NIRC.
Issue:
Whether the price difference in petitioner’s adverted sale of shares in PhilamCare attracts
donor’s tax.
Held:
Yes. The price difference is subject to donor’s tax.
Petitioner’s substantive arguments are unavailing. The absence of donative intent, if that be
the case, does not exempt the sales of stock transaction from donor’s tax since Sec. 100 of
the NIRC categorically states that the amount by which the fair market value of the
property exceeded the value of the consideration shall be deemed a gift. Thus, even if there
is no actual donation, the difference in price is considered a donation by fiction of law.
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 rendered in the course of trade or business.
Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets SEC. 106. Value-Added Tax on Sale of Goods “Sec. 106. Value-added Tax on Sale of
the parameters for determining the “fair market value” of a sale of stocks. Such issuance or Properties. - Goods or Properties.—
was made pursuant to the Commissioner’s power to interpret tax laws and to promulgate
rules and regulations for their implementation. (A) Rate and Base of Tax. - There shall be “(A) Rate and Base of Tax.— There shall be
levied, assessed and collected on every sale, levied, assessed and collected on every
Lastly, petitioner is mistaken in stating that RMC 25-11, having been issued after the sale, barter or exchange of goods or properties, sale, barter or exchange of goods or
was being applied retroactively in contravention to Sec. 246 of the NIRC.Instead, it merely value-added tax equivalent to ten percent properties, a value-added tax equivalent to
called for the strict application of Sec. 100, which was already in force the moment the (10%) [44] of the gross selling price or gross twelve percent (12%) of the gross selling
NIRC was enacted. value in money of the goods or properties price or gross value in money of the goods
sold, bartered or exchanged, such tax to be or properties sold, bartered or exchanged,
Sec. 246 Non-Retroactivity of Rulings. — Any revocation, modification or reversal of paid by the seller or transferor: Provided, such tax to be paid by the seller or
any of the rules and regulations promulgated in accordance with the preceding Sections or That the President, upon the transferor.
any of the rulings or circulars promulgated by the Commissioner shall not be given recommendation of the Secretary of Finance,
retroactive application if the revocation, modification or reversal will be prejudicial to the shall, effective January 1, 2006, raise the “(1) x x x
taxpayers, except in the following cases: rate of value-added tax to twelve
(a) Where the taxpayer deliberately misstates or omits material facts from his return or percent(12%), after any of the following “(2) The following sales by VAT-registered
any document required of him by the Bureau of Internal Revenue; conditions has been satisfied: persons shall be subject to zero percent
(b) Where the facts subsequently gathered by the Bureau of Internal Revenue are (0%) rate:
materially different from the facts on which the ruling is based; or (i) Value-added tax collection as a
(c) Where the taxpayer acted in bad faith. percentage of Gross Domestic “(a) Export Sales.— The term
Product (GDP) of the previous year ‘export sales’ means:
exceeds two and four-fifth percent
B. Business Taxes (2 4/5%); or “(1) The sale and actual
a. Value Added Tax (VAT) shipment of goods from
(ii) National Government deficit as a the Philippines to a
i. Sec. 105-115, NIRC as amended by RA 8424 & RA 9238, February 5, 2004 percentage of GDP of the previous foreign country,
and RA 9337 effective July 1, 2005 year exceeds one and one-half irrespective of any
NIRC TRAIN LAW percent (1 1/2%). [45] shipping arrangement
SEC. 105. Persons Liable. - Any person who, in the course of trade or business, sells that may be agreed upon
barters, exchanges, leases goods or properties, renders services, and any person who (1) "Goods or Properties." The term which may influence or
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 to 108 "goods" or "properties" shall mean determine the transfer of
of this Code. all tangible and intangible objects ownership of the goods
which are capable of pecuniary so exported and paid for
The value-added tax is an indirect tax and the amount of tax may be shifted or passed on estimation and shall include: in acceptable foreign
to the buyer, transferee or lessee of the goods, properties or services. This rule shall currency or its equivalent
likewise apply to existing contracts of sale or lease of goods, properties or services at the (a) Real properties held in goods or services, and
time of the effectivity of Republic Act No. 7716. primarily for sale to accounted for in
customers or held for lease accordance with the rules
The phrase "in the course of trade or business" means the regular conduct or pursuit of a in the ordinary course of and regulations of the
commercial or an economic activity, including transactions incidental thereto, by any person trade or business; Bangko Sentral ng
regardless of whether or not the person engaged therein is a non-stock, nonprofit private Pilipinas (BSP);
organization (irrespective of the disposition of its net income and whether or not it sells (b) The right or the
exclusively to members or their guests), or government entity. privilege to use patent, “(2) Sale and delivery of
copyright, design or model, goods to:
The rule of regularity, to the contrary notwithstanding, services as defined in this Code plan, secret formula or
rendered in the Philippines by nonresident foreign persons shall be considered as being process, goodwill, “(i) Registered

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 21
 trademark, trade brand or enterprises influence or sales exceed seventy
other like property or right; within a determine the percent (70%) of total
separate transfer of annual production;
(c) The right or the customs ownership of the
privilege to use in the territory as goods so exported “(5) Those considered
Philippines of any provided under and paid for in export sales under
industrial, commercial or special laws; acceptable foreign Executive Order No. 226,
scientific equipment; and currency or its otherwise known as the
equivalent in Omnibus Investment
(d) The right or the “(ii) Registered goods or services, Code of 1987, and other
privilege to use motion enterprises and accounted for special laws; and
picture films, tapes and within tourism in accordance
discs; and enterprise zones with the rules and “(6) The sale of goods,
as declared by regulations of the supplies, equipment and
(e) Radio, television, the Tourism Bangko Sentral ng fuel to persons engaged
satellite transmission and Infrastructure Pilipinas (BSP); in international shipping
cable television time. and Enterprise or international air
Zone Authority (2) Sale of raw transport operations:
The term "gross selling price" (TIEZA) subject materials or Provided, That the goods,
means the total amount of money to the provisions packaging supplies, equipment and
or its equivalent which the under Republic materials to a fuel shall be used for
purchaser pays or is obligated to Act No. 9593 or nonresident buyer international shipping or
pay to the seller in consideration of The Tourism Act for delivery to a air transport operations.
the sale, barter or exchange of the of 2009. resident local
goods or properties, excluding the export-oriented “Provided, That subparagraphs
value-added tax. The excise tax, if “(3) Sale of raw materials enterprise to be (3), (4), and (5) hereof shall be
any, on such goods or properties or packaging materials to used in subject to the twelve percent
shall form part of the gross selling a nonresident buyer for manufacturing, (12%) value-added tax and no
price. delivery to a resident processing, longer be considered export sales
local export-oriented packing or subject to zero percent (0%) VAT
(2) The following sales by VAT- enterprise to be used in repacking in the rate upon satisfaction of the
registered persons shall be subject manufacturing, Philippines of the following conditions:
to zero percent (0%) rate: processing, packing or said buyer's
repacking in the goods and paid “(1) The successful
(a) Export Sales. - The Philippines of the said for in acceptable establishment and
term "export sales" means: buyer’s goods and paid foreign currency implementation of an
for in acceptable foreign and accounted for enhanced VAT refund
(1) The sale and currency and accounted in accordance system that grants
actual shipment for in accordance with with the rules and refunds of creditable
of goods from the the rules and regulations regulations of the input tax within ninety
Philippines to a of the Bangko Sentral ng Bangko Sentral ng (90) days from the filing
foreign country, Pilipinas (BSP); Pilipinas (BSP); of the VAT refund
irrespective of any application with the
shipping “(4) Sale of raw materials (3) Sale of raw Bureau: Provided, That,
arrangement that or packaging materials to materials or to determine the
may be agreed export-oriented packaging effectivity of item no. 1,
upon which may enterprise whose export materials to all applications filed from

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 export-oriented January 1, 2018 shall be resident in the Philippines, laws or international agreements
enterprise whose processed and must be paid for in acceptable to which the Philippines is a
export sales decided within ninety foreign currency and signatory effectively subjects such
exceed seventy (90) days from the filing accounted for in sales to zero rate.
percent (70%) of of the VAT refund accordance with the rules
total annual application; and and regulations of the “x x x.”
production; Bangko Sentral ng Pilipinas
“(2) All pending VAT (BSP).
(4) Sale of gold to refund claims as of
the Bangko December 31, 2017 shall (c) Sales to persons or
Sentral ng be fully paid in cash by entities whose exemption
Pilipinas (BSP); December 31, 2019. under special laws or
and international agreements
“Provided, That the Department of to which the Philippines is
(5) Those Finance shall establish a VAT a signatory effectively
considered export refund center in the Bureau of subjects such sales to zero
sales under Internal Revenue (BIR) and in the rate.
Executive Order Bureau of Customs (BOC) that will
NO. 226, handle the processing and (B) Transactions Deemed Sale. - The
otherwise known granting of cash refunds of following transactions shall be deemed sale:
as the "Omnibus creditable input tax.
Investment Code (1) Transfer, use or consumption
of 1987", and “An amount equivalent to five not in the course of business of
other special percent (5%) of the total VAT goods or properties originally
laws; and collection of the BIR and the BOC intended for sale or for use in the
from the immediately preceding course of business;
(6) The sale of year shall be automatically
goods, supplies, appropriated annually and shall be (2) Distribution or transfer to:
equipment and treated as a special account in the
fuel to persons General Fund or as trust receipts (a) Shareholders or
engaged in for the purpose of funding claims investors as share in the
international for VAT refund: Provided, That profits of the VAT-
shipping or any unused fund, at the end of registered persons; or
international air the year shall revert to the
transport General Fund. (b) Creditors in payment of
operations. [46] debt;
“Provided, further, That the BIR
(b) Foreign Currency and the BOC shall be required to (3) Consignment of goods if actual
Denominated Sale. - The submit to the Congressional sale is not made within sixty (60)
phrase "foreign currency Oversight Committee on the days following the date such goods
denominated sale" means Comprehensive Tax Reform were consigned; and
sale to a nonresident of Program (COCCTRP) a quarterly
goods, except those report of all pending claims for (4) Retirement from or cessation of
mentioned in Sections 149 refund and any unused fund. business, with respect to inventories
and 150, assembled or of taxable goods existing as of such
manufactured in the “(b) Sales to persons or entities retirement or cessation.
Philippines for delivery to a whose exemption under special

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(C) Changes in or Cessation of Status of a
VAT-registered Person. - The tax imposed in
Subsection (A) of this Section shall also apply
to goods disposed of or existing as of a
certain date if under circumstances to be
prescribed in rules and regulations to be
promulgated by the Secretary of Finance,
upon recommendation of the Commissioner,
the status of a person as a VAT-registered
person changes or is terminated.
(D) Sales Returns, Allowances and Sales
Discounts. - The value of goods or properties
sold and subsequently returned or for which
allowances were granted by a VAT-registered
person may be deducted from the gross
sales or receipts for the quarter in which a
refund is made or a credit memorandum or
refund is issued. Sales discount granted and
indicated in the invoice at the time of sale
and the grant of which does not depend
upon the happening of a future event may
be excluded from the gross sales within the
same quarter it was given.
(E) Authority of the Commissioner to
Determine the Appropriate Tax Base. - The
Commissioner shall, by rules and regulations
prescribed by the Secretary of Finance,
determine the appropriate tax base in cases
where a transaction is deemed a sale, barter
or exchange of goods or properties under
Subsection (B) hereof, or where the gross
selling price is unreasonably lower than the
actual market value.
SEC. 107. Value-Added Tax on Importation
of Goods. -
(A) In General. - There shall be levied,
assessed and collected on every importation
of goods a value-added tax equivalent to ten
percent (10%) [47] based on the total value
used by the Bureau of Customs in
determining tariff and customs duties plus
customs duties, excise taxes, if any, and
other charges, such tax to be paid by the
importer prior to the release of such goods
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
“Sec. 107. Value-added Tax on Importation
of Goods.—
“(A) In General.— There shall be levied,
assessed and collected on every
importation of goods a value-added tax
equivalent to twelve percent (12%) based
on the total value used by the Bureau of
Customs in determining tariff and customs
duties, plus customs duties, excise taxes, if
any, and other charges, such tax to be paid
by the importer prior to the release of such
from customs custody: Provided, That where goods from customs custody: Provided,
the customs duties are determined on the That where the customs duties are
basis of the quantity or volume of the goods, determined on the basis of the quantity or
the value-added tax shall be based on the volume of the goods, the value-added tax
landed cost plus excise taxes, if any shall be based on the landed cost plus
Provided, further, That the President, upon excise taxes, if any.
the recommendation of the Secretary of
Finance, shall, effective January 1, 2006, “(B) Transfer of Goods by Tax-exempt
raise the rate of the value-added tax to Persons.— x x x.”
twelve percent (12%), after any of the
following conditions has been satisfied:
(i) Value-added tax collection as a
percentage of Gross Domestic
Product (GDP) of the previous year
exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as
a percentage of GDP of the previous
year exceeds one and one-half
percent (1 ½ %).
(B) Transfer of Goods by Tax-exempt
Persons. - In the case of tax-free importation
of goods into the Philippines by persons,
entities or agencies exempt from tax where
such goods are subsequently sold,
transferred or exchanged in the Philippines to
non-exempt persons or entities, the
purchasers, transferees or recipients shall be
considered the importers thereof, who shall
be liable for any internal revenue tax on such
importation. The tax due on such importation
shall constitute a lien on the goods superior
to all charges or liens on the goods,
irrespective of the possessor thereof.
SEC. 108. Value-added Tax on Sale of “Sec. 108. Value-added Tax on Sale of
Services and Use or Lease of Properties. - Services and Use or Lease of Properties.—
(A) Rate and Base of Tax. - There shall be “(A) Rate and Base of Tax.— There shall be
levied, assessed and collected, a value-added levied, assessed and collected, a value-
tax equivalent to ten percent (10%) 10 of added tax equivalent to twelve percent
gross receipts derived from the sale or (12%) of gross receipts derived from the
exchange of services, including the use or sale or exchange of services, including the
lease of properties: Provided, That the use or lease of properties.
President, upon the recommendation of the
Page 24
Secretary of Finance, shall, effective January
1, 2006,raise the value-added tax to twelve
percent (12%), after any of the following
conditions has been satisfied:
(i) Value-added tax collection as a
percentage of Gross Domestic
Product (GDP) of the previous year
exceeds two and four-fifth percent
(2 4/5%); or
(ii) National government deficit as a
percentage of GDP of the previous
year exceeds one and one-half
percent (1 1/2%). [49]
The phrase "sale or exchange of services"
means the performance of all kinds of
services in the Philippines for others for a
fee, remuneration or consideration, including
those performed or rendered by construction
and service contractors; stock, real estate,
commercial, customs and immigration
brokers; lessors of property, whether
personal or real; warehousing services;
lessors or distributors of cinematographic
films; persons engaged in milling processing,
manufacturing or repacking goods for others;
proprietors, operators or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts; proprietors or operators of
restaurants, refreshment parlors, cafes and
other eating places, including clubs and
caterers; dealers in securities; lending
investors; transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes for
hire another domestic common carriers by
land relative to their transport of goods or
cargoes; common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the
Philippines to another place in the
Philippines; sales of electricity by generation
companies, transmission, and distribution
companies; services of franchise grantees of
electric utilities. [50] telephone and
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
“The phrase ‘sale or exchange of services’
means the performance of all kinds of
services in the Philippines for others for a
fee, remuneration or consideration,
including those performed or rendered by
construction and service contractors; stock,
real estate, commercial, customs and
immigration brokers; lessors of property,
whether personal or real; warehousing
services; lessors or distributors of
cinematographic films; persons engaged in
milling, processing, manufacturing or
repacking goods for others; proprietors,
operators or keepers of hotels, motels,
resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers;
dealers in securities; lending investors;
transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes for
hire and other domestic common carriers
by land relative to their transport of goods
or cargoes; common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the
Philippines to another place in the
Philippines; sales of electricity by
generation companies, transmission by any
entity, and distribution companies,
including electric cooperatives; services of
franchise grantees of electric utilities,
telephone and telegraph, radio and
television broadcasting and all other
franchise grantees except those under
Section 119 of this Code and non-life
insurance companies (except their crop
insurances), including surety, fidelity,
indemnity and bonding companies; and
similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties. The phrase ‘sale or exchange of
services’ shall likewise include:
“(1) The lease or the use of or the
telegraph, radio and television broadcasting
and all other franchise grantees except those
under section 119 of this Code, and non-life
insurance companies (except their crop
insurances), including surety, fidelity,
indemnity, and bonding companies; and
similar services regardless of whether or not
the performance thereof calls for the exercise
or use of the physical or mental faculties.
The phrase "sale or exchange of services"
shall likewise include:
(1) The lease or the use of or the
right or privilege to use any
copyright, patent, design or model,
plan secret formula or process,
goodwill, trademark, trade brand or
other like property or right;
(2) The lease of the use of, or the
right to use of any industrial,
commercial or scientific equipment;
(3) The supply of scientific,
technical, industrial or commercial
knowledge or information;
(4) The supply of any assistance
that is ancillary and subsidiary to
and is furnished as a means of
enabling the application or
enjoyment of any such property, or
right as is mentioned in
subparagraph (2) or any such
knowledge or information as is
mentioned in subparagraph (3);
(5) The supply of services by a
nonresident person or his employee
in connection with the use of
property or rights belonging to, or
the installation or operation of any
brand, machinery or other
apparatus purchased from such
nonresident person.
(6) The supply of technical advice,
right or privilege to use any
copyright, patent, design or
model, plan, secret formula or
process, goodwill, trademark,
trade brand or other like property
or right;
“(2) The lease or the use of, or
the right to use of any industrial,
commercial or scientific
equipment;
“(3) The supply of scientific,
technical industrial or commercial
knowledge or information;
“(4) The supply of any assistance
that is ancillary and subsidiary to
and is furnished as a means of
enabling the application or
enjoyment of any such property,
or right as is mentioned in
subparagraph (2) or any such
knowledge or information as is
mentioned in subparagraph (3);
“(5) The supply of services by a
nonresident person or his
employee in connection with the
use of property or rights belonging
to, or the installation or operation
of any brand, machinery or other
apparatus purchased from such
nonresident person;
“(6) The supply of technical
advice, assistance or services
rendered in connection with
technical management or
administration of any scientific
industrial or commercial
undertaking, venture, projector
scheme;
“(7) The lease of motion picture
films, -films, tapes and discs; and
Page 25
 assistance or services rendered in
connection with technical
management or administration of
any scientific, industrial or
commercial undertaking, venture,
project or scheme;
(7) The lease of motion picture
films, films, tapes and discs; and
(8) The lease or the use of or the
right to use radio, television,
satellite transmission and cable
television time.
Lease of properties shall be subject to the
tax herein imposed irrespective of the place
where the contract of lease or licensing
agreement was executed if the property is
leased or used in the Philippines.
The term "gross receipts" means the total
amount of money or its equivalent
representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding value-added tax.
(B) Transactions Subject to Zero Percent
(0%) Rate - The following services
performed in the Philippines by VAT-
registered persons shall be subject to zero
percent (0%) rate.
(1) Processing, manufacturing or
repacking goods for other persons
doing business outside the
Philippines which goods are
subsequently exported, where the
services are paid for in acceptable
foreign currency and accounted for
in accordance with the rules and
regulations of the Bangko Sentral
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
“(8) The lease or the use of or the
right to use radio, television,
satellite transmission and cable
television time.
“Lease of properties shall be subject to the
tax herein imposed irrespective of the place
where the contract of lease or licensing
agreement was executed if the property is
leased or used in the Philippines.
“The term ‘gross receipts’ means the total
amount of money or its equivalent
representing the contract price,
compensation, service fee, rental or
royalty, including the amount charged for
materials supplied with the services and
deposits and advanced payments actually
or constructively received during the
taxable quarter for the services performed
or to be performed for another person,
excluding value-added tax.
“(B) Transactions Subject to Zero Percent
(0%) Rate.— The following services
performed in the Philippines by VAT
registered persons shall be subject to zero
percent (0%) rate:
“(1) Processing, manufacturing or
repacking goods for other persons
doing business outside the
Philippines which goods are
subsequently exported, where the
services are paid for in acceptable
foreign currency and accounted
for in accordance with the rules
and regulations of the Bangko
Sentral ng Pilipinas (BSP);
“(2) Services other than those
mentioned in the preceding
paragraph, rendered to a person
engaged in business conducted
outside the Philippines or to a
nonresident person not engaged
in business who is outside the
ng Pilipinas (BSP);
(2) Services other than those
mentioned in the preceding
paragraph, rendered to a person
engaged in business conducted
outside the Philippines or to a
nonresident person not engaged in
business who is outside the
Philippines when the services are
performed, [51] the consideration
for which is paid for in acceptable
foreign currency and accounted for
in accordance with the rules and
regulations of the Bangko Sentral
ng Pilipinas (BSP)
(3) Services rendered to persons or
entities whose exemption under
special laws or international
agreements to which the Philippines
is a signatory effectively subjects
the supply of such services to zero
percent (0%) rate;
(4) Services rendered to persons
engaged in international shipping or
international air transport
operations, including leases of
property for use thereof. [52]
(5) Services performed by
subcontractors and/or contractors in
processing, converting, of
manufacturing goods for an
enterprise whose export sales
exceed seventy percent (70%) of
total annual production.
(6) Transport of passengers and
cargo by air or sea vessels from the
Philippines to a foreign country; and
(7) Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other
Philippines when the services are
performed, the consideration for
which is paid for in acceptable
foreign currency and accounted
for in accordance with the rules
and regulations of the Bangko
Sentral ng Pilipinas (BSP);
“(3) Services rendered to persons
or entities whose exemption under
special laws or international
agreements to which the
Philippines is a signatory
effectively subjects the supply of
such services to zero percent
(0%) rate;
“(4) Services rendered to persons
engaged in international shipping
or international air transport
operations, including leases of
property for use thereof: Provided,
That these services shall be
exclusive for international shipping
or air transport operations;
“(5) Services performed by
subcontractors and/or contractors
in processing, converting, or
manufacturing goods for an
enterprise whose export sales
exceed seventy percent (70%) of
total annual production;
“(6) Transport of passengers and
cargo by domestic air or sea
vessels from the Philippines to a
foreign country; and
“(7) Sale of power or fuel
generated through renewable
sources of energy such as, but not
limited to, biomass, solar, wind,
hydropower, geothermal, ocean
energy, and other emerging
energy sources using technologies
such as fuel cells and hydrogen
Page 26
emerging energy sources using technologies fuels. shall establish a VAT refund center in the
such as fuel cells and hydrogen fuels. Bureau of Internal Revenue (BIR) and in
“(8) Services rendered to: the Bureau of Customs (BOC) that will
handle the processing and granting of cash
“(i) Registered refunds of creditable input tax.
enterprises within a
separate customs “An amount equivalent to five percent (5%)
territory as provided of the total value-added tax collection of
under special law; and the BIR and the BOC from the immediately
preceding year shall be automatically
“(ii) Registered appropriated annually and shall be treated
enterprises within as a special account in the General Fund or
tourism enterprise zones as trust receipts for the purpose of funding
as declared by the TIEZA claims for VAT Refund: Provided, That any
subject to the provisions unused fund, at the end of the year shall
under Republic Act No. revert to the General Fund.
9593 or The Tourism Act
of 2009. “Provided, further, That the BIR and the
BOC shall be required to submit to the
“Provided, That subparagraphs (B)(1) and COCCTRP a quarterly report of all pending
(B)(5) hereof shall be subject to the twelve claims for refund and any unused fund.”
percent (12%) value-added tax and no SEC. 109. Exempt Transactions. - [54] “Sec. 109. Exempt Transactions.— (1)
longer be subject to zero percent (0%) VAT Subject to the provisions of Subsection (2)
rate upon satisfaction of the following (1) Subject to the provisions of Subsection hereof, the following transactions shall be
conditions: (2) hereof, the following transactions shall be exempt from the value-added tax:
exempt from the value-added tax.
“(1) The successful establishment “(A) x x x
and implementation of an (A) Sale or importation of
enhanced VAT refund system that agricultural and marine food “(B) x x x
grants refunds of creditable input products in their original state,
tax within ninety (90) days from livestock and poultry of or king “(C) x x x
the filing of the VAT refund generally used as, or yielding or
application with the Bureau: producing foods for human “(D) Importation of professional
Provided, That, to determine the consumption; and breeding stock instruments and implements, tools of trade,
effectivity of item no. 1, all and genetic materials therefor. occupation or employment, wearing
applications filed from January 1, apparel, domestic animals, and personal
2018 shall be processed and must Products classified under this and household effects belonging to persons
be decided within ninety (90) days paragraph shall be considered in coming to settle in the Philippines or
from the filing of the VAT refund their original state even if they have Filipinos or their families and descendants
application; and undergone the simple processes of who are now residents or citizens of other
preparation or preservation for the countries, such parties hereinafter referred
“(2) All pending VAT refund claims market, such as freezing, drying, to as overseas Filipinos, in quantities and of
as of December 31, 2017 shall be salting, broiling, roasting, smoking the class suitable to the profession, rank or
fully paid in cash by December 31, or stripping. Polished and/or husked position of the persons importing said
2019. rice, corn grits, raw cane sugar and items, for their own use and not for barter
molasses, ordinary salt and copra or sale, accompanying such persons, or
“Provided, That the Department of Finance shall be considered in their original arriving within a reasonable time: Provided,

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 27
 state; [55]
(B) Sale or importation of fertilizers;
seeds, seedlings and fingerlings;
fish, prawn, livestock and poultry
feeds, including ingredients,
whether locally produced or
imported, used in the manufacture
of finished feeds (except specialty
feeds for race horses, fighting
cocks, aquarium fish, zoo animals
and other animals generally
considered as pets);
(C) Importation of personal and
household effects belonging to the
residents of the Philippines
returning from abroad and
nonresident citizens coming to
resettle in the Philippines: Provided,
That such goods are exempt from
customs duties under the Tariff and
Customs Code of the Philippines;
(D) Importation of professional
instruments and implements,
wearing apparel, domestic animals,
and personal household effects
(except any vehicle, vessel, aircraft,
machinery other goods for use in
the manufacture and merchandise
of any kind in commercial quantity)
belonging to persons coming to
settle in the Philippines, for their
own use and not for sale, barter or
exchange, accompanying such
persons, or arriving within ninety
(90) days before or after their
arrival, upon the production of
evidence satisfactory to the
Commissioner, that such persons
are actually coming to settle in the
Philippines and that the change of
residence is bona fide;
(E) Services subject to percentage
tax under Title V;
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
That the Bureau of Customs may, upon the
production of satisfactory evidence that
such persons are actually coming to settle
in the Philippines and that the goods are
brought from their former place of abode,
exempt such goods from payment of duties
and taxes: Provided, further, That vehicles,
vessels, aircrafts, machineries and other
similar goods for use in manufacture, shall
not fall within this classification and shall
therefore be subject to duties, taxes and
other charges;
“(E) Services subject to percentage tax
under Title V;
“(F) Services by agricultural contract
growers and milling for others of palay into
rice, corn into grits and sugar cane into raw
sugar;
“(G) Medical, dental, hospital and
veterinary services except those rendered
by professionals;
“(H) Educational services rendered by
private educational institutions, duly
accredited by the Department of Education
(DepEd), the Commission on Higher
Education (CHED), the Technical Education
and Skills Development Authority (TESDA)
and those rendered by government
educational institutions;
“(I) Services rendered by individuals
pursuant to an employer-employee
relationship;
“(J) Services rendered by regional or area
headquarters established in the Philippines
by multinational corporations which act as
supervisory, communications and
coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines;
(F) Services by agricultural contract
growers and milling for others of
palay into rice, corn into grits and
sugar cane into raw sugar;
(G) Medical, dental, hospital and
veterinary services except those
rendered by professionals. [56]
(H) Educational services rendered
by private educational institutions,
duly accredited by the Department
of Education(DepED), the
Commission on Higher Education
(CHED), the Technical Education
and Skills Development Authority
(TESDA)and those rendered by
government educational institutions;
[57]
(I) Services rendered by individuals
pursuant to an employer-employee
relationship;
(J) Services rendered by regional or
area headquarters established in the
Philippines by multinational
corporations which act as
supervisory, communications and
coordinating centers for their
affiliates, subsidiaries or branches in
the Asia-Pacific Region and do not
earn or derive income from the
Philippines;
(K) Transactions which are exempt
under international agreements to
which the Philippines is a signatory
or under special laws, except those
under Presidential Decree No. 529;
[58]
(L) Sales by agricultural
cooperatives duly registered with
the Cooperative Development
Authority to their members as well
“(K) Transactions which are exempt under
international agreements to which the
Philippines is a signatory or under special
laws, except those under Presidential
Decree No. 529;
“(L) Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority to their members as
well as sale of their produce, whether in its
original state or processed form, to non-
members; their importation of direct farm
inputs, machineries and equipment,
including spare parts thereof, to be used
directly and exclusively in the production
and/or processing of their produce;
“(M) Gross receipts from lending activities
by credit or multi-purpose cooperatives
duly registered with the Cooperative
Development Authority;
“(N) Sales by non-agricultural, non-electric
and non-credit cooperatives duly registered
with the Cooperative Development
Authority: Provided, That the share capital
contribution of each member does not
exceed Fifteen thousand pesos (₱15,000)
and regardless of the aggregate capital and
net surplus ratably distributed among the
members;
“(O) Export sales by persons who are not
VAT-registered;
“(P) Sale of real properties not primarily
held for sale to customers or held for lease
in the ordinary course of trade or business
or real property utilized for low-cost and
socialized housing as defined by Republic
Act No. 7279, otherwise known as the
Urban Development and Housing Act of
1992, and other related laws, residential lot
valued at One million five hundred
thousand pesos (₱1,500,000) and below,
house and lot, and other residential
dwellings valued at Two million five
Page 28
 as sale of their produce, whether in
its original state or processed form,
to non-members; their importation
of direct farm inputs, machineries
and equipment, including spare
parts thereof, to be used directly
and exclusively in the production
and/or processing of their produce;
(M) Gross receipts from lending
activities by credit or multi-purpose
cooperatives duly registered with
the Cooperative Development
Authority;
(N) Sales by non-agricultural, non-
electric and non-credit cooperatives
duly registered with the Cooperative
Development Authority: Provided,
That the share capital contribution
of each member does not exceed
Fifteen thousand pesos (P15, 000)
and regardless of the aggregate
capital and net surplus ratably
distributed among the members;
(O) Export sales by persons who are
not VAT-registered;
(P) Sale of real properties not
primarily held for sale to customers
or held for lease in the ordinary
course of trade or business or real
property utilized for low-cost and
socialized housing as defined by
Republic Act No. 7279, otherwise
known as the Urban Development
and Housing Act of 1992, and other
related laws, residential lot valued
at One million pesos (P1,500,000)
[59] and below, house and lot, and
other residential dwellings valued at
Two million five hundred thousand
pesos (P2, 500, 000) [60] and
below: Provided, That not later than
January 31, 2009 and every three
(3) years thereafter, the amount
hundred thousand pesos (₱2,500,000) and
below: Provided, That beginning January 1,
2021, the VAT exemption shall only apply
to sale of real properties not primarily held
for sale to customers or held for lease in
the ordinary course of trade or business,
sale of real property utilized for socialized
housing as defined by Republic Act No.
7279, sale of house and lot, and other
residential dwellings with selling price of
not more than Two million pesos
(₱2,000,000): Provided, further, That every
three (3) years thereafter, the amount
herein stated shall be adjusted to its
present value using the Consumer Price
Index, as published by the Philippine
Statistics Authority (PSA);
“(Q) Lease of a residential unit with a
monthly rental not exceeding Fifteen
thousand pesos (₱15,000);
“(R) Sale, importation, printing or
publication of books and any newspaper,
magazine, review or bulletin which appears
at regular intervals with fixed prices or
subscription and sale and which is not
devoted principally to the publication of
paid advertisements;
“(S) Transport of passengers by
international carriers;
“(T) Sale, importation or lease of passenger
or cargo vessels and aircraft, including
engine, equipment and spare parts thereof
for domestic or international transport
operations;
“(U) Importation of fuel, goods and
supplies by persons engaged in
international shipping or air transport
operations: Provided, That the fuel, goods,
and supplies shall be used for international
shipping or air transport operations;
“(V) Services of bank, non-bank financial
herein stated shall be adjusted to
their present values using the
Consumer Price Index, as published
by the National Statistics Office
(NSO); [61]
(Q) Lease of a residential unit with a
monthly rental not exceeding Ten
thousand pesos (P10, 000):
[62]Provided, That not later than
January 31, 2009 and every three
(3) years thereafter, the amount
herein stated shall be adjusted to its
present value using the Consumer
Price Index as published by the
National Statistics Office (NSO);
[63]
(R) Sale, importation, printing or
publication of books and any
newspaper, magazine review or
bulletin which appears at regular
intervals with fixed prices for
subscription and sale and which is
not devoted principally to the
publication of paid advertisements;
(S) Transport of passengers by
international carriers;
(T) Sale, importation or lease of
passenger or cargo vessels and
aircraft, including engine,
equipment and spare parts thereof
for domestic or international
transport operations;
(U) Importation of fuel, goods and
supplies by persons engaged in
international shipping or air
transport operations;
(V) Services of bank, non-bank
financial intermediaries performing
quasi-banking functions, and other
non-bank financial intermediaries;
an
intermediaries performing quasi-banking
functions, and other non-bank financial
intermediaries;
“(W) Sale or lease of goods and services to
senior citizens and persons with disability,
as provided under Republic Act Nos. 9994
(Expanded Senior Citizens Act of 2010) and
10754 (An Act Expanding the Benefits and
Privileges of Persons With Disability),
respectively;
“(X) Transfer of property pursuant to
Section 40(C)(2) of the NIRC, as amended;
“(Y) Association dues, membership fees,
and other assessments and charges
collected by homeowners associations and
condominium corporations;
“(Z) Sale of gold to the Bangko Sentral ng
Pilipinas (BSP);
“(AA) Sale of drugs and medicines
prescribed for diabetes, high cholesterol,
and hypertension beginning January 1,
2019; and
“(BB) Sale or lease of goods or properties
or the performance of services other than
the transactions mentioned in the
preceding paragraphs, the gross annual
sales and/or receipts do not exceed the
amount of Three million pesos
(₱3,000,000).

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 29

(W) Sale or lease of goods or
properties or the performance of
services other than the transactions
mentioned in the preceding
paragraphs, the gross annual sales
and/or receipts do not exceed the
amount of One million five hundred
thousand pesos (P1,500,000):
Provided, That not later than
January 31, 2009 and every three
(3) years thereafter, the amount
herein stated shall be adjusted to its
present With footnote in the book
value using the Consumer Price
Index, as published by. the National
Statistics-Office (NSO);
(2) A VAT-registered person may elect that
Subsection (1) not apply to its sale of goods
or properties or services: Provided, that an
election made under this subsection shall be
irrevocable for a period of three (3) years
from the quarter the election was made. [64]
SEC. 110. Tax Credits. -
A. Creditable Input Tax. -
(1) Any input tax evidenced by a
VAT invoice or official receipt issued
in accordance with Section 113
hereof on the following transactions
shall be creditable against the
output tax:
(a) Purchase
importation of goods:
(i) For sale; or
(ii) For
conversion into or
intended to form
part of a finished
product for sale
including
packaging
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
materials; or the capital good is less than five (5) years,
as used for depreciation purposes, then the
(iii) For use as input VAT shall be spread over such a
supplies in the shorter period: Provided, further, That the
course of amortization of the input VAT shall only be
business; or allowed until December 31, 2021 after
which taxpayers with unutilized input VAT
(iv) For use as on capital goods purchased or imported
materials supplied shall be allowed to apply the same as
in the sale of scheduled until fully utilized: Provided,
service; or finally, That in the case of purchase of
services, lease or use of properties, the
(v) For use in input tax shall be creditable to the
trade or business purchaser, lessee or licensee upon payment
for which of the compensation, rental, royalty or fee.
deduction for
depreciation or “x x x.”
amortization is
allowed under this
Code. [65]
(b) Purchase of services
on which a value-added
tax has been actually paid.
Sec. 110. Tax Credits.—
(2) The input tax on domestic
“(A) Creditable Input Tax.— purchase or importation of goods
or properties by a VAT-registered
“(1) x x x person [66] shall be creditable:
“(2) x x x (a) To the purchaser upon
consummation of sale and
“(a) x x x on importation of goods or
properties; and
“(b) x x x
or (b) To the importer upon
“Provided, That the input tax on goods payment of the value-
purchased or imported in a calendar month added tax prior to the
for use in trade or business for which release of the goods from
deduction for depreciation is allowed under the custody of the Bureau
this Code shall be spread evenly over the of Customs.
month of acquisition and the fifty-nine (59)
succeeding months if the aggregate Provided, that the input tax on goods
acquisition cost for such goods, excluding purchased or imported in a calendar month
the VAT component thereof, exceeds One for use in trade or business for which
million pesos (₱1,000,000): Provided, deduction for depreciation is allowed under
however, That if the estimated useful life of this Code shall be spread evenly over the a
Page 30
month of acquisition and the fifty-nine (59) (B) Excess Output or Input Tax. [69] - If at
succeeding months if the aggregate the end of any taxable quarter the output tax
acquisition cost for such goods, excluding the exceeds the input tax, the excess shall be
VAT component thereof, exceeds One million paid by the Vat-registered person. If the
pesos (P 1, 000, 000): Provided, however, input tax exceeds the output tax, the excess
That if the estimated useful life of the capital shall be carried over to the succeeding
goodis less than five (5) years, as used for quarter or quarters. Provided, however, That
depreciation purposes, then the input VAT any input tax attributable to zero-rated sales
shall be spread over such a shorter period: by a VAT-registered person may at his option
[67]Provided, finally, that in the case of be refunded or credited against other
purchase of services, lease or use of internal revenue taxes, subject to the
properties, the input tax shall be creditable provisions of Section 112.
to the purchaser, lessee or license upon
payment of the compensation, rental, royalty (C) Determination of Creditable Input Tax. -
or free. The sum of the excess input tax carried over
from the preceding month or quarter and the
(3) A VAT-registered person who is input tax creditable to a VAT-registered
also engaged in transactions not person during the taxable month or quarter
subject to the value-added tax shall shall be reduced by the amount of claim for
be allowed tax credit as follows: refund or tax credit for value-added tax and
other adjustments, such as purchase returns
(a) Total input tax which or allowances and input tax attributable to
can be directly attributed exempt sale.
to transactions subject to
value-added tax; and [68] The claim for tax credit referred to in the
foregoing paragraph shall include not only
(b) A ratable portion of any those filed with the Bureau of Internal
input tax which cannot be Revenue but also those filed with other
directly attributed to either government agencies, such as the Board of
activity. Investments and the Bureau of Customs.

The term "input tax" means the value-added SEC. 111. Transitional/Presumptive Input Tax Credits. -
tax due from or paid by a VAT-registered
person in the course of his trade or business (A) Transitional Input Tax Credits. - A person who becomes liable to value-added tax or any
on importation of goods or local purchase of person who elects to be a VAT-registered person shall, subject to the filing of an inventory
goods or services, including lease or use of according to rules and regulations prescribed by the Secretary of finance, upon
property, from a VAT-registered person. It recommendation of the Commissioner, be allowed input tax on his beginning inventory of
shall also include the transitional input tax goods, materials and supplies equivalent to two percent (2%) [70] of the value of such
determined in accordance with Section 111 inventory or the actual value-added tax paid on such goods, materials and supplies,
of this Code. whichever is higher, which shall be creditable against the output tax.

The term "output tax" means the value- (B) Presumptive Input Tax Credits. - Persons or firms engaged in the processing of
added tax due on the sale or lease of taxable sardines, mackerel and milk, and in manufacturing refined sugar and cooking oil, shall be
goods or properties or services by any allowed a presumptive input tax, creditable against the output tax, equivalent to four
person registered or required to register percent (4%) [71] of the gross value in money of their purchases of primary agricultural
under Section 236 of this Code. products which are used as inputs to their production.

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 31
As used in this Subsection, the term 'processing' shall mean pasteurization, canning and which may be used in payment of his other
activities which through physical or chemical process alter the exterior texture or form or internal revenue taxes.
inner substance of a product in such manner as to prepare it for special use to which it
could not have been put in its original form or condition. (C) Period within which Refund or Tax Credit
SEC. 112. Refunds or Tax Credits of Input “Sec. 112. Refunds or Tax Credits of Input of Input Taxes shall be Made. - In proper
Tax. - Tax.— cases, the Commissioner shall grant a refund
or issue the tax credit certificate for
(A) Zero-rated or Effectively Zero-rated “(A) x x x creditable input taxes within one hundred
Sales. - Any VAT-registered person, whose twenty (120) days from the date of
sales are zero-rated or effectively zero-rated “(B) x x x submission of complete documents in
may, within two (2) years after the close of support of the application filed in accordance
the taxable quarter when the sales were “(C) Period within which Refund of Input with Subsections (A) hereof. [73]
made, apply for the issuance of a tax credit Taxes shall be Made.— In proper cases, the
certificate or refund of creditable input tax Commissioner shall grant a refund for In case of full or partial denial of the claim
due or paid attributable to such sales, except creditable input taxes within ninety (90) for tax refund or tax credit, or the failure on
transitional input tax, to the extent that such days from the date of submission of the the part of the Commissioner to act on the
input tax has not been applied against output official receipts or invoices and other application within the period prescribed
tax: Provided, however, That in the case of documents in support of the application above, the taxpayer affected may, within
zero-rated sales under Section filed in accordance with Subsections (A) thirty (30) days from the receipt of the
106(A)(2)(a)(1), (2) and (b) and Section 108 and (B) hereof: Provided, That should the decision denying the claim or after the
(B)(1) and (2), the acceptable foreign Commissioner find that the grant of refund expiration of the one hundred twenty day-
currency exchange proceeds thereof had is not proper, the Commissioner must state period, appeal the decision or the unacted
been duly accounted for in accordance with in writing the legal and factual basis for the claim with the Court of Tax Appeals.
the rules and regulations of the Bangko denial.
Sentral ng Pilipinas (BSP): Provided, further, (D) Manner of Giving Refund. - Refunds shall
That where the taxpayer is engaged in zero- “In case of full or partial denial of the claim be made upon warrants drawn by the
rated or effectively zero-rated sale and also for tax refund, the taxpayer affected may, Commissioner or by his duly authorized
in taxable or exempt sale of goods of within thirty (30) days from the receipt of representative without the necessity of being
properties or services, and the amount of the decision denying the claim, appeal the countersigned by the Chairman, Commission
creditable input tax due or paid cannot be decision with the Court of Tax Appeals: on audit, the provisions of the Administrative
directly and entirely attributed to any one of Provided, however, That failure on the part Code of 1987 to the contrary
the transactions, it shall be allocated of any official, agent, or employee of the notwithstanding: Provided, That refunds
proportionately on the basis of the volume of BIR to act on the application within the under this paragraph shall be subject to post
sales. Provided, finally, That for a person ninety (90)-day period shall be punishable audit by the Commission on Audit.
making sales that are zero-rated under under Section 269 of this Code. SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. -
Section 108(B) (6), the input taxes shall be
allocated ratably between his zero-rated and “x x x.“ (A) Invoicing Requirements. - A VAT-registered person shall issue:
non-zero-rated sales. [72]
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
(B) Cancellation of VAT Registration. - A
person whose registration has been cancelled (2) A VAT official receipt for every lease of goods or properties, and for every
due to retirement from or cessation of sale, barter or exchange of services. [74]
business, or due to changes in or cessation
of status under Section 106(C) of this Code (B) Information Contained in the VAT Invoice or VAT Official Receipt. - The following
may, within two (2) years from the date of information shall be indicated in the VAT invoice or VAT official receipt:
cancellation, apply for the issuance of a tax
credit certificate for any unused input tax (1) A statement that the seller is a VAT-registered person, followed by his

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 Taxpayer's Identification Number (TIN); and any input tax credit; and

(2) The total amount which the purchaser pays or is obligated to pay to the seller
with the indication that such amount includes the value-added tax. Provided, That:
(a) The amount of the tax shall be known as a separate item in the
invoice or receipt;
(ii) A 50% surcharge under Section 248(B) of this Code; [76]
(b) The VAT shall, if the other requisite information required under
Subsection (B) hereof is shown on the invoice or receipt, be recognized
as an input tax credit to the purchaser under Section 110 of this Code.

(b) If the sale is exempt from value-added tax, the term "VAT-exempt (2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a
sale: shall be written or printed prominently on the invoice or receipt; VAT-exempt transaction, but fails to display prominently on the invoice or receipt
the term 'VAT exempt sale', the issuer shall be liable to account for the tax
(c) If the sale is subject to zero percent (0%) value-added tax, the term imposed in section 106 or 108 as if Section 109 did not apply. [77]
"zero-rated sale" shall be written or printed prominently on the invoice or
receipt. (E) Transitional Period. - Notwithstanding Subsection (B) hereof, taxpayers may continue to
issue VAT invoices and VAT official receipt for the period July 1, 2005 to December 31,
(d) If the sale involved goods, properties or services some of which are 2005 in accordance with Bureau of Internal Revenue administrative practices that existed as
subject to and some of which are VAT zero-rated or Vat exempt, the of December 31, 2004.
invoice or receipt shall clearly indicate the break-down of the sale price SEC. 114. Return and Payment of Value- “Sec. 114. Return and Payment of Value-
between its taxable, exempt and zero-rated components, and the Added Tax. - added Tax.—
calculation of the value-added tax on each portion of the sale shall be
known on the invoice or receipt: Provided, That the seller may issue (A) In General. - Every person liable to pay “(A) In General.— Every person liable to
separate invoices or receipts for the taxable, exempt, and zero-rated the value-added tax imposed under this Title pay the value-added tax imposed under
components of the sale. shall file a quarterly return of the amount of this Title shall file a quarterly return of the
his gross sales or receipts within twenty-five amount of his gross sales or receipts within
(3) The date of transaction, quantity, unit cost and description of the goods or (25) days following the close of each taxable twenty-five (25) days following the close of
properties or nature of the service; and quarter prescribed for each taxpayer: each taxable quarter prescribed for each
Provided, however, That VAT-registered taxpayer: Provided, however, That VAT-
(4) In the case of sales in the amount of One thousand pesos (P1,000) or more persons shall pay the value-added tax on a registered persons shall pay the value-
where the sale or transfer is made to a VAT-registered person, the name, business monthly basis. added tax on a monthly basis: Provided,
style, if any, address and Taxpayer Identification Number (TIN) of the purchaser, finally, That beginning January 1, 2023, the
customer or client. [75] Any person, whose registration has been filing and payment required under this
cancelled in accordance with Section 236, Subsection shall be done within twenty-five
(C) Accounting Requirements. - Notwithstanding the provisions of Section 233, all persons shall file a return and pay the tax due (25) days following the close of each
subject to the value-added tax under Sections 106 and 108 shall, in addition to the regular thereon within twenty-five (25) days from taxable quarter.
accounting records required, maintain a subsidiary sales journal and subsidiary purchase the date of cancellation of registration:
journal on which the daily sales and purchases are recorded. The subsidiary journals shall Provided, That only one consolidated return “x x x
contain such information as may be required by the Secretary of Finance. shall be filed by the taxpayer for his principal
place of business or head office and all “(B) x x x
(D) Consequence of Issuing Erroneous VAT Invoice or VAT Official Receipt. - branches.
“(C) Withholding of Value-added Tax.—
(1) If a person who is not a VAT-registered persons issues an invoice or receipt (B) Where to File the Return and Pay the The Government or any of its political
showing his Taxpayer Identification Number (TIN), followed by the word "VAT"; Tax. - Except as the Commissioner otherwise subdivisions, instrumentalities or agencies,
permits, the return shall be filed with and the including government-owned or -controlled
(a) The issuer shall, in addition to any liability to other percentage taxes, tax paid to an authorized agent bank, corporations (GOCCs) shall, before making
be liable to: Revenue Collection Officer or duly authorized payment on account of each purchase of
city or municipal Treasurer in the Philippines goods and services which are subject to the
(i) The tax imposed in Section 106 or 108 without the benefit of located within the revenue district where the value-added tax imposed in Sections 106

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taxpayer is registered or required to register.
(C) Withholding of Value-added Tax. - The
Government or any of its political
subdivisions, instrumentalities or agencies,
including government-owned or -controlled
corporations (GOCCs) shall, before making
payment on account of each purchase of
goods and services which are f are subject to
the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold
the value-added tax imposed in Sections 106
and 108 of this Code, deduct and withhold a
final value-added tax at the rate of five
percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use
of properties or property rights to
nonresident owners shall be subject to ten
percent (10%) [78] withholding tax at the
time of payment. For purposes of this
Section, the payor or person in control of the
payment shall be considered as the
withholding agent. [79]
The value-added tax withheld under this
Section shall be remitted within ten (10) days
following the end of the month the
withholding was made
SEC. 115. Power of the Commissioner to Suspend the Business Operations of a Taxpayer. -
The Commissioner or his authorized representative is hereby empowered to suspend the
business operations and temporarily close the business establishment of any person for any
of the following violations:
(a) In the case of a VAT-registered Person. -
and 108 of this Code, deduct and withhold
the value-added tax imposed in Sections
106 and 108 of this Code, deduct and
withhold a final value-added tax at the rate
of five percent (5%) of the gross payment
thereof: Provided, That beginning January
1, 2021, the VAT witholding system under ii. Revenue Regulation 16-2005 (November 1, 2005)
this Subsection shall shift from final to a
creditable system: Provided, further, That
the payment for lease or use of properties
or property rights to nonresident owners iii. Revenue Regulation No. 4-2007 (February 7, 2007)
shall be subject to twelve percent (12%)
withholding tax at the time of payment:
Provided, finally, That payments for
purchases of goods and services arising iv. VAT Amendments by the TRAIN law (refer to table above)
from projects funded by Official 1. Persons Liable (SAME)
Development Assistance (ODA) as defined 2. Meaning of In the Course of Trade or Business (SAME)
under Republic Act No. 8182, otherwise 3. Vatable on Sale of Goods and Properties/ Services and Use or Lease
known as the ‘Official Development of Properties (Sec. 106, TRAIN)
Assistance Act of 1996’, as amended, shall 4. Zero-Rated Sales of Goods/Services (Sec. 106,2, TRAIN)
not be subject to the final withholding tax 5. Effectively Zero-rated Sale of Goods and Properties/Services (Sec.
system as imposed in this Subsection. For 112, TRAIN)
purposes of this Section, the payor or 6. Transactions Deemed Sale (SAME)
person in control of the payment shall be 7. VAT on Importation of Goods (Sec. 107, TRAIN)
considered as the withholding agent. 8. VAT-Exempt Transactions (Sec. 109, TRAIN)
9. Claim for Input Tax on Depreciable Goods (Sec. 110, TRAIN)
10. Transitional Input Tax Credits (SAME)
11. Presumptive Input Tax Credits (SAME)
12. Claims for Refund/Tax Credit
13. Invoicing Requirements (SAME)
G.R. No. 125355. March 30, 2000.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. COURT OF APPEALS and
COMMONWEALTH MANAGEMENT AND SERVICES CORPORATION, respondents.

(1) Failure to issue receipts or invoices; Short Summary:

(2) Failure to file a value-added tax return as required under Section 114; or
(3) Understatement of taxable sales or receipts by thirty percent (30%) or more of
his correct taxable sales or receipts for the taxable quarter.
COMASERCO performs collection, consultative and other technical services, including
functioning as an internal auditor of Philamlife and its other affiliates. It was assessed by
the BIR of deficiency in VAT for taxable year 1988. COMESERCO contested such and
claimed that it was not engaged in the business of providing services to Philamlife and its
affiliates.

(b) Failure of any Person to Register as Required under Section 236.
The temporary closure of the establishment shall be for the duration of not less than five
(5) days and shall be lifted only upon compliance with whatever requirements prescribed by
the Commissioner in the closure order.
Facts:
Commonwealth Management and Services Corporation (COMASERCO, for brevity), is a
corporation duly organized and existing under the laws of the Philippines. It is an affiliate of
Philippine American Life Insurance Co. (Philamlife), organized by the latter to perform

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collection, consultative and other technical services, including functioning as an internal
auditor, of Philamlife and its other affiliates.
On January 24, 1992, the Bureau of Internal Revenue (BIR) issued an assessment to
private respondent COMASERCO for deficiency value-added tax (VAT) amounting to
P351,851.01, for taxable year 1988.
On September 29, 1992, COMASERCO filed with the Court of Tax Appeals a petition for
review contesting the Commissioner’s assessment. COMASERCO asserted that the services
it rendered to Philamlife and its affiliates, relating to collections, consultative and other
technical assistance, including functioning as an internal auditor, were on a “no-profit,
reimbursement-of-cost-only” basis. It averred that it was not engaged in the business of
providing services to Philamlife and its affiliates. COMASERCO was established to ensure
operational orderliness and administrative efficiency of Philamlife and its affiliates, and not
in the sale of services. COMASERCO stressed that it was not profit-motivated, thus not
engaged in business. In fact, it did not generate profit but suffered a net loss in taxable
year 1988. COMASERCO averred that since, it was not engaged in business, it was not
liable to pay VAT.
Issue:
Whether COMASERCO was engaged in the sale of services, and thus liable to pay VAT
Held:
Yes. Section 99 of the National Internal Revenue Code of 1986, as amended by Executive
Order (E.O.) No. 273 in 1988, provides that:
“Section 99. Persons liable.—Any person who, in the course of trade or business, sells,
barters or exchanges goods, renders services, or engages in similar transactions and any
person who imports goods shall be subject to the value-added tax (VAT) imposed in
Sections 100 to 102 of this Code.”
Republic Act No. 7716, the Expanded VAT Law (EVAT), amending among other sections,
Section 99 of the Tax Code provides that:
“SEC. 105. Persons Liable.—Any person who, in the course of trade or business, sells,
barters, exchanges, leases goods or properties, renders services, and any person who
imports goods shall be subject to the value-added tax (VAT) imposed in Sections 106 and
108 of this Code.
“The value-added tax is an indirect tax and the amount of tax may be shifted or passed on
to the buyer, transferee or lessee of the goods, properties or services. This rule shall
likewise apply to existing sale or lease of goods, properties or services at the time of the
effectivity of Republic Act No. 7716.
“The phrase “in the course of trade or business” means the regular conduct or pursuit of a
commercial or an economic activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a nonstock, nonprofit
organization (irrespective of the disposition of its net income and whether or not it sells
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
exclusively to members of their guests), or government entity.
“The rule of regularity, to the contrary notwithstanding, services as defined in this Code
rendered in the Philippines by nonresident foreign persons shall be considered as being
rendered in the course of trade or business.”
The said provision clarifies that even a non-stock, non-profit, organization or government
entity, is liable to pay VAT on the sale of goods or services. VAT is a tax on transactions,
imposed at every stage, of the distribution process on the sale, barter, exchange
of goods or property, and on the performance of services, even in the absence of
profit attributable thereto. The term “in the course of trade or business” requires the
regular conduct or pursuit of a commercial or an economic activity, regardless of whether or
not the entity is profit-oriented.
The definition of the term “in the course of trade or business” incorporated in the
present law applies to all transactions even to those made prior to its enactment. Executive
Order No. 273 stated that any person who, in the course of trade or business, sells, barters
or exchanges goods and services, was already liable to pay VAT. The present law merely
stresses that even a nonstock, nonprofit organization or goveminent entity is liable to pay
VAT for the sale of goods and services.
Section 108 of the National Internal Revenue Code of 199710 defines the phrase “sale of
services” as the “performance of all kinds of services for others for a fee, remuneration or
consideration.” It includes “the supply of technical advice, assistance or services rendered in
connection with technical management or administration of any scientific, industrial or
commercial undertaking or project.”
Hence, it is immaterial whether the primary purpose of a corporation indicates that it
receives payments for services rendered to its affiliates on a reimbursement-on-cost basis
only, without realizing profit, for purposes of determining liability for VAT on services
rendered. As long as the entity provides service for a fee, remuneration or consideration,
then the service rendered is subject to VAT.
At any rate, it is a rule that because taxes are the lifeblood of the nation, statutes that allow
exemptions are construed strictly against the grantee and liberally in favor of the
government. Otherwise stated, any exemption from the payment of a tax must be clearly
stated in the language of the law; it cannot be merely implied therefrom. In the case of
VAT, Section 109, Republic Act 8424 clearly enumerates the transactions exempted from
VAT. The services rendered by COMASERCO do not fall within the exemptions.
a. BIR Ruling April 22,1996-effectivity of VAT on other Taxpayers
Page 35
G.R. No. 152609 June 29, 2005
COMMISSIONER OF INTERNAL REVENUE, Petitioner,vs. AMERICAN EXPRESS There being no immediate action on the part of the [petitioner], [respondent’s] petition was filed on
INTERNATIONAL, INC. (PHILIPPINE BRANCH), Respondent. April 15, 1999.
DECISION
PANGANIBAN, J.: In support of its Petition for Review, the following arguments were raised by [respondent]:

Summary:
As a general rule, the value-added tax (VAT) system uses the destination principle. However, our VAT
law itself provides for a clear exception, under which the supply of service shall be zero-rated when the
following requirements are met:
A. Export sales by a VAT-registered person, the consideration for which is paid for in acceptable foreign
currency inwardly remitted to the Philippines and accounted for in accordance with existing regulations
of the Bangko Sentral ng Pilipinas, are subject to [VAT] at zero percent (0%). According to
[respondent], being a VAT-registered entity, it is subject to the VAT imposed under Title IV of the Tax
Code.

(1) the service is performed in the Philippines;
(2) the service falls under any of the categories provided in Section 102(b) of the Tax Code; and
(3) it is paid for in acceptable foreign currency that is accounted for in accordance with the regulations
of the Bangko Sentral ng Pilipinas.
Since respondent’s services meet these requirements, they are zero-rated. Petitioner’s Revenue
Regulations that alter or revoke the above requirements are ultra vires and invalid.
The CIR, in his Answer filed on May 6, 1999, claimed by way of Special and Affirmative Defenses that:
● The claim for refund is subject to investigation by the Bureau of Internal Revenue;
● Taxes paid and collected are presumed to have been made in accordance with laws and
regulations, hence, not refundable.
● AmEx must prove that it has complied with the governing rules with reference to tax recovery
or refund, which are found in Sections 204(c) and 229 of the Tax Code, as amended

FACTS:
"[Respondent] is a Philippine branch of American Express International, Inc., a corporation duly
organized and existing under and by virtue of the laws of the State of Delaware, U.S.A., with office in
the Philippines.
Amex Philippines registered itself with the Bureau of Internal Revenue (BIR), Revenue District Office
No. 47 (East Makati) as a value-added tax (VAT) taxpayer.
The [CTA], through the Presiding Judge Ernesto D. Acosta rendered a decision in favor of American
Express holding that its services are subject to zero-rate pursuant to Section 108(b) of the Tax Reform
Act of 1997 and Section 4.102-2 (b)(2) of Revenue Regulations 5-96.
The Court of Appeals affirmed the CTA’s ruling and reasoned that the CIR’s reliance on VAT Ruling
No. 040-98 was unwarranted. By requiring that respondent’s services be consumed abroad in order to
be zero-rated, petitioner went beyond the sphere of interpretation and into that of legislation.

On April 13, 1999, [respondent] filed with the BIR a letter-request for the refund of its 1997 excess
input taxes in the amount of ₱3,751,067.04, which amount was arrived at after deducting from its total
input VAT paid of ₱3,763,060.43 its applied output VAT liabilities only for the third and fourth quarters
of 1997 amounting to ₱5,193.66 and ₱6,799.43, respectively. [Respondent] cites as basis therefor,
Section 110 (B) of the 1997 Tax Code.
Section 110. Tax Credits. -
xxxxxxxxx
‘(B) Excess Output or Input Tax. - If at the end of any taxable quarter the output tax exceeds the input
tax, the excess shall be paid by the VAT-registered person. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding quarter or quarters. Any input tax attributable to the
purchase of capital goods or to zero-rated sales by a VAT-registered person may at his
option be refunded or credited against other internal revenue taxes, subject to the
provisions of Section 112.’
VAT Ruling No. 040-98 relied upon by petitioner is a less general interpretation at the
administrative level, rendered by the BIR commissioner upon request of a taxpayer to clarify
certain provisions of the VAT law. As correctly held by the CA, when this ruling states that the
service must be "destined for consumption outside of the Philippines" in order to
qualify for zero rating, it contravenes both the law and the regulations issued pursuant to it.77
This portion of VAT Ruling No. 040-98 is clearly ultra vires and invalid.
ISSUE:
Is American Express entitled to the zero percent (0%) VAT
HELD:
YES. The law is very clear. Under the last paragraph quoted above, services performed by VAT-
registered persons in the Philippines (other than the processing, manufacturing or repacking of goods
for persons doing business outside the Philippines), when paid in acceptable foreign currency and
accounted for in accordance with the rules and regulations of the BSP, are zero-rated.

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Respondent is a VAT-registered person that facilitates the collection and payment of
receivables belonging to its non-resident foreign client, for which it gets paid in acceptable
foreign currency inwardly remitted and accounted for in conformity with BSP rules and regulations.
Certainly, the service it renders in the Philippines is not in the same category as "processing,
manufacturing or repacking of goods" and should, therefore, be zero-rated. In reply to a query of
respondent, the BIR opined in VAT Ruling No. 080-89 that the income respondent earned from its
parent company’s regional operating centers (ROCs) was automatically zero-rated effective January 1,
1988.12
Service has been defined as "the art of doing something useful for a person or company for a fee"13 or
"useful labor or work rendered or to be rendered by one person to another."14 For facilitating in the
Philippines the collection and payment of receivables belonging to its Hong Kong-based foreign client,
and getting paid for it in duly accounted acceptable foreign currency, respondent renders service falling
under the category of zero rating. Pursuant to the Tax Code, a VAT of zero percent should, therefore,
be levied upon the supply of that service.
VAT Requirements for the Supply of Service
The VAT is a tax on consumption "expressed as a percentage of the value added to goods or services"
purchased by the producer or taxpayer.43 As an indirect tax on services, its main object is the
transaction itself or, more concretely, the performance of all kinds of services conducted in the course
of trade or business in the Philippines. These services must be regularly conducted in this country;
undertaken in "pursuit of a commercial or an economic activity;" for a valuable consideration; and not
exempt under the Tax Code, other special laws, or any international agreement.
Without doubt, the transactions respondent entered into with its Hong Kong-based client meet all these
requirements.
First, respondent regularly renders in the Philippines the service of facilitating the collection
and payment of receivables belonging to a foreign company that is a clearly separate and
distinct entity.
Second, such service is commercial in nature; carried on over a sustained period of time; on a
significant scale; with a reasonable degree of frequency; and not at random, fortuitous or
attenuated.
Third, for this service, respondent definitely receives consideration in foreign currency that is
accounted for in conformity with law.
Finally, respondent is not an entity exempt under any of our laws or international
agreements.
Services Subject to Zero VAT
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
As a general rule, the VAT system uses the destination principle as a basis for the
jurisdictional reach of the tax. Goods and services are taxed only in the country where they are
consumed. Thus, exports are zero-rated, while imports are taxed.
Confusion in zero rating arises because petitioner equates the performance of a particular type of
service with the consumption of its output abroad. In the present case, the facilitation of the collection
of receivables is different from the utilization or consumption of the outcome of such service. While the
facilitation is done in the Philippines, the consumption is not. Respondent renders assistance to its
foreign clients -- the ROCs outside the country -- by receiving the bills of service establishments located
here in the country and forwarding them to the ROCs abroad. The consumption contemplated by law,
contrary to petitioner’s administrative interpretation, does not imply that the service be done abroad in
order to be zero-rated.
Consumption is "the use of a thing in a way that thereby exhausts it." Applied to services, the term
means the performance or "successful completion of a contractual duty, usually resulting in the
performer’s release from any past or future liability x x x." The services rendered by respondent are
performed or successfully completed upon its sending to its foreign client the drafts and bills it has
gathered from service establishments here. Its services, having been performed in the Philippines, are
therefore also consumed in the Philippines.
Unlike goods, services cannot be physically used in or bound for a specific place when their destination
is determined. Instead, there can only be a "predetermined end of a course" when determining the
service "location or position x x x for legal purposes." Respondent’s facilitation service has
no physical existence, yet takes place upon rendition, and therefore upon consumption, in
the Philippines. Under the destination principle, as petitioner asserts, such service is subject to VAT at
the rate of 10 percent.
Respondent’s Services Exempt from the Destination Principle
However, the law clearly provides for an exception to the destination principle; that is, for a
zero percent VAT rate for services that are performed in the Philippines, "paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the [BSP]." Thus, for the
supply of service to be zero-rated as an exception, the law merely requires that
● first, the service be performed in the Philippines;
● second, the service fall under any of the categories in Section 102(b) of the Tax Code; and,
● third, it be paid in acceptable foreign currency accounted for in accordance with BSP rules
and regulations.
Indeed, these three requirements for exemption from the destination principle are met by
respondent. Its facilitation service is performed in the Philippines. It falls under the second category
found in Section 102(b) of the Tax Code, because it is a service other than "processing, manufacturing
or repacking of goods" as mentioned in the provision. Undisputed is the fact that such service meets
the statutory condition that it be paid in acceptable foreign currency duly accounted for in accordance
with BSP rules. Thus, it should be zero-rated.
Page 37
G.R. No. 153205 January 22, 2007
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
BURMEISTER AND WAIN SCANDINAVIAN CONTRACTOR MINDANAO, INC., Respondent.
DECISION
CARPIO, J.:
FACTS:
Burmeister and Wain Scandinavian Contractor is a domestic corporation duly organized and existing
under and by virtue of the laws of the Philippines with principal address located at Daruma Building,
Jose P. Laurel Avenue, Lanang, Davao City.
It is represented that a foreign consortium composed of Burmeister and Wain Scandinavian Contractor
A/S (BWSC-Denmark), Mitsui Engineering and Shipbuilding, Ltd., and Mitsui and Co., Ltd. entered into a
contract with the National Power Corporation (NAPOCOR) for the operation and maintenance of
[NAPOCOR’s] two power barges. The Consortium appointed BWSC-Denmark as its coordination
manager.
BWSC-Denmark established Burmeister and Wain Scandinavian Contractor Mindanao, Inc., which
subcontracted the actual operation and maintenance of NAPOCOR’s two power barges as well as the
performance of other duties and acts which necessarily have to be done in the Philippines.
NAPOCOR paid capacity and energy fees to the Consortium in a mixture of currencies (Mark, Yen, and
Peso). The freely convertible non-Peso component is deposited directly to the Consortium’s bank
accounts in Denmark and Japan, while the Peso-denominated component is deposited in a separate and
special designated bank account in the Philippines. On the other hand, the Consortium pays
[respondent] in foreign currency inwardly remitted to the Philippines through the banking system.
In order to ascertain the tax implications of the above transactions, [respondent] sought a ruling from
the BIR which responded with BIR Ruling No. 023-95 dated February 14, 1995, declaring therein that if
[respondent] chooses to register as a VAT person and the consideration for its services is paid for in
acceptable foreign currency and accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas, the aforesaid services shall be subject to VAT at zero-rate.
[Respondent] chose to register as a VAT taxpayer. On May 26, 1995, the Certificate of Registration
bearing RDO Control No. 95-113-007556 was issued in favor of [respondent] by the Revenue District
Office No. 113 of Davao City.
For the year 1996, [respondent] seasonably filed its quarterly Value-Added Tax Returns reflecting,
among others, a total zero-rated sales of P147,317,189.62 with VAT input taxes of P3,361,174.14
On December 29, 1997, [respondent] availed of the Voluntary Assessment Program (VAP) of the BIR. It
allegedly misinterpreted Revenue Regulations No. 5-96 dated February 20, 1996 to be applicable to its
case.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
In [conformity] with the aforecited Revenue Regulations, [respondent] subjected its sale of services to
the Consortium to the 10% VAT in the total amount of P103,558,338.11 representing April to December
1996 sales since said Revenue Regulations No. 5-96 became effective only on April 1996. The sum of
P43,893,951.07, representing January to March 1996 sales was subjected to zero rate. Consequently,
[respondent] filed its 1996 amended VAT return consolidating therein the VAT output and input taxes
for the four calendar quarters of 1996.
On January 7,1999, [respondent] was able to secure VAT Ruling No. 003-99 from the VAT Review
Committee which reconfirmed BIR Ruling No. 023-95 "insofar as it held that the services being
rendered by BWSCMI is subject to VAT at zero percent (0%)."
On the strength of the aforementioned rulings, [respondent] on April 22,1999, filed a claim for the
issuance of a tax credit certificate with Revenue District No. 113 of the BIR. [Respondent] believed that
it erroneously paid the output VAT for 1996 due to its availment of the Voluntary Assessment Program
(VAP) of the BIR.
On 27 December 1999, respondent filed a petition for review with the CTA in order to toll the running
of the two-year prescriptive period under the Tax Code.
The CTA ordered petitioner to issue a tax credit certificate for P6,994,659.67 in favor of respondent.
In affirming the CTA, the Court of Appeals rejected the CIR’s view and found untenable its contention
that under VAT Ruling No. 040-98, Burmeister and Wain Scandinavian Contractor Mindanao Inc.
services should be destined for consumption abroad to enjoy zero-rating. The Court of Appeals
disagreed with petitioner’s argument that our VAT law generally follows the destination principle (i.e.,
exports exempt, imports taxable)
ISSUE:
Whether respondent is entitled to the refund of P6,994,659.67 as erroneously paid output VAT for the
year 1996
HELD:
NO. The Tax Code not only requires that the services be other than "processing, manufacturing or
repacking of goods" and that payment for such services be in acceptable foreign currency accounted for
in accordance with BSP rules. Another essential condition for qualification to zero-rating under
Section 102(b)(2) is that the recipient of such services is doing business outside the
Philippines.
While this requirement is not expressly stated in the second paragraph of Section 102(b), this is clearly
provided in the first paragraph of Section 102(b) where the listed services must be "for other persons
doing business outside the Philippines." The phrase "for other persons doing business outside the
Philippines" not only refers to the services enumerated in the first paragraph of Section 102(b), but also
pertains to the general term "services" appearing in the second paragraph of Section 102(b).
Page 38
In short, services other than processing, manufacturing, or repacking of goods must likewise be
performed for persons doing business outside the Philippines.
This can only be the logical interpretation of Section 102(b)(2). If the provider and recipient of the
"other services" are both doing business in the Philippines, the payment of foreign
currency is irrelevant. Otherwise, those subject to the regular VAT under Section 102(a) can avoid
paying the VAT by simply stipulating payment in foreign currency inwardly remitted by the recipient of
services.
To interpret Section 102(b)(2) to apply to a payer-recipient of services doing business in the Philippines
is to make the payment of the regular VAT under Section 102(a) dependent on the generosity of the
taxpayer. The provider of services can choose to pay the regular VAT or avoid it by stipulating payment
in foreign currency inwardly remitted by the payer-recipient. Such interpretation removes Section
102(a) as a tax measure in the Tax Code, an interpretation this Court cannot sanction. A tax is a
mandatory exaction, not a voluntary contribution.
When Section 102(b)(2) stipulates payment in "acceptable foreign currency" under BSP rules, the law
clearly envisions the payer-recipient of services to be doing business outside the
Philippines. Only those not doing business in the Philippines can be required under BSP
rules to pay in acceptable foreign currency for their purchase of goods or services from the
Philippines. In a domestic transaction, where the provider and recipient of services are both doing
business in the Philippines, the BSP cannot require any party to make payment in foreign currency.
Services covered by Section 102(b) (1) and (2) are in the nature of export sales since the
payer-recipient of services is doing business outside the Philippines. Under BSP rules, the proceeds of
export sales must be reported to the Bangko Sentral ng Pilipinas. Thus, there is reason to require the
provider of services under Section 102(b) (1) and (2) to account for the foreign currency proceeds to
the BSP. The same rationale does not apply if the provider and recipient of the services are both doing
business in the Philippines since their transaction is not in the nature of an export sale even if payment
is denominated in foreign currency.
When the provider and recipient of services are both doing business in the Philippines, their transaction
falls squarely under Section 102(a) governing domestic sale or exchange of services. Indeed, this is a
purely local sale or exchange of services subject to the regular VAT, unless of course the transaction
falls under the other provisions of Section 102(b).
Is the Consortium doing business in the Philippines?
YES. The payer-recipient of respondent’s services is the Consortium which is a joint-venture doing
business in the Philippines. While the Consortium’s principal members are non-resident
foreign corporations, the Consortium itself is doing business in the Philippines. This is shown
clearly in BIR Ruling No. 023-95 which states that the contract between the Consortium and NAPOCOR
is for a 15-year term
Destination Principle
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
The Court recognizes the rule that the VAT system generally follows the "destination principle" (exports
are zero-rated whereas imports are taxed). However, as the Court stated in American Express, there is
an exception to this rule.
This exception refers to the 0% VAT on services enumerated in Section 102 and performed in the
Philippines. For services covered by Section 102(b)(1) and (2), the recipient of the services must be a
person doing business outside the Philippines. Thus, to be exempt from the destination principle under
Section 102(b)(1) and (2), the services must be
(a) performed in the Philippines;
(b) for a person doing business outside the Philippines; and
(c) paid in acceptable foreign currency accounted for in accordance with BSP rules.
IN CONTRAST WITH THE AMEX CASE
Respondent’s reliance on the ruling in American Express is misplaced. That case involved a recipient of
services, specifically American Express International, Inc. (Hongkong Branch), doing business
outside the Philippines.
In contrast, this case involves a recipient of services – the Consortium – which is doing
business in the Philippines. Hence, American Express’ services were subject to 0% VAT, while
respondent’s services should be subject to 10% VAT.
G.R. No. 146984 July 28, 2006
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MAGSAYSAY LINES, INC., BALIWAG NAVIGATION, INC., FIM LIMITED OF THE MARDEN
GROUP (HK) and NATIONAL DEVELOPMENT COMPANY, respondents.
DECISION
TINGA, J.:
FACTS:
Pursuant to a government program of privatization, NDC decided to sell to private enterprise all of its
shares in its wholly-owned subsidiary the National Marine Corporation (NMC). The NDC decided to sell
in one lot its NMC shares and five (5) of its ships, which are 3,700 DWT Tween-Decker, "Kloeckner"
type vessels.1 The vessels were constructed for the NDC between 1981 and 1984, then initially leased
Page 39
to Luzon Stevedoring Company, also its wholly-owned subsidiary. Subsequently, the vessels were
transferred and leased, on a bareboat basis, to the NMC.
The NMC shares and the vessels were offered for public bidding. Among the stipulated terms and
conditions for the public auction was that the winning bidder was to pay "a value added
tax of 10% on the value of the vessels." On 3 June 1988, private respondent Magsaysay Lines,
Inc. (Magsaysay Lines) offered to buy the shares and the vessels for P168,000,000.00. The bid was
made by Magsaysay Lines, purportedly for a new company still to be formed composed of itself,
Baliwag Navigation, Inc., and FIM Limited of the Marden Group based in Hongkong (collectively, private
respondents).4 The bid was approved by the Committee on Privatization, and a Notice of Award dated
1 July 1988 was issued to Magsaysay Lines.
On 28 September 1988, the implementing Contract of Sale was executed between NDC, on one hand,
and Magsaysay Lines, Baliwag Navigation, and FIM Limited, on the other. Paragraph 11.02 of the
contract stipulated that "[v]alue-added tax, if any, shall be for the account of the
PURCHASER.
Per arrangement, an irrevocable confirmed Letter of Credit previously filed as bidders bond was
accepted by NDC as security for the payment of VAT, if any. By this time, a formal request for a ruling
on whether or not the sale of the vessels was subject to VAT had already been filed with the Bureau of
Internal Revenue (BIR) by the law firm of Sycip Salazar Hernandez & Gatmaitan, presumably in behalf
of private respondents. Thus, the parties agreed that should no favorable ruling be received from the
BIR, NDC was authorized to draw on the Letter of Credit upon written demand the amount needed for
the payment of the VAT on the stipulated due date, 20 December 1988.
In January of 1989, private respondents through counsel received VAT Ruling No. 568-88 dated 14
December 1988 from the BIR, holding that the sale of the vessels was subject to the 10% VAT.
Private respondents moved for the reconsideration of VAT Ruling No. 568-88, as well as VAT Ruling No.
395-88 (dated 18 August 1988), but their motion was denied when the BIR issued VAT Ruling Nos.
007-89 dated 24 February 1989.
On 10 April 1989, private respondents filed an Appeal and Petition for Refund with the CTA, followed by
a Supplemental Petition for Review on 14 July 1989. They prayed for the reversal of VAT Rulings No.
395-88, 568-88 and 007-89, as well as the refund of the VAT payment made amounting to
P15,120,000.00.
The Commissioner of Internal Revenue (CIR) opposed the petition, first arguing that private
respondents were not the real parties in interest as they were not the transferors or sellers as
contemplated in Sections 99 and 100 of the then Tax Code.
The CIR also squarely defended the VAT rulings holding the sale of the vessels liable for VAT, especially
citing Section 3 of Revenue Regulation No. 5-87 (R.R. No. 5-87), which provided that "[VAT] is imposed
on any sale or transactions ‘deemed sale’ of taxable goods (including capital goods, irrespective of the
date of acquisition)." The CIR argued that the sale of the vessels were among those transactions
"deemed sale," as enumerated in Section 4 of R.R. No. 5-87. It seems that the CIR particularly
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
emphasized Section 4(E)(i) of the Regulation, which classified "change of ownership of business" as a
circumstance that gave rise to a transaction "deemed sale."
In a Decision dated 27 April 1992, the CTA rejected the CIR’s arguments and granted the
petition. The CTA ruled that the sale of a vessel was an "isolated transaction," not done in the
ordinary course of NDC’s business, and was thus not subject to VAT, which under Section 99 of the Tax
Code, was applied only to sales in the course of trade or business.
The CIR appealed the CTA Decision to the Court of Appeals, which on 11 March 1997, rendered a
Decision reversing the CTA declaring the transaction fell within the classification of those "deemed
sale" under R.R. No. 5-87, since the sale of the vessels together with the NMC shares brought about a
change of ownership in NMC
However, the Court of Appeals reversed itself upon reconsidering the case and ruled that the
"change of ownership of business" as contemplated in R.R. No. 5-87 must be a consequence of the
"retirement from or cessation of business" by the owner of the goods, as provided for in Section 100 of
the Tax Code
ISSUE:
Whether the sale by the National Development Company (NDC) of five (5) of its vessels to the private
respondents is subject to value-added tax (VAT) under the National Internal Revenue Code of 1986
(Tax Code).
HELD:
NO. VAT is not a singular-minded tax on every transactional level. Its assessment bears direct relevance
to the taxpayer’s role or link in the production chain. Hence, as affirmed by Section 99 of the Tax Code
and its subsequent incarnations, the tax is levied only on the sale, barter or exchange of goods or
services by persons who engage in such activities, in the course of trade or business. These
transactions outside the course of trade or business may invariably contribute to the production chain,
but they do so only as a matter of accident or incident.
As the sales of goods or services do not occur within the course of trade or business, the providers of
such goods or services would hardly, if at all, have the opportunity to appropriately credit any VAT
liability as against their own accumulated VAT collections since the accumulation of output VAT arises in
the first place only through the ordinary course of trade or business.
That the sale of the vessels was not in the ordinary course of trade or business of NDC was
appreciated by both the CTA and the Court of Appeals, the latter doing so even in its first decision
which it eventually reconsidered.
This finding is confirmed by the Revised Charter of the NDC which bears no indication that the NDC was
created for the primary purpose of selling real property.
Page 40
The conclusion that the sale was not in the course of trade or business, which the CIR does not dispute
before this Court, should have definitively settled the matter. Any sale, barter or exchange of goods or
services not in the course of trade or business is not subject to VAT.
Section 100 of the Tax Code, which is implemented by Section 4(E)(i) of R.R. No. 5-87 now relied upon
by the CIR, is captioned "Value-added tax on sale of goods," and it expressly states that "[t]here shall
be levied, assessed and collected on every sale, barter or exchange of goods, a value added tax x x x."
Section 100 should be read in light of Section 99, which lays down the general rule on
which persons are liable for VAT in the first place and on what transaction if at all. It may
even be noted that Section 99 is the very first provision in Title IV of the Tax Code, the Title that covers
VAT in the law. Before any portion of Section 100, or the rest of the law for that matter, may be applied
in order to subject a transaction to VAT, it must first be satisfied that the taxpayer and transaction
involved is liable for VAT in the first place under Section 99.
It would have been a different matter if Section 100 purported to define the phrase "in the course of
trade or business" as expressed in Section 99. If that were so, reference to Section 100 would have
been necessary as a means of ascertaining whether the sale of the vessels was "in the course of trade
or business," and thus subject to VAT. But that is not the case. What Section 100 and Section
4(E)(i) of R.R. No. 5-87 elaborate on is not the meaning of "in the course of trade or
business," but instead the identification of the transactions which may be deemed as sale.
It would become necessary to ascertain whether under those two provisions the transaction may be
deemed a sale, only if it is settled that the transaction occurred in the course of trade or business in the
first place. If the transaction transpired outside the course of trade or business, it would be irrelevant
for the purpose of determining VAT liability whether the transaction may be deemed sale, since it
anyway is not subject to VAT.
Accordingly, the Court rules that given the undisputed finding that the transaction in
question was not made in the course of trade or business of the seller, NDC that is, the sale is
not subject to VAT pursuant to Section 99 of the Tax Code, no matter how the said sale may hew to
those transactions deemed sale as defined under Section 100.
In any event, even if Section 100 or Section 4 of R.R. No. 5-87 were to find application in this case, the
Court finds the discussions offered on this point by the CTA and the Court of Appeals (in its subsequent
Resolution) essentially correct. Section 4 (E)(i) of R.R. No. 5-87 does classify as among the transactions
deemed sale those involving "change of ownership of business."
However, Section 4(E) of R.R. No. 5-87, reflecting Section 100 of the Tax Code, clarifies that such
"change of ownership" is only an attending circumstance to "retirement from or cessation of business[,
] with respect to all goods on hand [as] of the date of such retirement or cessation."25 Indeed, Section
4(E) of R.R. No. 5-87 expressly characterizes the "change of ownership of business" as only a
"circumstance" that attends those transactions "deemed sale," which are otherwise stated in the same
section
[G.R. No. 153866. February 11, 2005]
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. SEAGATE TECHNOLOGY
(PHILIPPINES), respondent.
DOCTRINE: Business companies registered in and operating from the Special Economic Zone in
Naga, Cebu -- like herein respondent -- are entities exempt from all internal revenue taxes and the
implementing rules relevant thereto, including the value-added taxes or VAT. Although export sales are
not deemed exempt transactions, they are nonetheless zero-rated. Hence, in the present case, the
distinction between exempt entities and exempt transactions has little significance, because the net
result is that the taxpayer is not liable for the VAT. Respondent, a VAT-registered enterprise, has
complied with all requisites for claiming a tax refund of or credit for the input VAT it paid on capital
goods it purchased. Thus, the Court of Tax Appeals and the Court of Appeals did not err in ruling that it
is entitled to such refund or credit.
FACTS: Respondent is a resident foreign corporation duly registered with the Securities and
Exchange Commission to do business in the Philippines, with principal office address at the new Cebu
Township One, Special Economic Zone, Barangay Cantao-an, Naga, Cebu.
Respondent is registered with the Philippine Export Zone Authority (PEZA) and has been issued PEZA
Certificate No. 97-044 pursuant to Presidential Decree No. 66, as amended, to engage in the
manufacture of recording components primarily used in computers for export. Such registration was
made on 6 June 1997.
Respondent is VAT-registered entity. VAT returns for the period 1 April 1998 to 30 June 1999 have
been filed by respondent.
An administrative claim for refund of VAT input taxes in the amount of P28,369,226.38 with supporting
documents (inclusive of the P12,267,981.04 VAT input taxes subject of this Petition for Review), was
filed on 4 October 1999 with Revenue District Office No. 83, Talisay Cebu.
No final action has been received by respondent from petitioner on respondents claim for VAT refund.
The administrative claim for refund by the respondent on October 4, 1999 was not acted upon by the
petitioner prompting the respondent to elevate the case to the CTA by way of Petition for Review in
order to toll the running of the two-year prescriptive period.
For his part, petitioner contends that the alleged claim for tax refund/credit of respondent is subject to
administrative routinary investigation/examination by petitioners Bureau. Since taxes are presumed to
have been collected in accordance with laws and regulations, the respondent has the burden of proof
that the taxes sought to be refunded were erroneously or illegally collected.
Granting that respondent is a PEZA registered Ecozone Enterprise, then its business is not subject to
VAT pursuant to Section 24 of RA 7916 in relation to Section 103 of the Tax Code, as amended. As
respondents business is not subject to VAT, the capital goods and services it alleged to have purchased
are considered not used in VAT taxable business. As such, respondent is not entitled to refund of input
taxes on such capital goods pursuant to Section 4.106.1 of Revenue Regulations No. ([RR])7-95, and of
input taxes on services pursuant to Section 4.103 of said regulations.
The Tax Court rendered a decision granting the claim for refund.
Page 41
The CA affirmed the Decision of the CTA granting the claim for refund or issuance of a tax credit
certificate (TCC) in favor of respondent in the reduced amount of P12,122,922.66. This sum
represented the unutilized but substantiated input VAT paid on capital goods purchased for the period
covering April 1, 1998 to June 30, 1999.
The appellate court reasoned that respondent had availed itself only of the fiscal incentives under
Executive Order No. (EO) 226 (otherwise known as the Omnibus Investment Code of 1987), not of
those under both Presidential Decree No. (PD) 66, as amended, and Section 24 of RA 7916.
Respondent was, therefore, considered exempt only from the payment of income tax when it opted for
the income tax holiday in lieu of the 5 percent preferential tax on gross income earned. As a VAT-
registered entity, though, it was still subject to the payment of other national internal revenue taxes,
like the VAT.
Moreover, the CA held that neither Section 109 of the Tax Code nor Sections 4.106-1 and 4.103-1 of RR
7-95 were applicable. Having paid the input VAT on the capital goods it purchased, respondent correctly
filed the administrative and judicial claims for its refund within the two-year prescriptive period. Such
payments were -- to the extent of the refundable value -- duly supported by VAT invoices or official
receipts, and were not yet offset against any output VAT liability.
ISSUE: Whether or not respondent is entitled to the refund or issuance of Tax Credit
Certificate in the amount of P12,122,922.66 representing alleged unutilized input VAT paid on capital
goods purchased for the period April 1, 1998 to June 30, 1999
RULING: Yes, respondent is entitled to the refund
Entitlement of a VAT-Registered PEZA Enterprise to a Refund of or Credit for Input VAT
No doubt, as a PEZA-registered enterprise within a special economic zone, respondent is entitled to the
fiscal incentives and benefits provided for in either PD 66 or EO 226. It shall, moreover, enjoy all
privileges, benefits, advantages or exemptions under both Republic Act Nos. (RA) 7227 and 7844.
Preferential Tax Treatment Under Special Laws
If it avails itself of PD 66, notwithstanding the provisions of other laws to the contrary, respondent shall
not be subject to internal revenue laws and regulations for raw materials, supplies, articles, equipment,
machineries, spare parts and wares, except those prohibited by law, brought into the zone to be stored,
broken up, repacked, assembled, installed, sorted, cleaned, graded or otherwise processed,
manipulated, manufactured, mixed or used directly or indirectly in such activities. Even so, respondent
would enjoy a net-operating loss carry over; accelerated depreciation; foreign exchange and financial
assistance; and exemption from export taxes, local taxes and licenses.
Comparatively, the same exemption from internal revenue laws and regulations applies if EO 226 is
chosen. Under this law, respondent shall further be entitled to an income tax holiday; additional
deduction for labor expense; simplification of customs procedure; unrestricted use of consigned
equipment; access to a bonded manufacturing warehouse system; privileges for foreign nationals
employed; tax credits on domestic capital equipment, as well as for taxes and duties on raw materials;
and exemption from contractors taxes, wharfage dues, taxes and duties on imported capital equipment
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
and spare parts, export taxes, duties, imposts and fees, local taxes and licenses, and real property
taxes.
A privilege available to respondent under the provision in RA 7227 on tax and duty-free importation of
raw materials, capital and equipment -- is, ipso facto, also accorded to the zone under RA 7916.
Furthermore, the latter law -- notwithstanding other existing laws, rules and regulations to the contrary
-- extends to that zone the provision stating that no local or national taxes shall be imposed therein. No
exchange control policy shall be applied; and free markets for foreign exchange, gold, securities and
future shall be allowed and maintained. Banking and finance shall also be liberalized under minimum
Bangko Sentral regulation with the establishment of foreign currency depository units of local
commercial banks and offshore banking units of foreign banks.
In the same vein, respondent benefits under RA 7844 from negotiable tax credits for locally-produced
materials used as inputs. Aside from the other incentives possibly already granted to it by the Board of
Investments, it also enjoys preferential credit facilities and exemption from PD 1853.
From the above-cited laws, it is immediately clear that petitioner enjoys preferential tax treatment. It is
not subject to internal revenue laws and regulations and is even entitled to tax credits. The VAT on
capital goods is an internal revenue tax from which petitioner as an entity is exempt. Although the
transactions involving such tax are not exempt, petitioner as a VAT-registered person, however, is
entitled to their credits.
Nature of the VAT and the Tax Credit Method
Viewed broadly, the VAT is a uniform tax ranging, at present, from 0 percent to 10 percent levied on
every importation of goods, whether or not in the course of trade or business, or imposed on each sale,
barter, exchange or lease of goods or properties or on each rendition of services in the course of trade
or business as they pass along the production and distribution chain, the tax being limited only to the
value added to such goods, properties or services by the seller, transferor or lessor. It is an indirect tax
that may be shifted or passed on to the buyer, transferee or lessee of the goods, properties or services.
As such, it should be understood not in the context of the person or entity that is primarily, directly and
legally liable for its payment, but in terms of its nature as a tax on consumption. In either case, though,
the same conclusion is arrived at.
The law that originally imposed the VAT in the country, as well as the subsequent amendments of that
law, has been drawn from the tax credit method. Such method adopted the mechanics and self-
enforcement features of the VAT as first implemented and practiced in Europe and subsequently
adopted in New Zealand and Canada. Under the present method that relies on invoices, an entity can
credit against or subtract from the VAT charged on its sales or outputs the VAT paid on its purchases,
inputs and imports.
If at the end of a taxable quarter the output taxes charged by a seller are equal to the input taxes
passed on by the suppliers, no payment is required. It is when the output taxes exceed the input taxes
that the excess has to be paid. If, however, the input taxes exceed the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-rated or
effectively zero-rated transactions or from the acquisition of capital goods, any excess over the output
taxes shall instead be refunded to the taxpayer or credited against other internal revenue taxes.
Page 42
Zero-Rated and Effectively Zero-Rated Transactions
Although both are taxable and similar in effect, zero-rated transactions differ from effectively zero-rated
transactions as to their source.
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate
is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions charges no output tax, but can claim a refund of or a tax
credit certificate for the VAT previously charged by suppliers.
Effectively zero-rated transactions, however, refer to the sale of goods or supply of services to persons
or entities whose exemption under special laws or international agreements to which the Philippines is a
signatory effectively subjects such transactions to a zero rate. Again, as applied to the tax base, such
rate does not yield any tax chargeable against the purchaser. The seller who charges zero output tax
on such transactions can also claim a refund of or a tax credit certificate for the VAT previously charged
by suppliers.
Zero Rating and Exemption
In terms of the VAT computation, zero rating and exemption are the same, but the extent of relief that
results from either one of them is not.
Applying the destination principle to the exportation of goods, automatic zero rating is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales. Effective zero rating, on the contrary, is intended to benefit the purchaser who, not being directly
and legally liable for the payment of the VAT, will ultimately bear the burden of the tax shifted by the
suppliers.
In both instances of zero rating, there is total relief for the purchaser from the burden of the tax. But in
an exemption there is only partial relief, because the purchaser is not allowed any tax refund of or
credit for input taxes paid.
Exempt Transaction and Exempt Party
The object of exemption from the VAT may either be the transaction itself or any of the parties to the
transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature, are
specifically listed in and expressly exempted from the VAT under the Tax Code, without regard to the
tax status -- VAT-exempt or not -- of the party to the transaction. Indeed, such transaction is not
subject to the VAT, but the seller is not allowed any tax refund of or credit for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the Tax Code,
a special law or an international agreement to which the Philippines is a signatory, and by virtue of
which its taxable transactions become exempt from the VAT. Such party is also not subject to the VAT,
but may be allowed a tax refund of or credit for input taxes paid, depending on its registration as a VAT
or non-VAT taxpayer.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
As mentioned earlier, the VAT is a tax on consumption, the amount of which may be shifted or passed
on by the seller to the purchaser of the goods, properties or services. While the liability is imposed on
one person, the burden may be passed on to another. Therefore, if a special law merely exempts a
party as a seller from its direct liability for payment of the VAT, but does not relieve the same party as a
purchaser from its indirect burden of the VAT shifted to it by its VAT-registered suppliers, the purchase
transaction is not exempt. Applying this principle to the case at bar, the purchase transactions entered
into by respondent are not VAT-exempt.
Special laws may certainly exempt transactions from the VAT. However, the Tax Code provides that
those falling under PD 66 are not. PD 66 is the precursor of RA 7916 -- the special law under which
respondent was registered. The purchase transactions it entered into are, therefore, not VAT-exempt.
These are subject to the VAT; respondent is required to register.
Its sales transactions, however, will either be zero-rated or taxed at the standard rate of 10 percent,
depending again on the application of the destination principle.
If respondent enters into such sales transactions with a purchaser -- usually in a foreign country -- for
use or consumption outside the Philippines, these shall be subject to 0 percent. If entered into with a
purchaser for use or consumption in the Philippines, then these shall be subject to 10 percent, unless
the purchaser is exempt from the indirect burden of the VAT, in which case it shall also be zero-rated.
Since the purchases of respondent are not exempt from the VAT, the rate to be applied is zero. Its
exemption under both PD 66 and RA 7916 effectively subjects such transactions to a zero rate, because
the ecozone within which it is registered is managed and operated by the PEZA as a separate customs
territory. This means that in such zone is created the legal fiction of foreign territory. Under the cross-
border principle of the VAT system being enforced by the Bureau of Internal Revenue (BIR), no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the territorial
border of the taxing authority. If exports of goods and services from the Philippines to a foreign country
are free of the VAT, then the same rule holds for such exports from the national territory -- except
specifically declared areas -- to an ecozone.
Sales made by a VAT-registered person in the customs territory to a PEZA-registered entity are
considered exports to a foreign country; conversely, sales by a PEZA-registered entity to a VAT-
registered person in the customs territory are deemed imports from a foreign country. An ecozone --
indubitably a geographical territory of the Philippines -- is, however, regarded in law as foreign soil.
This legal fiction is necessary to give meaningful effect to the policies of the special law creating the
zone. If respondent is located in an export processing zone within that ecozone, sales to the export
processing zone, even without being actually exported, shall in fact be viewed as constructively
exported under EO 226. Considered as export sales, such purchase transactions by respondent would
indeed be subject to a zero rate.
Tax Exemptions Broad and Express
Applying the special laws we have earlier discussed, respondent as an entity is exempt from internal
revenue laws and regulations.
This exemption covers both direct and indirect taxes, stemming from the very nature of the VAT as a
tax on consumption, for which the direct liability is imposed on one person but the indirect burden is
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passed on to another. Respondent, as an exempt entity, can neither be directly charged for the VAT on
its sales nor indirectly made to bear, as added cost to such sales, the equivalent VAT on its purchases.
Ubi lex non distinguit, nec nos distinguere debemus. Where the law does not distinguish, we ought not
to distinguish.
Moreover, the exemption is both express and pervasive for the following reasons:
First, RA 7916 states that no taxes, local and national, shall be imposed on business establishments
operating within the ecozone. Since this law does not exclude the VAT from the prohibition, it is
deemed included. Exceptio firmat regulam in casibus non exceptis. An exception confirms the rule in
cases not excepted; that is, a thing not being excepted must be regarded as coming within the purview
of the general rule.
Moreover, even though the VAT is not imposed on the entity but on the transaction, it may still be
passed on and, therefore, indirectly imposed on the same entity -- a patent circumvention of the law.
That no VAT shall be imposed directly upon business establishments operating within the ecozone
under RA 7916 also means that no VAT may be passed on and imposed indirectly. Quando aliquid
prohibetur ex directo prohibetur et per obliquum. When anything is prohibited directly, it is also
prohibited indirectly.
Second, when RA 8748 was enacted to amend RA 7916, the same prohibition applied, except for real
property taxes that presently are imposed on land owned by developers. This similar and repeated
prohibition is an unambiguous ratification of the laws intent in not imposing local or national taxes on
business enterprises within the ecozone.
Third, foreign and domestic merchandise, raw materials, equipment and the like shall not be subject to
x x x internal revenue laws and regulations under PD 66 -- the original charter of PEZA (then EPZA) that
was later amended by RA 7916. No provisions in the latter law modify such exemption.
Although this exemption puts the government at an initial disadvantage, the reduced tax collection
ultimately redounds to the benefit of the national economy by enticing more business investments and
creating more employment opportunities.
Fourth, even the rules implementing the PEZA law clearly reiterate that merchandise -- except those
prohibited by law -- shall not be subject to x x x internal revenue laws and regulations x x x if brought
to the ecozones restricted area or manufacturing by registered export enterprises, of which respondent
is one. These rules also apply to all enterprises registered with the EPZA prior to the effectivity of such
rules.
Fifth, export processing zone enterprises registered with the Board of Investments (BOI) under EO 226
patently enjoy exemption from national internal revenue taxes on imported capital equipment
reasonably needed and exclusively used for the manufacture of their products; on required supplies and
spare part for consigned equipment; and on foreign and domestic merchandise, raw materials,
equipment and the like -- except those prohibited by law -- brought into the zone for manufacturing. In
addition, they are given credits for the value of the national internal revenue taxes imposed on
domestic capital equipment also reasonably needed and exclusively used for the manufacture of their
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
products, as well as for the value of such taxes imposed on domestic raw materials and supplies that
are used in the manufacture of their export products and that form part thereof.
Sixth, the exemption from local and national taxes granted under RA 7227 are ipso facto accorded to
ecozones. In case of doubt, conflicts with respect to such tax exemption privilege shall be resolved in
favor of the ecozone.
And seventh, the tax credits under RA 7844 -- given for imported raw materials primarily used in the
production of export goods, and for locally produced raw materials, capital equipment and spare parts
used by exporters of non-traditional products-- shall also be continuously enjoyed by similar exporters
within the ecozone. Indeed, the latter exporters are likewise entitled to such tax exemptions and
credits.
Tax Refund as Tax Exemption
To be sure, statutes that grant tax exemptions are construed strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.
Tax refunds are in the nature of such exemptions. Accordingly, the claimants of those refunds bear the
burden of proving the factual basis of their claims; and of showing, by words too plain to be mistaken,
that the legislature intended to exempt them. In the present case, all the cited legal provisions are
teeming with life with respect to the grant of tax exemptions too vivid to pass unnoticed. In addition,
respondent easily meets the challenge.
Respondent, which as an entity is exempt, is different from its transactions which are not exempt. The
end result, however, is that it is not subject to the VAT. The non-taxability of transactions that are
otherwise taxable is merely a necessary incident to the tax exemption conferred by law upon it as an
entity, not upon the transactions themselves. Nonetheless, its exemption as an entity and the non-
exemption of its transactions lead to the same result for the following considerations:
First, the contemporaneous construction of our tax laws by BIR authorities who are called upon to
execute or administer such laws will have to be adopted. Their prior tax issuances have held
inconsistent positions brought about by their probable failure to comprehend and fully appreciate the
nature of the VAT as a tax on consumption and the application of the destination principle. Revenue
Memorandum Circular No. (RMC) 74-99, however, now clearly and correctly provides that any VAT-
registered suppliers sale of goods, property or services from the customs territory to any registered
enterprise operating in the ecozone -- regardless of the class or type of the latters PEZA registration --
is legally entitled to a zero rate.
Second, the policies of the law should prevail. Ratio legis est anima. The reason for the law is its very
soul.
In PD 66, the urgent creation of the EPZA which preceded the PEZA, as well as the establishment of
export processing zones, seeks to encourage and promote foreign commerce as a means of x x x
strengthening our export trade and foreign exchange position, of hastening industrialization, of
reducing domestic unemployment, and of accelerating the development of the country.
RA 7916, as amended by RA 8748, declared that by creating the PEZA and integrating the special
economic zones, the government shall actively encourage, promote, induce and accelerate a sound and
balanced industrial, economic and social development of the country x x x through the establishment,
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among others, of special economic zones x x x that shall effectively attract legitimate and productive
foreign investments.
Under EO 226, the State shall encourage x x x foreign investments in industry x x x which shall x x x
meet the tests of international competitiveness[,] accelerate development of less developed regions of
the country[,] and result in increased volume and value of exports for the economy. Fiscal incentives
that are cost-efficient and simple to administer shall be devised and extended to significant projects to
compensate for market imperfections, to reward performance contributing to economic development,
and to stimulate the establishment and assist initial operations of the enterprise.
Wisely accorded to ecozones created under RA 7916 was the governments policy -- spelled out earlier
in RA 7227 -- of converting into alternative productive uses the former military reservations and their
extensions, as well as of providing them incentives to enhance the benefits that would be derived from
them in promoting economic and social development.
Finally, under RA 7844, the State declares the need to evolve export development into a national effort
in order to win international markets. By providing many export and tax incentives, the State is able to
drive home the point that exporting is indeed the key to national survival and the means through which
the economic goals of increased employment and enhanced incomes can most expeditiously be
achieved.
The Tax Code itself seeks to promote sustainable economic growth x x x; x x x increase economic
activity; and x x x create a robust environment for business to enable firms to compete better in the
regional as well as the global market. After all, international competitiveness requires economic and tax
incentives to lower the cost of goods produced for export. State actions that affect global competition
need to be specific and selective in the pricing of particular goods or services.
All these statutory policies are congruent to the constitutional mandates of providing incentives to
needed investments, as well as of promoting the preferential use of domestic materials and locally
produced goods and adopting measures to help make these competitive. Tax credits for domestic
inputs strengthen backward linkages. Rightly so, the rule of law and the existence of credible and
efficient public institutions are essential prerequisites for sustainable economic development.
VAT Registration, Not Application for Effective Zero Rating, Indispensable to VAT Refund
Registration is an indispensable requirement under our VAT law. Petitioner alleges that respondent did
register for VAT purposes with the appropriate Revenue District Office. However, it is now too late in
the day for petitioner to challenge the VAT-registered status of respondent, given the latters prior
representation before the lower courts and the mode of appeal taken by petitioner before this Court.
The PEZA law, which carried over the provisions of the EPZA law, is clear in exempting from internal
revenue laws and regulations the equipment -- including capital goods -- that registered enterprises will
use, directly or indirectly, in manufacturing. EO 226 even reiterates this privilege among the incentives
it gives to such enterprises. Petitioner merely asserts that by virtue of the PEZA registration alone of
respondent, the latter is not subject to the VAT. Consequently, the capital goods and services
respondent has purchased are not considered used in the VAT business, and no VAT refund or credit is
due. This is a non sequitur. By the VATs very nature as a tax on consumption, the capital goods and
services respondent has purchased are subject to the VAT, although at zero rate. Registration does not
determine taxability under the VAT law.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Moreover, the facts have already been determined by the lower courts. Having failed to present
evidence to support its contentions against the income tax holiday privilege of respondent, petitioner is
deemed to have conceded. It is a cardinal rule that issues and arguments not adequately and seriously
brought below cannot be raised for the first time on appeal. This is a matter of procedure and a
question of fairness. Failure to assert within a reasonable time warrants a presumption that the party
entitled to assert it either has abandoned or declined to assert it.
The BIR regulations additionally requiring an approved prior application for effective zero rating cannot
prevail over the clear VAT nature of respondents transactions. The scope of such regulations is not
within the statutory authority x x x granted by the legislature.
First, a mere administrative issuance, like a BIR regulation, cannot amend the law; the former cannot
purport to do any more than interpret the latter. The courts will not countenance one that overrides the
statute it seeks to apply and implement.
Other than the general registration of a taxpayer the VAT status of which is aptly determined, no
provision under our VAT law requires an additional application to be made for such taxpayers
transactions to be considered effectively zero-rated. An effectively zero-rated transaction does not and
cannot become exempt simply because an application therefor was not made or, if made, was denied.
To allow the additional requirement is to give unfettered discretion to those officials or agents who,
without fluid consideration, are bent on denying a valid application. Moreover, the State can never be
estopped by the omissions, mistakes or errors of its officials or agents.
Second, grantia argumenti that such an application is required by law, there is still the presumption of
regularity in the performance of official duty. Respondents registration carries with it the presumption
that, in the absence of contradictory evidence, an application for effective zero rating was also filed and
approval thereof given. Besides, it is also presumed that the law has been obeyed by both the
administrative officials and the applicant.
Third, even though such an application was not made, all the special laws we have tackled exempt
respondent not only from internal revenue laws but also from the regulations issued pursuant thereto.
Leniency in the implementation of the VAT in ecozones is an imperative, precisely to spur economic
growth in the country and attain global competitiveness as envisioned in those laws.
A VAT-registered status, as well as compliance with the invoicing requirements, is sufficient for the
effective zero rating of the transactions of a taxpayer. The nature of its business and transactions can
easily be perused from, as already clearly indicated in, its VAT registration papers and photocopied
documents attached thereto. Hence, its transactions cannot be exempted by its mere failure to apply
for their effective zero rating. Otherwise, their VAT exemption would be determined, not by their
nature, but by the taxpayers negligence -- a result not at all contemplated. Administrative convenience
cannot thwart legislative mandate.
Tax Refund or Credit in Order
Having determined that respondents purchase transactions are subject to a zero VAT rate, the tax
refund or credit is in order.
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As correctly held by both the CA and the Tax Court, respondent had chosen the fiscal incentives in EO
226 over those in RA 7916 and PD 66. It opted for the income tax holiday regime instead of the 5
percent preferential tax regime.
The latter scheme is not a perfunctory aftermath of a simple registration under the PEZA law, for EO
226 also has provisions to contend with. These two regimes are in fact incompatible and cannot be
availed of simultaneously by the same entity. While EO 226 merely exempts it from income taxes, the
PEZA law exempts it from all taxes.
Therefore, respondent can be considered exempt, not from the VAT, but only from the payment of
income tax for a certain number of years, depending on its registration as a pioneer or a non-pioneer
enterprise. Besides, the remittance of the aforesaid 5 percent of gross income earned in lieu of local
and national taxes imposable upon business establishments within the ecozone cannot outrightly
determine a VAT exemption. Being subject to VAT, payments erroneously collected thereon may then
be refunded or credited.
Even if it is argued that respondent is subject to the 5 percent preferential tax regime in RA 7916,
Section 24 thereof does not preclude the VAT. One can, therefore, counterargue that such provision
merely exempts respondent from taxes imposed on business. To repeat, the VAT is a tax imposed on
consumption, not on business. Although respondent as an entity is exempt, the transactions it enters
into are not necessarily so. The VAT payments made in excess of the zero rate that is imposable may
certainly be refunded or credited.
Compliance with All Requisites for VAT Refund or Credit
As further enunciated by the Tax Court, respondent complied with all the requisites for claiming a VAT
refund or credit.
First, respondent is a VAT-registered entity. This fact alone distinguishes the present case from Contex,
in which this Court held that the petitioner therein was registered as a non-VAT taxpayer. Hence, for
being merely VAT-exempt, the petitioner in that case cannot claim any VAT refund or credit.
Second, the input taxes paid on the capital goods of respondent are duly supported by VAT invoices
and have not been offset against any output taxes. Although enterprises registered with the BOI after
December 31, 1994 would no longer enjoy the tax credit incentives on domestic capital equipment -- as
provided for under Article 39(d), Title III, Book I of EO 226 -- starting January 1, 1996, respondent
would still have the same benefit under a general and express exemption contained in both Article
77(1), Book VI of EO 226; and Section 12, paragraph 2 (c) of RA 7227, extended to the ecozones by RA
7916.
There was a very clear intent on the part of our legislators, not only to exempt investors in ecozones
from national and local taxes, but also to grant them tax credits. This fact was revealed by the
sponsorship speeches in Congress during the second reading of House Bill No. 14295, which later
became RA 7916, as shown below:
MR. RECTO. x x x Some of the incentives that this bill provides are exemption from national and local
taxes; x x x tax credit for locally-sourced inputs x x x.
xxxxxxxxx
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
MR. DEL MAR. x x x To advance its cause in encouraging investments and creating an environment
conducive for investors, the bill offers incentives such as the exemption from local and national taxes, x
x x tax credits for locally sourced inputs x x x.
And third, no question as to either the filing of such claims within the prescriptive period or the validity
of the VAT returns has been raised. Even if such a question were raised, the tax exemption under all
the special laws cited above is broad enough to cover even the enforcement of internal revenue laws,
including prescription.
Summary
To summarize, special laws expressly grant preferential tax treatment to business establishments
registered and operating within an ecozone, which by law is considered as a separate customs territory.
As such, respondent is exempt from all internal revenue taxes, including the VAT, and regulations
pertaining thereto. It has opted for the income tax holiday regime, instead of the 5 percent preferential
tax regime. As a matter of law and procedure, its registration status entitling it to such tax holiday can
no longer be questioned. Its sales transactions intended for export may not be exempt, but like its
purchase transactions, they are zero-rated. No prior application for the effective zero rating of its
transactions is necessary. Being VAT-registered and having satisfactorily complied with all the requisites
for claiming a tax refund of or credit for the input VAT paid on capital goods purchased, respondent is
entitled to such VAT refund or credit.
G.R. No. 180173 April 6, 2011
MICROSOFT PHILIPPINES, INC., Petitioner, vs. COMMISSIONER OF INTERNAL REVENUE,
Respondent.
FACTS: Petitioner Microsoft Philippines, Inc. is a VAT taxpayer duly registered with the
Bureau of Internal Revenue (BIR). Microsoft renders marketing services to Microsoft Operations Pte Ltd.
(MOP) and Microsoft Licensing, Inc. (MLI), both affiliated non-resident foreign corporations. The
services are paid for in acceptable foreign currency and qualify as zero-rated sales for VAT purposes
under Section 108(B)(2) of the National Internal Revenue Code (NIRC) of 1997, as amended. Section
108(B)(2) states:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. –
(B) Transactions Subject to Zero Percent (0%) Rate. – The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate:
(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported x x x;
(2) Services other than those mentioned in the preceding paragraph, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP); x x x
For the year 2001, Microsoft yielded total sales in the amount of ₱261,901,858.99. Of this amount,
₱235,724,614.68 pertain to sales derived from services rendered to MOP and MLI while ₱26,177,244.31
refer to sales to various local customers. Microsoft paid VAT input taxes in the amount of
₱11,449,814.99 on its domestic purchases of taxable goods and services.
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On 27 December 2002, Microsoft filed an administrative claim for tax credit of VAT input taxes in the
amount of ₱11,449,814.99 with the BIR. The administrative claim for tax credit was filed within two
years from the close of the taxable quarters when the zero-rated sales were made.
On 23 April 2003, due to the BIR's inaction, Microsoft filed a petition for review with the CTA. Microsoft
claimed to be entitled to a refund of unutilized input VAT attributable to its zero-rated sales and prayed
that judgment be rendered directing the claim for tax credit or refund of VAT input taxes for taxable
year 2001.
Respondent Commissioner of Internal Revenue (CIR) prayed for the dismissal of the petition for review.
The CTA Second Division denied the claim for tax credit of VAT input taxes. The CTA explained that
Microsoft failed to comply with the invoicing requirements of Sections 113 and 237 of the NIRC as well
as Section 4.108-1 of Revenue Regulations No. 7-95 (RR 7-95). The CTA stated that Microsoft's official
receipts do not bear the imprinted word "zero-rated" on its face, thus, the official receipts cannot be
considered as valid evidence to prove zero-rated sales for VAT purposes.
The CTA En Banc denied the petition for review and affirmed in toto the Decision of the CTA Second
Division.
Microsoft insists that Sections 113 and 237 of the NIRC and Section 4.108-1 of RR 7-95 do not provide
that failure to indicate the word "zero-rated" in the invoices or receipts would result in the outright
invalidation of these invoices or receipts and the disallowance of a claim for tax credit or refund.
ISSUE: Whether Microsoft is entitled to a claim for a tax credit or refund of VAT input taxes
on domestic purchases of goods or services attributable to zero-rated sales for the year 2001 even if
the word "zero-rated" is not imprinted on Microsoft's official receipts.
RULING: No, Microsoft is not entitled to a claim for a tax credit or refund of VAT input taxes
At the outset, a tax credit or refund, like tax exemption, is strictly construed against the taxpayer. The
taxpayer claiming the tax credit or refund has the burden of proving that he is entitled to the refund or
credit, in this case VAT input tax, by submitting evidence that he has complied with the requirements
laid down in the tax code and the BIR's revenue regulations under which such privilege of credit or
refund is accorded.
Sections 113(A) and 237 of the NIRC which provide for the invoicing requirements for VAT-registered
persons state:
SEC. 113. Invoicing and Accounting Requirements for VAT-Registered Persons. –
(A) Invoicing Requirements. – A VAT-registered person shall, for every sale, issue
an invoice or receipt. In addition to the information required under Section 237, the
following information shall be indicated in the invoice or receipt:
(1) A statement that the seller is a VAT-registered person, followed by his taxpayer's
identification number (TIN); and
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax. x x x
SEC. 237. Issuance of Receipts or Sales or Commercial Invoices. – All persons subject
to an internal revenue tax shall, for each sale or transfer of merchandise or for services
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
rendered valued at Twenty-five pesos (P25.00) or more, issue duly registered receipts or sales
or commercial invoices, prepared at least in duplicate, showing the date of transaction,
quantity, unit cost and description of merchandise or nature of service: Provided, however,
That in the case of sales, receipts or transfers in the amount of One hundred pesos (₱100.00)
or more, or regardless of the amount, where the sale or transfer is made by a person liable to
value-added tax to another person also liable to value-added tax; or where the receipt is
issued to cover payment made as rentals, commissions, compensations or fees, receipts or
invoices shall be issued which shall show the name, business style, if any, and address of the
purchaser, customer or client: Provided, further, That where the purchaser is a VAT-registered
person, in addition to the information herein required, the invoice or receipt shall further show
the Taxpayer Identification Number (TIN) of the purchaser.
The original of each receipt or invoice shall be issued to the purchaser, customer or client at
the time the transaction is effected, who, if engaged in business or in the exercise of
profession, shall keep and preserve the same in his place of business for a period of three (3)
years from the close of the taxable year in which such invoice or receipt was issued, while the
duplicate shall be kept and preserved by the issuer, also in his place of business, for a like
period.
The Commissioner may, in meritorious cases, exempt any person subject to internal revenue
tax from compliance with the provisions of this Section.
Related to these provisions, Section 4.108-1 of RR 7-95 enumerates the information which must appear
on the face of the official receipts or invoices for every sale of goods by VAT-registered persons. At the
time Microsoft filed its claim for credit of VAT input tax, RR 7-95 was already in effect. The provision
states:
Sec. 4.108-1. Invoicing Requirements. – All VAT-registered persons shall, for every sale
or lease of goods or properties or services, issue duly registered receipts or sales or
commercial invoices which must show:
1. the name, TIN and address of seller;
2. date of transaction;
3. quantity, unit cost and description of merchandise or nature of service;
4. the name, TIN, business style, if any, and address of the VAT-registered purchaser,
customer or client;
5. the word "zero-rated" imprinted on the invoice covering zero-rated sales; and
6. the invoice value or consideration.
Only VAT-registered persons are required to print their TIN followed by the word
"VAT" in their invoices or receipts and this shall be considered as a "VAT invoice."
All purchases covered by invoices other than a "VAT invoice" shall not give rise to
any input tax.
The invoicing requirements for a VAT-registered taxpayer as provided in the NIRC and revenue
regulations are clear. A VAT-registered taxpayer is required to comply with all the VAT invoicing
requirements to be able to file a claim for input taxes on domestic purchases for goods or services
attributable to zero-rated sales. A "VAT invoice" is an invoice that meets the requirements of Section
4.108-1 of RR 7-95. Contrary to Microsoft's claim, RR 7-95 expressly states that "[A]ll purchases
covered by invoices other than a VAT invoice shall not give rise to any input tax." Microsoft's
Page 47
invoice, lacking the word "zero-rated," is not a "VAT invoice," and thus cannot give rise to any input
tax.
The subsequent enactment of Republic Act No. 9337 on 1 November 2005 elevating provisions of RR 7-
95 into law merely codified into law administrative regulations that already had the force and effect of
law. Such codification does not mean that prior to the codification the administrative regulations were
not enforceable.
The Court has ruled in several cases that the printing of the word "zero-rated" is required
to be placed on VAT invoices or receipts covering zero-rated sales in order to be entitled to
claim for tax credit or refund. In Panasonic v. Commissioner of Internal Revenue, the Court held
that the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales prevents
buyers from falsely claiming input VAT from their purchases when no VAT is actually paid. Absent such
word, the government may be refunding taxes it did not collect.
Here, both the CTA Second Division and CTA En Banc found that Microsoft's receipts did not indicate
the word "zero-rated" on its official receipts. The findings of fact of the CTA are not to be disturbed
unless clearly shown to be unsupported by substantial evidence. Indisputably, Microsoft failed to
comply with the invoicing requirements of the NIRC and its implementing revenue regulation to claim a
tax credit or refund of VAT input tax for taxable year 2001.
G.R. No. 178697 November 17, 2010
COMMISSIONER OF INTERNAL REVENUE, Petitioner, vs. SONY PHILIPPINES, INC.,
Respondent.
FACTS: On November 24, 1998, the CIR issued Letter of Authority No. 000019734 (LOA
19734) authorizing certain revenue officers to examine Sony’s books of accounts and other accounting
records regarding revenue taxes for "the period 1997 and unverified prior years." On December
6, 1999, a preliminary assessment for 1997 deficiency taxes and penalties was issued by the CIR which
Sony protested. Thereafter, acting on the protest, the CIR issued final assessment notices, the formal
letter of demand and the details of discrepancies.
Sony sought re-evaluation of the aforementioned assessment by filing a protest on February 2, 2000.
Sony submitted relevant documents in support of its protest on the 16th of that same month.
Within 30 days after the lapse of 180 days from submission of the said supporting documents to the
CIR, Sony filed a petition for review before the CTA. Sony Philippines argued that the basis used by the
CIR to assess said deficiency were the records covering the period of January 1998 through March 1998
which was a period not covered by the letter of authority so issued.
After trial, the CTA-First Division disallowed the deficiency VAT assessment because the subsidized
advertising expense paid by Sony which was duly covered by a VAT invoice resulted in an input VAT
credit. As regards the EWT, the CTA-First Division maintained the deficiency EWT assessment on Sony’s
motor vehicles and on professional fees paid to general professional partnerships. It also assessed the
amounts paid to sales agents as commissions with five percent (5%) EWT pursuant to Section 1(g) of
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Revenue Regulations No. 6-85. The CTA-First Division, however, disallowed the EWT assessment on
rental expense since it found that the total rental deposit of ₱10,523,821.99 was incurred from January
to March 1998 which was again beyond the coverage of LOA 19734. Except for the compromise
penalties, the CTA-First Division also upheld the penalties for the late payment of VAT on royalties, for
late remittance of final withholding tax on royalty as of December 1997 and for the late remittance of
EWT by some of Sony’s branches. In sum, the CTA-First Division partly granted Sony’s petition by
cancelling the deficiency VAT assessment but upheld a modified deficiency EWT assessment as well as
the penalties.
The CIR sought a reconsideration of the above decision. Because the CA First Division denied its motion
for reconsideration, CIR filed a petition for review with the CA. However, the latter dismissed the
petition. Hence, this petition was filed before the SC. The CIR insists that LOA 19734, although it states
"the period 1997 and unverified prior years," should be understood to mean the fiscal year ending in
March 31, 1998.
ISSUES:
1.) Was the investigation of its 1998 Final Withholding Tax return valid? - NO
2.) Whether or not Sony Philippines is engaged in the sale of services to Sony International Singapore
(SIS), thus liable to pay VAT - NO
RULING:
1.) Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given to the
appropriate revenue officer assigned to perform assessment functions. It empowers or enables said
revenue officer to examine the books of account and other accounting records of a taxpayer for the
purpose of collecting the correct amount of tax. The very provision of the Tax Code that the CIR relies
on is unequivocal with regard to its power to grant authority to examine and assess a taxpayer.
SEC. 6. Power of the Commissioner to Make Assessments and Prescribe Additional
Requirements for Tax Administration and Enforcement. –
(A)Examination of Returns and Determination of tax Due. – After a return has been filed as
required under the provisions of this Code, the Commissioner or his duly authorized
representative may authorize the examination of any taxpayer and the assessment of the
correct amount of tax: Provided, however, That failure to file a return shall not prevent the
Commissioner from authorizing the examination of any taxpayer.
Clearly, there must be a grant of authority before any revenue officer can conduct an examination or
assessment. Equally important is that the revenue officer so authorized must not go beyond the
authority given. In the absence of such an authority, the assessment or examination is a nullity.
As earlier stated, LOA 19734 covered "the period 1997 and unverified prior years." For said reason, the
CIR acting through its revenue officers went beyond the scope of their authority because the deficiency
VAT assessment they arrived at was based on records from January to March 1998 or using the fiscal
year which ended in March 31, 1998. As pointed out by the CTA-First Division in its April 28, 2005
Resolution, the CIR knew which period should be covered by the investigation. Thus, if CIR wanted or
intended the investigation to include the year 1998, it should have done so by including it in the LOA or
issuing another LOA.
Page 48
Upon review, the CTA-EB even added that the coverage of LOA 19734, particularly the phrase "and
unverified prior years," violated Section C of Revenue Memorandum Order No. 43-90 dated September
20, 1990, the pertinent portion of which reads:
3. A Letter of Authority should cover a taxable period not exceeding one taxable year.
The practice of issuing L/As covering audit of "unverified prior years is hereby prohibited. If
the audit of a taxpayer shall include more than one taxable period, the other periods or years
shall be specifically indicated in the L/A.
2.) CIR’s argument, that Sony’s advertising expense could not be considered as an input VAT credit
because the same was eventually reimbursed by Sony International Singapore (SIS), is also erroneous.
The CIR contends that since Sony’s advertising expense was reimbursed by SIS, the former never
incurred any advertising expense. As a result, Sony is not entitled to a tax credit. At most, the CIR
continues, the said advertising expense should be for the account of SIS, and not Sony.
The Court is not persuaded. As aptly found by the CTA-First Division and later affirmed by the CTA-EB,
Sony’s deficiency VAT assessment stemmed from the CIR’s disallowance of the input VAT credits that
should have been realized from the advertising expense of the latter. It is evident under Section 110 of
the 1997 Tax Code that an advertising expense duly covered by a VAT invoice is a legitimate business
expense. This is confirmed by no less than CIR’s own witness, Revenue Officer Antonio Aluquin. There
is also no denying that Sony incurred advertising expense. Aluquin testified that advertising companies
issued invoices in the name of Sony and the latter paid for the same. Indubitably, Sony incurred and
paid for advertising expense/ services. Where the money came from is another matter all together but
will definitely not change said fact.
The CIR further argues that Sony itself admitted that the reimbursement from SIS was income and,
thus, taxable. In support of this, the CIR cited a portion of Sony’s protest filed before it:
The fact that due to adverse economic conditions, Sony-Singapore has granted to our client a
subsidy equivalent to the latter’s advertising expenses will not affect the validity of the input
taxes from such expenses. Thus, at the most, this is an additional income of our client subject
to income tax. We submit further that our client is not subject to VAT on the subsidy income
as this was not derived from the sale of goods or services.
Insofar as the above-mentioned subsidy may be considered as income and, therefore, subject to
income tax, the Court agrees. However, the Court does not agree that the same subsidy should be
subject to the 10% VAT. To begin with, the said subsidy termed by the CIR as reimbursement was not
even exclusively earmarked for Sony’s advertising expense for it was but an assistance or aid in view of
Sony’s dire or adverse economic conditions, and was only "equivalent to the latter’s (Sony’s) advertising
expenses."
Section 106 of the Tax Code explains when VAT may be imposed or exacted. Thus:
SEC. 106. Value-added Tax on Sale of Goods or Properties. –
(A) Rate and Base of Tax. – There shall be levied, assessed and collected on every sale, barter
or exchange of goods or properties, value-added tax equivalent to ten percent (10%) of the
gross selling price or gross value in money of the goods or properties sold, bartered or
exchanged, such tax to be paid by the seller or transferor.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Thus, there must be a sale, barter or exchange of goods or properties before any VAT may be levied.
Certainly, there was no such sale, barter or exchange in the subsidy given by SIS to Sony. It was but a
dole out by SIS and not in payment for goods or properties sold, bartered or exchanged by Sony.
In the case of CIR v. Court of Appeals (CA), the Court had the occasion to rule that services rendered
for a fee even on reimbursement-on-cost basis only and without realizing profit are also subject to VAT.
The case, however, is not applicable to the present case. In that case, COMASERCO rendered service to
its affiliates and, in turn, the affiliates paid the former reimbursement-on-cost which means that it was
paid the cost or expense that it incurred although without profit. This is not true in the present case.
Sony did not render any service to SIS at all. The services rendered by the advertising companies, paid
for by Sony using SIS dole-out, were for Sony and not SIS. SIS just gave assistance to Sony in the
amount equivalent to the latter’s advertising expense but never received any goods, properties or
service from Sony.
Regarding the deficiency EWT assessment, more particularly Sony’s commission expense, the CIR
insists that said deficiency EWT assessment is subject to the ten percent (10%) rate instead of the five
percent (5%) citing Revenue Regulation No. 2-98 dated April 17, 1998. The said revenue regulation
provides that the 10% rate is applied when the recipient of the commission income is a natural person.
According to the CIR, Sony’s schedule of Selling, General and Administrative expenses shows the
commission expense as "commission/dealer salesman incentive," emphasizing the word salesman.
On the other hand, the application of the five percent (5%) rate by the CTA-First Division is based on
Section 1(g) of Revenue Regulations No. 6-85 which provides:
(g) Amounts paid to certain Brokers and Agents. – On gross payments to customs, insurance, real
estate and commercial brokers and agents of professional entertainers – five per centum (5%).
In denying the very same argument of the CIR in its motion for reconsideration, the CTA-First Division,
held:
x x x, commission expense is indeed subject to 10% withholding tax but payments made to broker is
subject to 5% withholding tax pursuant to Section 1(g) of Revenue Regulations No. 6-85. While the
commission expense in the schedule of Selling, General and Administrative expenses submitted by
petitioner (SPI) to the BIR is captioned as "commission/dealer salesman incentive" the same does not
justify the automatic imposition of flat 10% rate. As itemized by petitioner, such expense is composed
of "Commission Expense" in the amount of P10,200.00 and ‘Broker Dealer’ of P2,894,797.00.
The Court agrees with the CTA-EB when it affirmed the CTA-First Division decision. Indeed, the
applicable rule is Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, which
was the applicable rule during the subject period of examination and assessment as specified in the
LOA. Revenue Regulations No. 2-98, cited by the CIR, was only adopted in April 1998 and, therefore,
cannot be applied in the present case. Besides, the withholding tax on brokers and agents was only
increased to 10% much later or by the end of July 2001 under Revenue Regulations No. 6-2001. Until
then, the rate was only 5%.
The Court also affirms the findings of both the CTA-First Division and the CTA-EB on the deficiency EWT
assessment on the rental deposit. According to their findings, Sony incurred the subject rental deposit
in the amount of ₱10,523,821.99 only from January to March 1998. As stated earlier, in the absence of
the appropriate LOA specifying the coverage, the CIR’s deficiency EWT assessment from January to
March 1998, is not valid and must be disallowed.
Page 49

Finally, the Court now proceeds to the third ground relied upon by the CIR.
The CIR initially assessed Sony to be liable for penalties for belated remittance of its FWT on royalties
(i) as of December 1997; and (ii) for the period from January to March 1998. Again, the Court agrees
with the CTA-First Division when it upheld the CIR with respect to the royalties for December 1997 but
cancelled that from January to March 1998.
The CIR insists that under Section 3 of Revenue Regulations No. 5-82 and Sections 2.57.4 and
2.58(A)(2)(a) of Revenue Regulations No. 2-98, Sony should also be made liable for the FWT on
royalties from January to March of 1998. At the same time, it downplays the relevance of the
Manufacturing License Agreement (MLA) between Sony and Sony-Japan, particularly in the payment of
royalties.
The above revenue regulations provide the manner of withholding remittance as well as the payment of
final tax on royalty. Based on the same, Sony is required to deduct and withhold final taxes on royalty
payments when the royalty is paid or is payable. After which, the corresponding return and remittance
must be made within 10 days after the end of each month. The question now is when does the royalty
become payable?
Under Article X(5) of the MLA between Sony and Sony-Japan, the following terms of royalty payments
were agreed upon:
(5) Within two (2) months following each semi-annual period ending June 30 and December
31, the LICENSEE shall furnish to the LICENSOR a statement, certified by an officer of the
LICENSEE, showing quantities of the MODELS sold, leased or otherwise disposed of by the
LICENSEE during such respective semi-annual period and amount of royalty due pursuant this
ARTICLE X therefore, and the LICENSEE shall pay the royalty hereunder to the LICENSOR
concurrently with the furnishing of the above statement.
Withal, Sony was to pay Sony-Japan royalty within two (2) months after every semi-annual period
which ends in June 30 and December 31. However, the CTA-First Division found that there was accrual
of royalty by the end of December 1997 as well as by the end of June 1998. Given this, the FWTs
should have been paid or remitted by Sony to the CIR on January 10, 1998 and July 10, 1998. Thus, it
was correct for the CTA-First Division and the CTA-EB in ruling that the FWT for the royalty from
January to March 1998 was seasonably filed. Although the royalty from January to March 1998 was well
within the semi-annual period ending June 30, which meant that the royalty may be payable until
August 1998 pursuant to the MLA, the FWT for said royalty had to be paid on or before July 10, 1998 or
10 days from its accrual at the end of June 1998. Thus, when Sony remitted the same on July 8, 1998,
it was not yet late.
G.R. No. 181858 November 24, 2010
KEPCO PHILIPPINES CORPORATION, Petitioner,
vs. COMMISSIONER OF INTERNAL REVENUE, Respondent.
MENDOZA, J.:
● I listed all the issues (4 issues)
● You may not read italicized paragraphs
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
FACTS: Petitioner KEPCO is a VAT-registered independent power producer engaged in the business of
generating electricity. It exclusively sells electricity to NPC, an entity exempt from taxes under Section
13 of RA 6395. On December 4, 2001, Kepco filed an application for zero-rated sales with the BIR
and it was approved under VAT Ruling 64-01.
Accordingly, for taxable year 2002, it filed four Quarterly VAT Returns declaring zero-rated sales in the
aggregate amount of ₱3,285,308,055.85.
In the course of doing business with NPC, Kepco claimed expenses reportedly sustained in connection
with the production and sale of electricity with NPC. Based on Kepco’s calculation, it paid input VAT
amounting to ₱11,710,868.86 attributing the same to its zero-rated sales of electricity with NPC.
On April 20, 2004, Kepco filed before the CIR a claim for tax refund covering unutilized input VAT
payments attributable to its zero-rated sales transactions for taxable year 2002. Two days later, on April
22, 2004, it filed a petition for review before the CTA.
Respondent CIR averred that claims for refund were strictly construed against the taxpayer as it was
similar to a tax exemption. It asserted that the burden to show that the taxes were erroneous or illegal
lay upon the taxpayer.
KEPCO argues that the 1997 NIRC does not require the imprinting of the word zero-rated on invoices
and/or official receipts covering zero-rated sales. It claims that Section 113 in relation to Section 237 of
the 1997 NIRC "does not mention the requirement of imprinting the words ‘zero-rated’ to purchases
covering zero-rated transactions." Only Section 4.108-1 of Revenue Regulation No. 7-95 (RR No. 7-95)
"required the imprinting of the word ‘zero-rated’ on the VAT invoice or receipt." "Thus, Section 4.108-1
of RR No. 7-95 cannot be considered as a valid legislation considering the long-settled rule that
administrative rules and regulations cannot expand the letter and spirit of the law they seek to
enforce."
CTA: ruled that out of the total declared zero-rated sales of ₱3,285,308,055.85, Kepco was only able to
properly substantiate ₱1,451,788,865.52 as its zero-rated sales. After factoring, only 44.19% of the
validly supported input VAT payments being claimed could be considered. It also disallowed the
₱5,170,914.20 of Kepco’s claimed input vat due to its failure to comply with the substantiation
requirement. petitioner’s claim for refund is hereby partially granted. CIR is ordered to refund petitioner
the reduced amount of ₱2,890,005.96 representing unutilized input value-added tax for taxable year
2002. KEPCO moved for partial reconsideration but CRA denied it. It appealed the case to the CTA En
Banc.
CTA En Banc: dismissed the petition and ruled that "in order for Kepco to be entitled to its claim for
refund/issuance of tax credit certificate representing unutilized input VAT attributable to its zero-rated
sales for taxable year 2002, it must comply with the substantiation requirements under the appropriate
Revenue Regulations, i.e. Revenue Regulations 7-95." Thus, it concluded that "the Court in Division was
correct in disallowing a portion of Kepco’s claim for refund on the ground that input taxes on Kepco’s
purchase of goods and services were not supported by invoices and receipts printed with "TIN-VAT.”
#1 ISSUE: Whether the word "zero-rated" should be imprinted on invoices and/or official receipts as
part of the invoicing requirement
Page 50
HELD: Yes.
Section 4.108-1 of RR 7-95 proceeds from the rule-making authority granted to the Secretary of
Finance under Section 245 of the 1977 NIRC (PD 1158) for the efficient enforcement of the tax code
and of course its amendments. The requirement is reasonable and is in accord with the efficient
collection of VAT from the covered sales of goods and services. As aptly explained by the CTA’s First
Division, the appearance of the word "zero-rated" on the face of invoices covering zero-rated sales
prevents buyers from falsely claiming input VAT from their purchases when no VAT was actually paid.
If, absent such word, a successful claim for input VAT is made, the government would be refunding
money it did not collect.
Further, the printing of the word "zero-rated" on the invoice helps segregate sales that are subject to
10% (now 12%) VAT from those sales that are zero-rated. Unable to submit the proper invoices,
petitioner Panasonic has been unable to substantiate its claim for refund.
Following said ruling, Section 4.108-1 of RR 7-95 neither expanded nor supplanted the tax
code but merely supplemented what the tax code already defined and discussed. In fact,
the necessity of indicating "zero-rated" into VAT invoices/receipts became more apparent
when the provisions of this revenue regulation was later integrated into RA No. 9337, the
amendatory law of the 1997 NIRC.
Evidently, as it failed to indicate in its VAT invoices and receipts that the transactions were
zero-rated, Kepco failed to comply with the correct substantiation requirement for zero-
rated transactions.
#2 OTHER DISCUSSION: Kepco argues that non-compliance of invoicing requirements should not
result in the denial of the taxpayer’s refund claim. Citing Atlas Consolidated Mining & Development
Corporation vs. CIR, it claims that a party who fails to issue VAT official receipts/invoices for its sales
should only be imposed penalties as provided under Section 264 of the 1997 NIRC.
ISSUE: Whether non-compliance of invoicing requirements should not result in the denial of the
taxpayer’s refund claim
HELD: No. The Court has read the Atlas decision, and has not come across any categorical ruling that
refund should be allowed for those who had not complied with the substantiation requirements. It
merely recited "Section 263" which provided for penalties in case of "Failure or refusal to Issue Receipts
or Sales or Commercial Invoices, Violations related to the Printing of such Receipts or Invoices and
Other Violations." It does not categorically say that the claimant should be refunded. At any rate,
Section 264 (formerly Section 263) of the 1997 NIRC was not intended to excuse the compliance of the
substantive invoicing requirement needed to justify a claim for refund on input VAT payments.
#3 OTHER DISCUSSION: Kepco insists that Section 4.108.1 of Revenue Regulation 07-95 does not
require the word "TIN-VAT" to be imprinted on a VAT-registered person’s supporting invoices and
official receipts and so there is no reason for the denial of its ₱4,720,725.63 claim of input tax
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
ISSUE: Whether Section 4.108.1 of RR 07-95 requires the word "TIN-VAT" to be imprinted on a VAT-
registered person’s supporting invoices and official receipts
HELD: Yes. In this regard, Internal Revenue Regulation 7-95 (Consolidated VAT Regulations) is clear.
Section 4.108-1 thereof reads:
Only VAT registered persons are required to print their TIN followed by the word "VAT" in their
invoice or receipts and this shall be considered as a "VAT" Invoice. All purchases covered by
invoices other than ‘VAT Invoice’ shall not give rise to any input tax.
Contrary to Kepco’s allegation, the regulation specifically requires the VAT registered person to imprint
TIN-VAT on its invoices or receipts. Thus, the Court agrees with the CTA when it wrote: "To be
considered a ‘VAT invoice,’ the TIN-VAT must be printed, and not merely stamped. Consequently,
purchases supported by invoices or official receipts, wherein the TIN-VAT is not printed thereon, shall
not give rise to any input VAT. Likewise, input VAT on purchases supported by invoices or official
receipts which are NON-VAT are disallowed because these invoices or official receipts are not
considered as ‘VAT Invoices.’"
#4 OTHER DISCUSSION: Kepco further argues that under Section 113(A) of the 1997 NIRC, invoices
and official receipts are used interchangeably for purposes of substantiating input VAT. Hence, it claims
that the CTA should have accepted its substantiation of input VAT on (1) ₱64,509.50 on purchases of
goods with official receipts and (2) ₱256,689.98 on purchases of services with invoices.43
ISSUE: Whether invoices and official receipts can be used interchangeably for purposes of
substantiating input VAT
HELD: No. Under the law, a VAT invoice is necessary for every sale, barter or exchange of goods or
properties while a VAT official receipt properly pertains to every lease of goods or properties, and for
every sale, barter or exchange of services.
Distinctions of an invoice from a receipt:
A "sales or commercial invoice" is a written account of goods sold or services rendered indicating
the prices charged therefor or a list by whatever name it is known which is used in the ordinary course
of business evidencing sale and transfer or agreement to sell or transfer goods and services.
A "receipt" on the other hand is a written acknowledgment of the fact of payment in money or other
settlement between seller and buyer of goods, debtor or creditor, or person rendering services and
client or customer.
In other words, the VAT invoice is the seller’s best proof of the sale of the goods or services to the
buyer while the VAT receipt is the buyer’s best evidence of the payment of goods or services received
from the seller. Even though VAT invoices and receipts are normally issued by the supplier/seller alone,
the said invoices and receipts, taken collectively, are necessary to substantiate the actual amount or
quantity of goods sold and their selling price (proof of transaction), and the best means to prove the
Page 51
input VAT payments (proof of payment). Hence, VAT invoice and VAT receipt should not be confused as
referring to one and the same thing. Certainly, neither does the law intend the two to be used
alternatively.
Although it is true that the CTA is not strictly governed by technical rules of evidence, the invoicing and
substantiation requirements must, nevertheless, be followed because it is the only way to determine
the veracity of Kepco’s claims. Verily, the CTA En Banc correctly disallowed the input VAT that did not
meet the required standard of substantiation.
The CTA is devoted exclusively to the resolution of tax-related issues and has unmistakably acquired an
expertise on the subject matter. In the absence of abuse or reckless exercise of authority, the CTA En
Banc’s decision should be upheld.
The Court has always decreed that tax refunds are in the nature of tax exemptions which represent a
loss of revenue to the government. These exemptions, therefore, must not rest on vague, uncertain or
indefinite inference, but should be granted only by a clear and unequivocal provision of law on the basis
of language too plain to be mistaken. Such exemptions must be strictly construed against the taxpayer,
as taxes are the lifeblood of the government.
G.R. No. 182364 August 3, 2010
AT&T COMMUNICATIONS SERVICES PHILIPPINES, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
CARPIO MORALES, J.:
FYI: AT&T Communications Services Philippines, Inc. (petitioner) is a domestic corporation primarily
engaged in the business of providing information, promotional, supportive and liaison services to
foreign corporations such as AT&T Communications Services International Inc., AT&T Solutions, Inc.,
AT&T Singapore, Pte. Ltd.,, AT&T Global Communications Services, Inc. and Acer, Inc., an enterprise
registered with the Philippine Economic Zone Authority (PEZA).
Quick Facts: see bottom part
FACTS: Under Service Agreements forged by petitioner AT&T Communications Services Philippines,
Inc. with the above-named corporations, remuneration is paid in U.S. Dollars and inwardly remitted in
accordance with the rules and regulations of the BSP.
For the calendar year 2002, petitioner incurred input VAT when it generated and recorded zero-rated
sales in connection with its Service Agreements in the peso equivalent of ₱56,898,744.05. Petitioner
also incurred input VAT from purchases of capital goods and other taxable goods and services, and
importation of capital goods.
Despite the application of petitioner’s input VAT against its output VAT, an excess of unutilized input
VAT in the amount of ₱2,050,736.69 remained. As petitioner’s unutilized input VAT could not be directly
and exclusively attributed to either of its zero-rated sales or its domestic sales, an allocation of the input
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
VAT was made which resulted in the amount of ₱1,801,826.82 as petitioner’s claim attributable to its
zero-rated sales.
On March 26, 2004, petitioner filed with the CIR an application for tax refund and/or tax credit of its
excess/unutilized input VAT from zero-rated sales in the said amount of ₱1,801,826.82.1
To prevent the running of the prescriptive period, petitioner subsequently filed a petition for review with
the CTA.
Petitioner presented documents including its Summary of Zero-Rated Sales with corresponding
supporting documents; VAT invoices on which were stamped "zero-rated" and bank credit advices;
copies of Service Agreements; and report of the commissioned CPA.
CTA: Denied petitioner’s claim "for lack of substantiation," ; petitioner’s transactions fall under the
classification of zero-rated sales.
CTA, relying on Sections 1064 and 1085 of the Tax Code, held that since petitioner is engaged in sale of
services, VAT Official Receipts should have been presented in order to substantiate its claim of zero-
rated sales, not VAT invoices which pertain to sale of goods or properties.
ISSUE #1: Whether VAT official receipts or invoices are sufficient to substantiate a claim for tax refund
HELD #1: YES.
Section 113 of the Tax Code does not create a distinction between a sales invoice and an official
receipt.
Sec. 113. Invoicing and Accounting Requirements for VAT-Registered Persons.—
Invoicing Requirements.— A VAT-registered person shall, for every sale, issue an invoice or
receipt.
In addition to the information required under Section 237, the following information shall be indicated
in the invoice or receipt:
1. A statement that the seller is a VAT-registered person, followed by his taxpayer’s identification
number (TIN); and
2. The total amount which the purchaser pays or is obligated to pay to the seller with the
indication that such amount includes the value-added tax.
Section 110 of the 1997 Tax Code in fact provides: Section 110. Tax Credits—
A. Creditable Input Tax.—
(1) Any input tax evidenced by a VAT invoice or official receipt issued in accordance with
Section 113 hereof on the following transactions shall be creditable against the output tax:
(b) Purchase of services on which a value-added tax has actually been paid.
Page 52
Parenthetically, to determine the validity of petitioner’s claim as to unutilized input VAT, an invoice
would suffice provided the requirements under Sections 113 and 237 of the Tax Code are met.
Sales invoices are recognized commercial documents to facilitate trade or credit transactions. They are
proofs that a business transaction has been concluded, hence, should not be considered bereft of
probative value. Only the preponderance of evidence threshold as applied in ordinary civil cases is
needed to substantiate a claim for tax refund proper.
ISSUE #2: May a taxpayer who is engaged in zero-rated transactions apply for tax refund or issuance
of tax credit certificate for unutilized input VAT?
HELD #2. Yes, but subject to the following requirements:
1. the taxpayer is engaged in sales which are zero-rated (i.e., export sales) or effectively zero-
rated;
2. the taxpayer is VAT-registered;
3. the claim must be filed within two years after the close of the taxable quarter when such sales
were made;
4. the creditable input tax due or paid must be attributable to such sales, except the transitional
input tax, to the extent that such input tax has not been applied against the output tax; and
5. in case of zero-rated sales under Section 106 (A) (2) (a) (1) and (2), Section 106 (B) and
Section 108 (B) (1) and (2), the acceptable foreign currency exchange proceeds thereof have
been duly accounted for in accordance with BSP rules and regulations.7
Zero-rated transactions generally refer to the export sale of goods and supply of services. The tax rate
is set at zero. When applied to the tax base, such rate obviously results in no tax chargeable against
the purchaser. The seller of such transactions charges no output tax but can claim a refund or a tax
credit certificate for the VAT previously charged by suppliers. x x x
Applying the destination principle to the exportation of goods, automatic zero rating is primarily
intended to be enjoyed by the seller who is directly and legally liable for the VAT, making such seller
internationally competitive by allowing the refund or credit of input taxes that are attributable to export
sales.
SC: Petitioner has complied with the substantiation requirements to prove entitlement to refund/tax
credit.
The Court is not a trier of facts, however, hence the need to remand the case to the CTA for
determination and computation of petitioner’s refund/tax credit.
QUICK FACTS: Petitioner is a domestic corporation engaged in the business of providing, among
others, information and promotional services to foreign corporations and registered with the PEZA.
Remuneration is paid in US dollars and inwardly remitted in accordance with BSP rules and regulations.
Petitioner incurred input VAT when it generated zero-rated sales in connection with its Service
Agreement. It filed with the CIR an application for tax refund or tax credit of its unutilized input VAT
from zero rated sales, with sales invoices as support thereof.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
G.R. No. 172378 January 17, 2011
SILICON PHILIPPINES, INC., (Formerly INTEL PHILIPPINES MANUFACTURING, INC.),
Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
DEL CASTILLO, J.:
I put the CTA Division and En Banc Rulings because connected sa issue and the same decision sa SC.
FYI: Petitioner Silicon Philippines, Inc., a corporation duly organized and existing under and by virtue of
the laws of the RPH, is engaged in the business of designing, developing, manufacturing and exporting
advance and large-scale integrated circuit components or "IC’s." Petitioner is registered with the BIR as
a VAT taxpayer and with the Board of Investments (BOI) as a preferred pioneer enterprise.
FACTS: On May 21, 1999, petitioner Silicon Philippines, Inc., filed with the CIR, through the One-Stop
Shop Inter-Agency Tax Credit and Duty Drawback Center of the Department of Finance (DOF), an
application for credit/refund of unutilized input VAT for the period October 1, 1998 to December 31,
1998 in the amount of ₱31,902,507.50.
In 2000, due to the inaction of the CIR, a Petition for Review with the CTA Division was filed by the
petitioner.
Petitioner alleged that for the 4th quarter of 1998, it generated and recorded zero-rated export sales in
the amount of ₱3,027,880,818.42, paid to petitioner in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the BSP; and that for the said period, petitioner paid
input VAT in the total amount of ₱31,902,507.50, which have not been applied to any output VAT.
CTA Division: Respondent is ordered to issue a tax credit certificate in favor of petitioner in the
reduced amount of P9,898,867.00 representing input VAT on importation of capital goods. However,
the claim for refund of input VAT attributable to petitioner's alleged zero-rated sales in the amount of
P16,732,425.50 is hereby DENIED for lack of merit.
Petitioner moved for reconsideration.
● It claimed that it is not required to secure an ATP since it has a "Permit to Adopt Computerized
Accounting Documents such as Sales Invoice and Official Receipts" from the BIR.
● Petitioner further argued that because all its finished products are exported to its mother
company, Intel Corporation, a non-resident corporation and a non-VAT registered entity, the
printing of the word "zero-rated" on its export sales invoices is not necessary.
CIR contends that petitioner is not entitled to a credit/refund of unutilized input VAT on capital goods
because it failed to show that the goods imported/purchased are indeed capital goods as defined in
Section 4.106-1 of RR No. 7-95.
Page 53

The CTA Division denied both motions.
CTA En banc: Denied the petition for lack of merit.
With regard to the first assigned error, this Court reiterates that, the requirement of [printing] the BIR
permit to print on the face of the sales invoices and official receipts is a control mechanism adopted by
the Bureau of Internal Revenue to safeguard the interest of the government.
This requirement is clearly mandated under Section 238 of the 1997 NIRC, which provides that:
SEC. 238. Printing of Receipts or Sales or Commercial Invoice. – All persons who are engaged
in business shall secure from the Bureau of Internal Revenue an authority to print receipts or sales or
commercial invoices before a printer can print the same.
The above mentioned provision seeks to eliminate the use of unregistered and double or multiple sets
of receipts by striking at the very root of the problem — the printer. And what better way to prove that
the required permit to print was secured from the Bureau of Internal Revenue than to show or print the
same on the face of the invoices. There can be no other valid proof of compliance with the above
provision than to show the Authority to Print Permit number [printed] on the sales invoices and official
receipts.
With regard to petitioner’s failure to print the word "zero-rated" on the face of its export sales invoices,
it must be emphasized that Section 4.108-1 of Revenue Regulations No. 7-95 specifically requires that
all value-added tax registered persons shall, for every sale or lease of goods or properties or services,
issue duly registered invoices which must show the word "zero-rated" [printed] on the invoices covering
zero-rated sales.
In this case, not only should petitioner establish that it is entitled to the claim but it must most
importantly show proof of compliance with the substantiation requirements as mandated by law or
regulations.
Petitioner’s Arguments
Petitioner posits that the denial by the CTA En Banc of its claim for refund of input VAT attributable to
its zero-rated sales has no legal basis because the printing of the ATP and the word "zero-rated" on the
export sales invoices are not required under Sections 113 and 237 of the NIRC. And since there is no
law requiring the ATP and the word "zero-rated" to be indicated on the sales invoices,32 the absence of
such information in the sales invoices should not invalidate the petition nor result in the outright denial
of a claim for tax credit/refund.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
As to the claim for refund of input VAT on capital goods, petitioner insists that it has sufficiently proven
through testimonial and documentary evidence that all the goods purchased were used in the
production and manufacture of its finished products which were sold and exported.
Respondent’s Arguments
CIR asserts that the printing of the ATP on the export sales invoices, which serves as a control
mechanism for the BIR, is mandated by Section 238 of the NIRC;39 while the printing of the word "zero-
rated" on the export sales invoices, which seeks to prevent purchasers of zero-rated sales or services
from claiming non-existent input VAT credit/refund, is required under RR No. 7-95, promulgated
pursuant to Section 244 of the NIRC.
With regard to the unutilized input VAT on capital goods, respondent counters that petitioner failed to
show that the goods it purchased/imported are capital goods as defined in Section 4.106-1 of RR No. 7-
95.
ISSUES:
1. Whether the CTA En Banc erred in denying petitioner’s claim for credit/ refund of input VAT
attributable to its zero-rated sales in the amount of ₱16,732,425.00 due to its failure:
(a) to show that it secured an ATP from the BIR and to indicate the same in its export sales invoices;
and
(b) to print the word "zero-rated" in its export sales invoices.
2. Whether the CTA En Banc erred in ruling that only the amount of ₱9,898,867.00 can be
classified as input VAT paid on capital goods
HELD: NO in all issues.
Before us are two types of input VAT credits. One is a credit/refund of input VAT attributable to
zero-rated sales under Section 112 (A) of the NIRC, and the other is a credit/refund of input VAT
on capital goods pursuant to Section 112 (B) of the same Code.
CREDIT/REFUND OF INPUT VAT ON ZERO-RATED SALES
In a claim for credit/refund of input VAT attributable to zero-rated sales, Section 112 (A) of the NIRC
lays down four requisites, to wit:
1. the taxpayer must be VAT-registered;
2. the taxpayer must be engaged in sales which are zero-rated or effectively zero-rated;
3. the claim must be filed within two years after the close of the taxable quarter when such sales
were made; and
4. the creditable input tax due or paid must be attributable to such sales, except the transitional
input tax, to the extent that such input tax has not been applied against the output tax.
Page 54

To prove that it is engaged in zero-rated sales, petitioner presented export sales invoices, certifications
of inward remittance, export declarations, and airway bills of lading for the fourth quarter of 1998.
The CTA Division, however, found the export sales invoices of no probative value in establishing
petitioner’s zero-rated sales for the purpose of claiming credit/refund of input VAT because petitioner
failed to show that it has an ATP from the BIR and to indicate the ATP and the word "zero-rated" in its
export sales invoices. The CTA Division cited as basis Sections 113, 237 and 238 of the NIRC, in relation
to Section 4.108-1 of RR No. 7-95.
We partly agree with the CTA.
Printing the ATP on the invoices or receipts is not required.
➢ The ATP need not be reflected or indicated in the invoices or receipts because there is no law
or regulation requiring it. Thus, in the absence of such law or regulation, failure to print the
ATP on the invoices or receipts should not result in the outright denial of a claim or the
invalidation of the invoices or receipts for purposes of claiming a refund.
ATP must be secured from the BIR.
➢ But while there is no law requiring the ATP to be printed on the invoices or receipts, Section
238 of the NIRC expressly requires persons engaged in business to secure an ATP from the
BIR prior to printing invoices or receipts. Failure to do so makes the person liable under
Section 264 of the NIRC.
This brings us to the question of:
3. Whether a claimant for unutilized input VAT on zero-rated sales is required to present
proof that it has secured an ATP from the BIR prior to the printing of its invoices or
receipts.
HELD: Yes
Under Section 112 (A) of the NIRC, a claimant must be engaged in sales which are zero-rated or
effectively zero-rated. To prove this, duly registered invoices or receipts evidencing zero-rated sales
must be presented. However, since the ATP is not indicated in the invoices or receipts, the only way to
verify whether the invoices or receipts are duly registered is by requiring the claimant to present its ATP
from the BIR. Without this proof, the invoices or receipts would have no probative value for the
purpose of refund. In the case of Intel, we emphasized that:
It bears reiterating that while the pertinent provisions of the Tax Code and the rules and
regulations implementing them require entities engaged in business to secure a BIR authority to print
invoices or receipts and to issue duly registered invoices or receipts, it is not specifically required that
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
the BIR authority to print be reflected or indicated therein. Indeed, what is important with respect to
the BIR authority to print is that it has been secured or obtained by the taxpayer, and that invoices or
receipts are duly registered.
Failure to print the word "zero-rated" on the sales invoices is fatal to a claim for refund of
input VA.
Similarly, failure to print the word "zero-rated" on the sales invoices or receipts is fatal to a claim for
credit/refund of input VAT on zero-rated sales.
In Panasonic Communications Imaging Corporation of the Philippines case, we upheld the denial of
Panasonic’s claim for tax credit/refund due to the absence of the word "zero-rated" in its invoices. We
explained that compliance with Section 4.108-1 of RR 7-95, requiring the printing of the word "zero
rated" on the invoice covering zero-rated sales, is essential as this regulation proceeds from the rule-
making authority of the Secretary of Finance under Section 244 of the NIRC.
➔ All told, the non-presentation of the ATP and the failure to indicate the word "zero-rated" in
the invoices or receipts are fatal to a claim for credit/refund of input VAT on zero-rated sales.
➔ The failure to indicate the ATP in the sales invoices or receipts, on the other hand, is not.
➔ In this case, petitioner failed to present its ATP and to print the word "zero-rated" on its export
sales invoices.
➔ Thus, we find no error on the part of the CTA in denying outright petitioner’s claim for
credit/refund of input VAT attributable to its zero-rated sales.
CREDIT/REFUND OF INPUT VAT ON CAPITAL GOODS
Capital goods are defined under Section 4.106-1(b) of RR No. 7-95.
To claim a refund of input VAT on capital goods, Section 112 (B) of the NIRC requires that:
1. the claimant must be a VAT registered person;
2. the input taxes claimed must have been paid on capital goods;
3. the input taxes must not have been applied against any output tax liability; an
4. the administrative claim for refund must have been filed within two (2) years after the close of
the taxable quarter when the importation or purchase was made.
Corollarily, Section 4.106-1 (b) of RR No. 7-95 defines capital goods as follows:
"Capital goods or properties" refer to goods or properties with estimated useful life greater that one
year and which are treated as depreciable assets under Section 29 (f),57 used directly or indirectly in
the production or sale of taxable goods or services.
Page 55
Based on the foregoing definition, we find no reason to deviate from the findings of the CTA that
training materials, office supplies, posters, banners, T-shirts, books, and the other similar items
reflected in petitioner’s Summary of Importation of Goods are not capital goods. A reduction in the
refundable input VAT on capital goods from ₱15,170,082.00 to ₱9,898,867.00 is therefore in order.
RENATO V. DIAZ and AURORA MA. F. TIMBOL vs THE SECRETARY OF FINANCE and THE
COMMISSIONER OF INTERNAL REVENUE
G.R. No. 193007
July 19,2011
FACTS:
Petitioners Renato V. Diaz and Aurora Ma. F. Timbol filed petition for declaratory relief assailing the
validity of the impending imposition of VAT by the (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action.
Petitioners allege that the BIR attempted during the administration of President Gloria Macapagal-
Arroyo to impose VAT on toll fees. The imposition was deferred, however, in view of the consistent
opposition of Diaz and other sectors to such move. But, upon President Benigno C. Aquino III's
assumption of office in 2010, the BIR revived the idea and would impose the challenged tax on toll fees
beginning August 16, 2010 unless judicially enjoined.
PETITIONER’S ALLEGATION:
Petitioners hold the view that
● Congress did not, when it enacted the NIRC, intend to include toll fees within the meaning of
"sale of services" that are subject to VAT;
● a toll fee is a "user's tax," not a sale of services;
● to impose VAT on toll fees would amount to a tax on public service; and
● since VAT was never factored into the formula for computing toll fees, its imposition would
violate the non-impairment clause of the constitution.
On August 13, 2010 the Court issued a temporary restraining order (TRO), enjoining the
implementation of the VAT.
ANSWER:
The government avers that
● the NIRC imposes VAT on all kinds of services of franchise grantees, including tollway
operations, except where the law provides otherwise;
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
● the Court should seek the meaning and intent of the law from the words used in the statute;
and that the imposition of VAT on tollway operations have been the subject as early as 2003
of several BIR rulings and circulars.
The government also argues that petitioners have no right to invoke the non-impairment of contracts
clause since they clearly have no personal interest in existing toll operating agreements (TOAs)
between the government and tollway operators. At any rate, the non-impairment clause cannot limit
the State's sovereign taxing power which is generally read into contracts. Finally, the government
contends that the non-inclusion of VAT in the parametric formula for computing toll rates cannot
exempt tollway operators from VAT. In any event, it cannot be claimed that the rights of tollway
operators to a reasonable rate of return will be impaired by the VAT since this is imposed on top of the
toll rate. Further, the imposition of VAT on toll fees would have very minimal effect on motorists using
the tollways.
ISSUES/HELD:
1. Whether or not the government is unlawfully expanding VAT coverage by including tollway
operators and tollway operations in the terms franchise grantees and sale of services under
Section 108 of the Code.
NO. It is plain view that the law (Section 108 of the NIRC) imposes VAT on “all kinds of services”
rendered in the Philippines for a fee, including those specified in the list. The enumeration of the
affected services is not exclusive. By qualifying “services” with the words “all kinds,” Congress has given
the term “services” an all encompassing meaning. The listing of specific services is intended to illustrate
how pervasive and broad is the VAT’s reach rather than establish concrete limits to its application.
Thus, every activity that can be imagined as a form of “service” rendered for a fee should be deemed
included unless some provision of law especially excludes it and the government is not unlawfully
expanding VAT coverage by including tollway operators and tollway operations in the terms franchise
grantees and sale of services under Section 108 of the Code.
Third paragraph of Section 108 of the NIRC:
The phrase sale or exchange of services means the performance of all kinds of services in the
Philippines for others for a fee, remuneration or consideration, including those performed or rendered
by construction and service contractors; stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or repacking goods for
others; proprietors, operators or keepers of hotels, motels, resthouses, pension houses, inns, resorts;
proprietors or operators of restaurants, refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and other domestic
common carriers by land relative to their transport of goods or cargoes; common carriers by air and sea
relative to their transport of passengers, goods or cargoes from one place in the Philippines to another
place in the Philippines; sales of electricity by generation companies, transmission, and distribution
companies; services of franchise grantees of electric utilities, telephone and telegraph, radio and
television broadcasting and all other franchise grantees except those under Section 119 of this Code
and non-life insurance companies (except their crop insurances), including surety, fidelity, indemnity
Page 56
and bonding companies; and similar services regardless of whether or not the performance thereof calls
for the exercise or use of the physical or mental faculties.
2. Whether or not the imposition of VAT on tollway operators would:
a) Amount to a tax on tax and not a tax on services;
NO. Tollway fees are not taxes.
VAT on tollway operations cannot be deemed a tax on tax due to the nature of VAT as an indirect tax.
In indirect taxation, a distinction is made between the liability for the tax and burden of the tax. The
seller who is liable for the VAT may shift or pass on the amount of VAT it paid on goods, properties or
services to the buyer.
In such a case, what is transferred is not the seller’s liability but merely the burden of the VAT.
Consequently, VAT on tollway operations is not really a tax on the tollway user, but on the tollway
operator. Under Section 105 of the Code, VAT is imposed on any person who, in the course of trade or
business, sells or renders services for a fee. In other words, the seller of services, who in this case is
the tollway operator, is the person liable for VAT. The latter merely shifts the burden of VAT to the
tollway user as part of the toll fees. For this reason, VAT on tollway operations cannot be a tax on tax
even if toll fees were deemed as a “user’s tax.” VAT is assessed against the tollway operator’s gross
receipts and not necessarily on the toll fees.
b) Impair the tollway operators right to a reasonable return of investment under their TOAs;
Petitioners have no personality to invoke the non-impairment of contract clause on behalf of private
investors in the tollway projects. They will neither be prejudiced by nor be affected by the alleged
diminution in return of investments that may result from the VAT imposition. They had no interest at all
in the profits to be earned under the TOAs. The interest in and right to recover investments solely
belongs to the private tollway investors. Besides, their allegation that the private investor’s rate of
recovery will be adversely affected by imposing VAT on tollway operations is purely speculative.
c) Not administratively feasible and cannot be implemented.
NO. Administrative feasibility is one of the canons of a sound tax system.
It simply means that the tax system should be capable of being effectively administered and enforced
with the least inconvenience to the taxpayer. Non-observance of the canon, however, will not render a
tax imposition invalid “except to the extent that specific constitutional or statutory limitations are
impaired.”
Thus, even if the imposition of VAT on tollway operations may seem burdensome to implement, it is not
necessarily invalid unless some aspect of it is shown to violate any law or the Constitution. Here, it
remains to be seen how the taxing authority will actually implement the VAT on tollway operations.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
QUICK FACTS:
Petitioners filed a petition for declaratory relief assailing the validity of the impending imposition of
value added tax (VAT) by the Bureau of Internal Revenue (BIR) on the collections of tollway operators.
Petitioners claim that, since the VAT would result in increased toll fees, they have an interest as regular
users of tollways in stopping the BIR action. Petitioners hold the view that Congress did not, when it
enacted the NIRC, intend to include toll fees within the meaning of “sale of services” that are subject to
VAT; that a toll fee is a “user’s tax,” not a sale of services; that to impose VAT on toll fees would
amount to a tax on public service; and that, since VAT was never factored into the formula for
computing toll fees, its imposition would violate the non-impairment clause of the constitution.
On the other hand, the government avers that the NIRC imposes VAT on all kinds of services of
franchise grantees, including tollway operations. The government also argues that petitioners have no
right to invoke the non-impairment of contracts clause since they clearly have no personal interest in
existing toll operating agreements (TOAs) between the government and tollway operators. At any rate,
the non- impairment clause cannot limit the State’s sovereign taxing power which is generally read into
contracts.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR) vs. THE BUREAU OF
INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO BUÑAG, in his official
capacity as COMMISSIONER OF INTERNAL REVENUE, JOHN DOE and JANE DOE, who are
persons acting for, in behalf, or under the authority of Respondent
G.R. No. 172087 March 15, 2011
FACTS:
PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A on January 1, 1977.
Simultaneous to its creation, P.D. No. 1067-B (supplementing P.D. No. 1067-A) was issued exempting
PAGCOR from the payment of any type of tax, except a franchise tax of five percent (5%) of the gross
revenue. Thereafter, on June 2, 1978, P.D. No. 1399 was issued expanding the scope of PAGCOR's
exemption. To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869
was issued. PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which was issued in September 1984.
On January 1, 1998, R.A. No. 8424, otherwise known as the National Internal Revenue Code of 1997,
took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and controlled
corporations (GOCCs) shall pay corporate income tax, except petitioner PAGCOR, the Government
Service and Insurance Corporation, the Social Security System, the Philippine Health Insurance
Corporation, and the Philippine Charity Sweepstakes Office.
With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the National Internal
Revenue Code of 1997 were amended. The particular amendment that is at issue in this case is Section
1 of R.A. No. 9337, which amended Section 27 (c) of the National Internal Revenue Code of 1997 by
Page 57
excluding PAGCOR from the enumeration of GOCCs that are exempt from payment of corporate income
tax.
Respondent BIR issued Revenue Regulations (RR) No. 16-2005, specifically identifying PAGCOR as one
of the franchisees subject to 10% VAT imposed under Section 108 of the National Internal Revenue
Code of 1997, as amended by R.A. No. 9337. The said revenue regulation, in part, reads:
Sec. 4. 108-3. Definitions and Specific Rules on Selected Services. —
(h) Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax Code,
regardless of how their franchisees may have been granted, shall be subject to the 10% VAT imposed
under Sec.108 of the Tax Code. This includes, among others, the Philippine Amusement and Gaming
Corporation (PAGCOR), and its licensees or franchisees.
ISSUE:
Whether or not PAGCOR is exempt from VAT with the enactment of R.A. No. 9337
HELD:
YES. PAGCOR is exempt from VAT.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR to 10%
VAT is invalid for being contrary to R.A. No. 9337. As pointed out by the OSG, R.A. No. 9337 itself
exempts petitioner from VAT pursuant to Section 7 (k) thereof, which reads:
Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as follows:
Section 109. Exempt Transactions. -
(1) Subject to the provisions of Subsection
(2) hereof, the following transactions shall be exempt from the value-added tax:
(k) Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except Presidential Decree No. 529.
Petitioner is exempt from the payment of VAT, because PAGCOR’s charter, P.D. No. 1869, is a special
law that grants petitioner exemption from taxes.
Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337, which
retained Section 108 (B) (3) of R.A. No. 8424, thus:
(B) Transactions Subject to Zero Percent (0%) Rate. — The following services performed in the
Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;
(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such services to
zero percent (0%) rate;
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
PAGCOR is exempt from payment of indirect taxes. It is undisputed that P.D. 1869, the charter creating
PAGCOR, grants the latter an exemption from the payment of taxes. Section 13 of P.D. 1869
pertinently provides:
Sec. 13. Exemptions. — (2) Income and other taxes. -
(a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies
of whatever nature, whether National or Local, shall be assessed and collected under this Franchise
from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the
Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by
the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to
the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any
kind, nature or description, levied, established or collected by any municipal, provincial, or national
government authority.
(b) Others: The exemptions herein granted for earnings derived from the operations conducted under
the franchise specifically from the payment of any tax, income or otherwise, as well as any form of
charges, fees or levies, shall inure to the benefit of and extend to corporation(s), association(s),
agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in
connection with the operations of the casino(s) authorized to be conducted under this Franchise and to
those receiving compensation or other remuneration from the Corporation or operator as a result of
essential facilities furnished and/or technical services rendered to the Corporation or operator.
It is settled rule that in case of discrepancy between the basic law and a rule or regulation issued to
implement said law, the basic law prevails, because the said rule or regulation cannot go beyond the
terms and provisions of the basic law. RR No. 16-2005, therefore, cannot go beyond the provisions of
R.A. No. 9337. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said
regulatory provision is hereby nullified.
Although the law does not specifically mention PAGCOR's exemption from indirect taxes, PAGCOR is
undoubtedly exempt from such taxes because the law exempts from taxes persons or entities
contracting with PAGCOR in casino operations. Although, differently worded, the provision clearly
exempts PAGCOR from indirect taxes. In fact, it goes one step further by granting tax exempt status to
persons dealing with PAGCOR in casino operations. Thus, by extending the tax exemption to
entities or individuals dealing with PAGCOR in casino operations, it is exempting PAGCOR
from being liable to indirect taxes.
QUICK FACTS:
The Philippine Amusement and Gaming Corporation (PAGCOR) was created by P.D. No. 1067-A in 1977.
Obviously, it is a government owned and controlled corporation (GOCC).
In 1998, R.A. 8424 or the National Internal Revenue Code of 1997 (NIRC) became effective. Section 27
thereof provides that GOCC’s are NOT EXEMPT from paying income taxation but it exempted the
following GOCCs:
1. GSIS
Page 58
2. SSS
3. PHILHEALTH
4. PCSO
5. PAGCOR
But in May 2005, R.A. 9337, a law amending certain provisions of R.A. 8424, was passed. Section 1
thereof excluded PAGCOR from the exempt GOCCs hence PAGCOR was subjected to pay income
taxation. In September 2005, the Bureau of Internal Revenue issued the implementing rules and
regulations (IRR) for R.A. 9337. In the said IRR, it identified PAGCOR as subject to a 10% value added
tax (VAT) upon items covered by Section 108 of the NIRC (Sale of Services and Use or Lease of
Properties).
PAGCOR questions the constitutionality of Section 1 of R.A. 9337 as well as the IRR. PAGCOR avers that
the said provision violates the equal protection clause. PAGCOR argues that it is similarly situated with
SSS, GSIS, PCSO, and PHILHEALTH, hence it should not be excluded from the exemption.
COMMISSIONER OF INTERNAL REVENUE vs. AICHI FORGING COMPANY OF ASIA, INC.,
G.R. No. 184823 October 6, 2010
FACTS:
Aichi forging, a VAT entity filed a claim for refund of input VAT for its zero-rated sales with the Dept. of
Finance One-Stop Inter-Agency Tax Credit and Duty Drawback Center on Sept 30, 2004. On the same
day, Aichi Forging filed a Petition for Review with the CTA for the same action. The BIR disputed the
claim and alleged that the same was filed beyond the two-year period given that 2004 was a leap year
and thus the claim should have been filed on September 29, 2004. The CIR also raised issues related to
the reckoning of the 2-year period and the simultaneous filing of the administrative and judicial claims.
● CTA partially granted the refund by reducing the leaseless claims.
● CIR filed a Motion for Reconsideration insisting that they were filed beyond the
prescriptive period in accordance to Article 13 that: 1 year = 365 days and that filing an
administrative claim is a condition precedent before a judicial claim can be filed with the CTA.
● CTA and CTA En Banc denied petition.
Petitioner’s Contention:
It maintains that respondent’s (AFCAI) administrative and judicial claims for tax refund/credit were filed
in violation of Sections 112(A) and 229 of the NIRC. He posits that pursuant to Article 13 of the Civil
Code, since the year 2004 was a leap year, the filing of the claim for tax refund/credit on September
30, 2004 was beyond the two-year period, which expired on September 29, 2004.
They also contend that CTA En Banc erred in applying Section 114(A) of the NIRC in determining the
start of the two-year period as the said provision pertains to the compliance requirements in the
payment of VAT.
Respondent’s Argument:
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Respondent claims that it is entitled to a refund/credit of its unutilized input VAT for the period July 1,
2002 to September 30, 2002 as a matter of right because it has substantially complied with all the
requirements provided by law.
Respondent likewise defends the CTA En Banc in applying Section 114(A) of the NIRC in computing the
prescriptive period for the claim for tax refund/credit. Respondent believes that Section 112(A) of the
NIRC must be read together with Section 114(A) of the same Code.
ISSUE:
Whether respondent’s judicial and administrative claims for tax refund/credit were filed within the two-
year prescriptive period provided in Sections 112(A) and 229 of the NIRC.
HELD:
YES, the administrative claim for tax refund/credit was filed on time because under the law, unutilized
input VAT must be claimed within 2 years after the close of the taxable quarter when the sales were
made. However, the judicial claim was prematurely filed.
In computing the two-year prescriptive period for claiming a refund/credit of unutilized input VAT, the
Second Division of the CTA applied Section 112(A) of the NIRC, which states:
SEC. 112. Refunds or Tax Credits of Input Tax. –
(A) Zero-rated or Effectively Zero-rated Sales – Any VAT-registered person, whose sales are zero-
rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the
sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due
or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not
been applied against output tax: Provided, however, That in the case of zero-rated sales under Section
106(A)(2)(a)(1), (2) and (B) and Section 108 (B)(1) and (2), the acceptable foreign currency exchange
proceeds thereof had been duly accounted for in accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP): Provided, further, That where the taxpayer is engaged in zero-rated
or effectively zero-rated sale and also in taxable or exempt sale of goods or properties or services, and
the amount of creditable input tax due or paid cannot be directly and entirely attributed to any one of
the transactions, it shall be allocated proportionately on the basis of the volume of sales.
Sec. 204 (c) and 229 are applied only in instances of erroneous payment and illegal collection. In this
case, the applicable law is Section 112 (A) of NIRC. The phrase “within two (2) years x x x apply for the
issuance of a tax credit certificate or refund” under Subsection (A) of Section 112 of the NIRC refers to
applications for refund/credit filed with the CIR and not to appeals made to the CTA.
As ruled in the case of Commissioner of Internal Revenue v. Mirant Pagbilao Corporation (G.R. No.
172129, September 12, 2008), the two-year period should be reckoned from the close of the taxable
quarter when the sales were made. In Commissioner of Internal Revenue v. Primetown Property Group,
Inc (G.R. No. 162155, August 28, 2007, 531 SCRA 436) , we said that as between the Civil Code, which
provides that a year is equivalent to 365 days, and the Administrative Code of 1987, which states that a
year is composed of 12 calendar months, it is the latter that must prevail being the more recent law,
following the legal maxim, Lex posteriori derogat priori.
Page 59
Thus, applying this to the present case, the two-year period to file a claim for tax refund/credit for the
period July 1, 2002 to September 30, 2002 expired on September 30, 2004. Hence, respondent’s
administrative claim was timely filed. However, since the respondent simultaneously filed the judicial
claim with the administrative claim and did not wait for the decision of the CIR or lapse of the 120-day
period. Thus, the Court find the filing of the judicial claim premature. The premature filing of claim for
refund/credit of input VAT before the CTA warrants a dismissal in as much as no jurisdiction was
acquired by the CTA.
Doctrines:
– The CIR has 120 days, from the date of the submission of the complete documents within which to
grant or deny the claim for refund/credit of input vat. In case of full or partial denial by the CIR, the
taxpayer’s recourse is to file an appeal before the CTA within 30 days from receipt of the decision of the
CIR. However, if after the 120-day period the CIR fails to act on the application for tax refund/credit,
the remedy of the taxpayer is to appeal the inaction of the CIR to CTA within 30 days.
– A taxpayer is entitled to a refund either by authority of a statute expressly granting such right,
privilege, or incentive in his favor, or under the principle of solutio indebiti requiring the return of
taxes erroneously or illegally collected. In both cases, a taxpayer must prove not only his entitlement to
a refund but also his compliance with the procedural due process.
– As between the Civil Code and the Administrative
Code of 1987, it is the latter that must prevail being the more recent law, following the legal maxim,
Lex posteriori derogat priori.
– The phrase “within two (2) years x x x apply for the issuance of a tax credit certificate or refund”
under Subsection (A) of Section 112 of the NIRC refers to applications for refund/credit filed with the
CIR and not to appeals made to the CTA.
Quick FACTS:
On September 30, 2004, Aichi Forging filed a claim for refund/credit of input VAT attributable to its
zero-rated sales for the period July 1, 2002 to September 30, 2002 with the CIR through the DOF One-
Stop Shop. On the same day, Aichi Forging filed a Petition for Review with the CTA for the same action.
The BIR disputed the claim and alleged that the same was filed beyond the two-year period given that
2004 was a leap year and thus the claim should have been filed on September 29, 2004. The CIR also
raised issues related to the reckoning of the 2-year period and the simultaneous filing of the
administrative and judicial claims.
Fort Bonifacio Devt. Corp. v. CIR
G.R. Nos. 158885 and 170680;April 2, 2009; TInga, J
Facts:
On February 8, 1995, Fort Bonifacio Development Corporation (FBDC) purchased from the national
government, a vast tract of land. The sale took place prior to the enactment of RA No. 7716, thus no
VAT was paid. RA 7716 (EVAT Law) then took effect which made real estate transactions subject to
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
VAT. Between July and October 1997, FBDC sent two (2) letters to the BIR requesting appropriate
action on whether its use of its presumptive input VAT on its land inventory was in order. BIR
eventually disallowed the presumptive input tax credit arising from the land inventory on the basis of
Revenue Regulation 7-95 (RR 7-95) and Revenue Memorandum Circular 3-96 (RMC 3-96).
The CIR likewise cited from the Transitory Provisions of RR 7-95
G.R. No. 158885
FBDC received a notice from the BIR for the deficiency VAT for the 4th quarter of 1996. FBDC filed a
petition alleging that it is entitled to the transitional/presumptive input tax credit.
G.R. No. 170680
For the third quarter of 1997, FBDC paid output VAT To BIR. FBDC filed with the BIR a claim for
refund of the amount which it had paid as VAT for the third quarter of 1997. Such action was
unheaded. Utilizing the same valuation of 8% of the total book value of its beginning inventory of real
properties, FBDC argued that its input tax credit was more than enough to offset the VAT
paid by it for the third quarter of 1997.
BIR argued that that (1) transitional input tax is limited to improvements to real properties; and (2)
there should have been prior payment of taxes.
Issue(s):
1. Whether the 8% transitional input tax credit in Section 105 applied only to the improvements
on the real property? - NO
2. Whether there should have been prior payment of taxes before a transitional input tax credit
may be granted?- NO
Held:
1. NO. There is nothing in Section 105 of the Old NIRC that prohibits the inclusion of real
properties, together with the improvements thereon, in the beginning inventory of goods,
materials and supplies, based on which inventory the transitional input tax credit is
computed.
It can be conceded that when it was drafted Section 105 could not have possibly contemplated
concerns specific to real properties, as real estate transactions were not originally subject to VAT. At the
same time, when transactions on real properties were finally made subject to VAT beginning with Rep.
Act No. 7716, no corresponding amendment was adopted as regards Section 105 to provide for a
differentiated treatment in the application of the transitional input tax credit with respect to real
properties or real estate dealers. From the amendments to Section 100, there was no any any
differentiated VAT treatment on real properties or real estate dealers that would justify the suggested
limitations on the application of the transitional input tax on them.
Page 60
2. NO. Prior payments of sales taxes or VAT are not necessary for transitional input tax
credit to be granted.
CTA contends that The transitional input tax credit is conditioned on the prior payment of sales taxes or
the VAT
It is correct, as pointed out by the CTA, that upon the shift from sales taxes to VAT in 1987 newly-VAT
registered people would have been prejudiced by the inability to credit against the output VAT their
payments by way of sales tax on their existing stocks in trade. Yet that inequity was precisely
addressed by a transitory provision in E.O. No. 273 found in Section 25 thereof. The provision
authorized VAT-registered persons to invoke a presumptive input tax equivalent to 8% of
the value of the inventory as of December 31, 1987 of materials and supplies which are not
for sale, the tax on which was not taken up or claimed as deferred sales tax credit, and a
similar presumptive input tax equivalent to 8% of the value of the inventory as of
December 31, 1987 of goods for sale, the tax on which was not taken up or claimed as
deferred sales tax credit.
Section 25 of E.O. No. 273 perfectly remedies the problem assumed by the CTA as the basis for the
introduction of transitional input tax credit in 1987. If the core purpose of the tax credit is only, as
hinted by the CTA, to allow for some mode of accreditation of previously-paid sales taxes, then Section
25 alone would have sufficed. Yet E.O. No. 273 amended the Old NIRC itself by providing for the
transitional input tax credit under Section 105, thereby assuring that the tax credit would endure long
after the last goods made subject to sales tax have been consumed.
Section 105 states that the transitional input tax credits become available either to (1) a person who
becomes liable to VAT; or (2) any person who elects to be VAT-registered. The clear language of
the law entitles new trades or businesses to avail of the tax credit once they become VAT-registered.
The transitional input tax credit, whether under the Old NIRC or the New NIRC, may be
claimed by a newly-VAT registered person such as when a business as it commences
operations.
Again, nothing in the Old NIRC (or even the New NIRC) speaks of such a possibility or qualifies the
previous payment of VAT or any other taxes on the goods, materials and supplies as a pre-requisite for
inclusion in the beginning inventory.
It is apparent that the transitional input tax credit operates to benefit newly VAT-registered persons,
whether or not they previously paid taxes in the acquisition of their beginning inventory of goods,
materials and supplies. During that period of transition from non-VAT to VAT status, the transitional
input tax credit serves to alleviate the impact of the VAT on the taxpayer. At the very beginning, the
VAT-registered taxpayer is obliged to remit a significant portion of the income it derived from its sales
as output VAT. The transitional input tax credit mitigates this initial diminution of the taxpayers income
by affording the opportunity to offset the losses incurred through the remittance of the output VAT at a
stage when the person is yet unable to credit input VAT payments.
CTA’s contention:
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
● FBDC was excused from paying any tax on the purchase of its properties from the national
government, even claiming that to allow the transitional input tax credit is "tantamount to giving an
undeserved bonus to real estate dealers similarly situated as [FBDC] which the Government cannot
afford to provide."
SC answer:
● All tax laws in general, are designed to enforce uniform tax treatment to persons or classes of
persons who share minimum legislated standards. The common standard for the application of the
transitional input tax credit, as enacted by E.O. No. 273 and all subsequent tax laws which
reinforced or reintegrated the tax credit, is simply that the taxpayer in question has become liable
to VAT or has elected to be a VAT-registered person. E.O. No. 273 and the subsequent tax laws
are all decidedly neutral and accommodating in ascertaining who should be entitled to the tax
credit, and it behooves the CIR and the CTA to adopt a similarly judicious perspective.
● Under Section 105, the beginning inventory of goods forms part of the valuation of the transitional
input tax credit. Goods, as commonly understood in the business sense, refers to the product
which the VAT-registered person offers for sale to the public. With respect to real estate dealers, it
is the real properties themselves which constitute their goods. Such real properties are the
operating assets of the real estate dealer.
● Section 4.100-1 of RR No. 7-95 itself includes in its enumeration of goods or properties such
real properties held primarily for sale to customers or held for lease in the ordinary course of trade
or business. Said definition was taken from the very statutory language of Section 100 of the Old
NIRC. By limiting the definition of goods to improvements in Section 4.105-1, the BIR not only
contravened the definition of goods as provided in the Old NIRC, but also the definition which the
same revenue regulation itself has provided.
● A final observation. Section 4.105.1 of RR No. 7-95, insofar as it disallows real estate dealers from
including the value of their real properties in the beginning inventory of goods, materials and
supplies, has in fact already been repealed. The offending provisions were deleted with the
enactment of Revenue Regulation No. 6-97 (RR 6-97) dated 2 January 1997, which amended RR 7-
95. The repeal of the basis for the present assessments by RR 6-97 only highlights the continuing
absurdity of the position of the BIR towards FBDC.
ADDITIONAL DISCUSSIONS:
Rep. Act No. 7716, which significantly is also known as the Expanded Value-Added Tax (EVAT) law,
expanded the coverage of the VAT by amending Section 100 of the Old NIRC in several respects, some
of which we will enumerate:
1. First, it made every sale, barter or exchange of goods or properties subject to VAT.
2. Second, it generally defined goods or properties as all tangible and intangible objects which
are capable of pecuniary estimation.
3. Third, it included a non-exclusive enumeration of various objects that fall under the class
goods or properties subject to VAT, including [r]eal properties held primarily for sale to
customers or held for lease in the ordinary course of trade or business.
Rep. Act No. 7716 clarifies that it is the real properties held primarily for sale to customers or held for
lease in the ordinary course of trade or business that are subject to the VAT, and not when the real
Page 61
estate transactions are engaged in by persons who do not sell or lease properties in the ordinary course
of trade or business. It is clear that those regularly engaged in the real estate business are accorded
the same treatment as the merchants of other goods or properties available in the market. In the same
way that a milliner considers hats as his goods and a rancher considers cattle as his goods, a real
estate dealer holds real property, whether or not it contains improvements, as his goods.
The introduction of the VAT through E.O. No. 273 and its subsequent expansion through Rep. Act No.
7716 subjected various persons to the tax for the very first time, leaving them unable to claim the input
tax credit based on their purchases before they became subject to the VAT. Hence, the transitional
input tax credit was designed to alleviate that relatively iniquitous loss. Given that rationale, according
to the CTA, it would be improper to allow FBDC, which had acquired its properties through a tax-free
purchase, to claim the transitional input tax credit. The CTA added that Section 105.4.1 of RR 7-95 is
consonant with its perceived rationale behind the transitional input tax credit since the materials used
for the construction of improvements would have most likely involved the payment of VAT on their
purchase.
Related provisions:
Sec. 4.105-1. Transitional input tax on beginning inventories. Taxpayers who became VAT-
registered persons upon effectivity of RA No. 7716 who have exceeded the minimum turnover of
P500,000.00 or who voluntarily register even if their turnover does not exceed P500,000.00 shall be
entitled to a presumptive input tax on the inventory on hand as of December 31, 1995 on the
following: (a) goods purchased for resale in their present condition; (b) materials purchased for
further processing, but which have not yet undergone processing; (c) goods which have been
manufactured by the taxpayer; (d) goods in process and supplies, all of which are for sale or for use
in the course of the taxpayers trade or business as a VAT-registered person.
However, in the case of real estate dealers, the basis of the presumptive input tax shall
be the improvements, such as buildings, roads, drainage systems, and other similar
structures, constructed on or after the effectivity of EO 273 (January 1, 1988).
The transitional input tax shall be 8% of the value of the inventory or actual VAT paid, whichever is
higher, which amount may be allowed as tax credit against the output tax of the VAT-registered
person.
The CIR likewise cited from the Transitory Provisions of RR 7-95, particularly the following:
(a) Presumptive Input Tax Credits -
(iii) For real estate dealers, the presumptive input tax of 8% of the book value of
improvements on or after January 1, 1988 (the effectivity of E.O. 273) shall be allowed.
For purposes of sub-paragraphs (i), (ii) and (iii) above, an inventory as of December 31, 1995 of such
goods or properties and improvements showing the quantity, description and amount filed with the
RDO not later than January 31, 1996.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Commissioner of Internal Revenue v, Benguet Corporation, G.R. Nos, 134587 and 134588,
July 8, 2005
Facts: The transactions in question occurred during the period between 1988 and 1991.
Under Sec. 99 of the NIRC, as amended by EO No. 273 s. 1987, then in effect, any person who, in the
course of trade or business, sells, barters or exchanges goods, renders services, or engages in similar
transactions and any person who imports goods is liable for output VAT at rates of either 10% or 0%
(zero-rated) depending on the classification of the transaction under Sec. 100 of the NIRC. Persons
registered under the VAT system are allowed to recognize input VAT, or the VAT due from or paid by it
in the course of its trade or business on importation of goods or local purchases of goods or service,
including lease or use of properties, from a VAT-registered person.
On January, 1988- Benguet Corp applied for and was granted by the BIR zero-rated status on its sale of
gold to Central Bank. On August 28, 1988, BIR issued VAT Ruling No. 3788-88, which provides:
[t]he sale of gold to Central Bank is considered as export sale subject to zero-rate pursuant to
Section 100 of the Tax Code, as amended by Executive Order No. 273.
The BIR came out with at least six (6) other issuances reiterating the zero-rating of sale of gold to the
Central Bank, the latest of which is VAT Ruling No. 036-90 dated 14 February 1990. Relying on its zero-
rated status and the above issuances, Benguet Corp sold gold to the Central Bank during the period of
1 August 1989 to 31 July 1991 and entered into transactions that resulted in input VAT incurred in
relation to the subject sales of gold. It filed applications for tax refunds/credits corresponding to input
VAT but their application were either unacted upon or expressly disallowed by CIR. The express
disallowance of respondents application for refunds/credits and the issuance of deficiency assessments
against it were based on a BIR VAT Ruling No. 008-92 dated 23 January 1992 that was issued
subsequent to the consummation of the subject sales of gold to the Central Bank which provides that
sales of gold to the Central Bank shall not be considered as export sales and thus, shall be
subject to 10% VAT. In addition, BIR VAT Ruling No. 008-92 withdrew, modified, and superseded all
inconsistent BIR issuances. The relevant portions of the ruling provides, thus:
1. In general, for purposes of the term export sales only direct export sales and foreign currency
denominated sales, shall be qualified for zero-rating.
4. Local sales of goods, which by fiction of law are considered export sales (e.g., the Export Duty
Law considers sales of gold to the Central Bank of the Philippines, as export sale). This
transaction shall not be considered as export sale for VAT purposes.
....
[A]ll Orders and Memoranda issued by this Office inconsistent herewith are considered
withdrawn, modified or superseded. (Emphasis supplied)
Page 62

The BIR also issued VAT Ruling No. 059-92 dated 28 April 1992 and Revenue Memorandum Order No.
22-92 which decreed that the revocation of VAT Ruling No. 3788-88 by VAT Ruling No. 008-92 would
not unduly prejudice mining companies and, thus, could be applied retroactively.
Benguet Corp’s contention: A retroactive application of BIR VAT Ruling No. 008-92 would violate Sec.
246 of the NIRC, which mandates the non-retroactivity of rulings or circulars issued by the
Commissioner of Internal Revenue that would operate to prejudice the taxpayer.
CIR’s contention:
● BIR VAT Ruling No. 008-92 may validly be given retroactive effect since it was not prejudicial
to respondent.
● The deficiency 10% that may be assessable will only be equal to 1/11th of the amount billed
to the [Central Bank] rather than 10% thereof. In short, [respondent] may only be charged
based on the tax amount actually and technically passed on to the [Central Bank] as part of
the invoiced price.
CA Ruling:
● Respondent suffered financial damage equivalent to the sum of the disapproved claims. Had
respondent known that such sales were subject to 10% VAT, which rate was not the prevailing
rate at the time of the transactions, respondent would have passed on the cost of the input
taxes to the Central Bank.
● BIR VAT Ruling No. 008-92 cannot be given retroactive effect
Issue:
1. Whether VAT Ruling No. 008-92 which revoked previous rulings of the petitioner may be
legally applied retroactively to respondent.
2. Whether respondents sale of gold to the Central Bank during the period when such was
classified by BIR issuances as zero-rated could be taxed validly at a 10% rate after the
consummation of the transactions involved.
Held:
1. NO. BIR VAT Ruling No. 008-92 cannot be given retroactive effect because such was
prejudicial to Benguet Corp.
The rulings, circular, rules and regulations promulgated by the Commissioner of Internal Revenue
would have no retroactive application if to so apply them would be prejudicial to the
taxpayers. In fact, both petitioner and respondent agree that the retroactive application of VAT Ruling
No. 008-92 is valid only if such application would not be prejudicial to the respondent pursuant to the
explicit mandate under Sec. 246 of the NIRC
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
Sec. 246. Non-retroactivity of rulings.- Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance with the preceding Section or any of the rulings
or circulars promulgated by the Commissioner shall not be given retroactive application if the
revocation, modification or reversal will be prejudicial to the taxpayers except in the following
cases: (a) where the taxpayer deliberately misstates or omits material facts from his return on any
document required of him by the Bureau of Internal Revenue; (b) where the facts subsequently
gathered by the Bureau of Internal Revenue are materially different form the facts on which the
ruling is based; or (c) where the taxpayer acted in bad faith. (Emphasis supplied)
VAT is a percentage tax imposed at every stage of the distribution process on the sale, barter,
exchange or lease of goods or properties and rendition of services in the course of trade or business, or
the importation of goods. It is an indirect tax, which may be shifted to the buyer, transferee, or lessee
of the goods, properties, or services. However, the party directly liable for the payment of the tax is the
seller.
In transactions taxed at a 10% rate, when at the end of any given taxable quarter the output VAT
exceeds the input VAT, the excess shall be paid to the government; when the input VAT exceeds the
output VAT, the excess would be carried over to VAT liabilities for the succeeding quarter or quarters.
On the other hand, transactions which are taxed at zero-rate do not result in any output tax. Input VAT
attributable to zero-rated sales could be refunded or credited against other internal revenue taxes at
the option of the taxpayer.
Proceeding from the foregoing, there appears to be no upfront economic difference in changing the
sale of gold to the Central Bank from a 0% to 10% VAT rate provided that respondent would be
allowed the choice to pass on its VAT costs to the Central Bank. In the instant case, the retroactive
application of VAT Ruling No. 008-92 unilaterally forfeited or withdrew this option of respondent. The
adverse effect is that respondent became the unexpected and unwilling debtor to the BIR
of the amount equivalent to the total VAT cost of its product, a liability it previously could
have recovered from the BIR in a zero-rated scenario or at least passed on to the Central
Bank had it known it would have been taxed at a 10% rate. Thus, it is clear that respondent
suffered economic prejudice when its consummated sales of gold to the Central Bank were taken out of
the zero-rated category. The change in the VAT rating of respondents transactions with the
Central Bank resulted in the twin loss of its exemption from payment of output VAT and its
opportunity to recover input VAT, and at the same time subjected it to the 10% VAT sans
the option to pass on this cost to the Central Bank, with the total prejudice in money terms
being equivalent to the 10% VAT levied on its sales of gold to the Central Bank.
On CIR’s contention that the deficiency 10% that may be assessable will only be equal to
1/11th of the amount billed to the [Central Bank] rather than 10% thereof. In short,
[respondent] may only be charged based on the tax amount actually and technically
passed on to the [Central Bank] as part of the invoiced price.
Page 63

● To the Court, the aforequoted statement is a clear recognition that respondent would suffer
prejudice in the a mount actually and technically passed on to the [Central Bank] as part of
the invoiced price. In determining the prejudice suffered by respondent, it matters little how
the amount charged against respondent is computed, the point is that the amount (equal to
1/11th of the amount billed to the Central Bank) was charged against respondent, resulting in
damage to the latter.
2. NO. The sale of gold to the Central Bank during the period when such was classified by BIR
issuances as zero-rated could not be taxed validly at a 10% rate after the consummation of the
transactions involved.
At the time when the subject transactions were consummated, the prevailing BIR regulations relied
upon by respondent ordained that gold sales to the Central Bank were zero-rated. The BIR interpreted
Sec. 100 of the NIRC in relation to Sec. 2 of E.O. No. 581 s. 1980 which prescribed that gold sold to the
Central Bank shall be considered export and therefore shall be subject to the export and premium
duties. In coming out with this interpretation, the BIR also considered Sec. 169 of Central Bank Circular
No. 960 which states that all sales of gold to the Central Bank are considered constructive exports.
Respondent should not be faulted for relying on the BIR’s interpretation of the said laws
and regulations. While it is true, as petitioner alleges, that government is not estopped from
collecting taxes which remain unpaid on account of the errors or mistakes of its agents and/or officials
and there could be no vested right arising from an erroneous interpretation of law, these principles
must give way to exceptions based on and in keeping with the interest of justice and fairplay, as has
been done in the instant matter. For, it is primordial that every person must, in the exercise of his
rights and in the performance of his duties, act with justice, give everyone his due, and observe
honesty and good faith.
Commissioner of Internal Revenue v. SM Prime Holdings, Inc, et al, G.R, No.183505,
February 26, 2010
Facts:
In various cases, BIR sent formal demand letters to SM Prime Holdings Inc. and First Asia, for VAT
deficiency on cinema ticket sales for various years.
CIR’s contention:
● The enumeration of services subject to VAT in Section 108 of the NIRC is not exhaustive
because it covers all sales of services unless exempted by law
● The exhibition of movies by cinema operators or proprietors to the paying public, being a sale
of service, is subject to VAT.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
SM Prime Holdings, Inc et al contention:
● A plain reading of Section 108 of the NIRC of 1997 shows that the gross receipts of proprietors
or operators of cinemas/theaters derived from public admission are not among the services
subject to VAT
● gross receipts from cinema/theater admission tickets were never intended to be subject to any
tax imposed by the national government
Issue: Whether gross receipts derived from admission tickets by cinema/theater operators or
proprietors are subject to 10% VAT.
Held: NO. Gross receipts derived from admission tickets by cinema/theater operators or proprietors are
not subject to 10% VAT on the following grounds:
a. The enumeration of services subject to VAT under Section 108 of the NIRC is not
exhaustive
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
(A) Rate and Base of Tax. There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%) of gross receipts
derived from the sale or exchange of services, including the use or lease of
properties.
The phrase sale or exchange of services means the performance of
all kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by construction and service
contractors; stock, real estate, commercial, customs and immigration brokers; lessors
of property, whether personal or real; warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling, processing, manufacturing or
repacking goods for others; proprietors, operators or keepers of hotels, motels, rest
houses, pension houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including clubs and caterers;
dealers in securities; lending investors; transportation contractors on their transport
of goods or cargoes, including persons who transport goods or cargoes for hire and
other domestic common carriers by land, air and water relative to their transport of
goods or cargoes; services of franchise grantees of telephone and telegraph, radio
and television broadcasting and all other franchise grantees except those under
Section 119 of this Code; services of banks, non-bank financial intermediaries and
finance companies; and non-life insurance companies (except their crop insurances),
including surety, fidelity, indemnity and bonding companies; and similar services
regardless of whether or not the performance thereof calls for the exercise or use of
Page 64
 the physical or mental faculties. The phrase sale or exchange of services shall
likewise include:
(1) The lease or the use of or the right or privilege to use any
copyright, patent, design or model, plan, secret formula or process, goodwill,
trademark, trade brand or other like property or right;
xxxx
(7) The lease of motion picture films, films, tapes and discs; and
(8) The lease or the use of or the right to use radio, television,
satellite transmission and cable television time.
A cursory reading of the foregoing provision clearly shows that the enumeration of the sale or exchange
of services subject to VAT is not exhaustive. The words, including, similar services, and shall likewise
include, indicate that the enumeration is by way of example only.
Since the activity of showing motion pictures, films or movies by cinema/ theater operators or
proprietors is not included in the enumeration, it is incumbent upon the court to the determine whether
such activity falls under the phrase similar services. The intent of the legislature must therefore
be ascertained.
b. The legislature never intended operators or proprietors of cinema/theater
houses to be covered by VAT
(read the full text for the history/background of the VAT LAW)
The following facts can be established:
1. Historically, the activity of showing motion pictures, films or movies by cinema/theater
operators or proprietors has always been considered as a form of entertainment subject to
amusement tax.
2. Prior to the Local Tax Code, all forms of amusement tax were imposed by the national
government.
3. When the Local Tax Code was enacted, amusement tax on admission tickets from theaters,
cinematographs, concert halls, circuses and other places of amusements were transferred to
the local government.
4. Under the NIRC of 1977, the national government imposed amusement tax only on
proprietors, lessees or operators of cabarets, day and night clubs, Jai-Alai and race
tracks.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
5. The VAT law was enacted to replace the tax on original and subsequent sales tax and
percentage tax on certain services.
6. When the VAT law was implemented, it exempted persons subject to amusement
tax under the NIRC from the coverage of VAT.
7. When the Local Tax Code was repealed by the LGC of 1991, the local government continued
to impose amusement tax on admission tickets from theaters, cinematographs, concert halls,
circuses and other places of amusements.
8. Amendments to the VAT law have been consistent in exempting persons subject to
amusement tax under the NIRC from the coverage of VAT.
9. Only lessors or distributors of cinematographic films are included in the coverage
of VAT.
These reveal the legislative intent not to impose VAT on persons already covered by the amusement
tax. This holds true even in the case of cinema/theater operators taxed under the LGC of 1991 precisely
because the VAT law was intended to replace the percentage tax on certain services. The
mere fact that they are taxed by the local government unit and not by the national government is
immaterial. The Local Tax Code, in transferring the power to tax gross receipts derived by
cinema/theater operators or proprietor from admission tickets to the local government, did
not intend to treat cinema/theater houses as a separate class. No distinction must, therefore,
be made between the places of amusement taxed by the national government and those taxed by the
local government.
To hold otherwise would impose an unreasonable burden on cinema/theater houses
operators or proprietors, who would be paying an additional 10% VAT on top of the 30%
amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Such
imposition would result in injustice, as persons taxed under the NIRC of 1997 would be in a better
position than those taxed under the LGC of 1991. We need not belabor that a literal application of a law
must be rejected if it will operate unjustly or lead to absurd results. Thus, we are convinced that the
legislature never intended to include cinema/theater operators or proprietors in the coverage of VAT.
C. The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the
imposition of VAT
CIR’s contention: The enactment of RA No. 7160, thus, eliminating the statutory prohibition on the
national government to impose business tax on gross receipts from admission of persons to places of
amusement, led the way to the valid imposition of the VAT pursuant to Section 102 (now Section 108)
of the old Tax Code, as amended by the Expanded VAT Law (RA No. 7716) and which was
implemented beginning January 1, 1996
SC Ruling: The repeal of the Local Tax Code by the LGC of 1991 is not a legal basis for the imposition
of VAT on the gross receipts of cinema/theater operators or proprietors derived from admission tickets.
Page 65
The removal of the prohibition under the Local Tax Code did not grant nor restore to the national
government the power to impose amusement tax on cinema/theater operators or proprietors. Neither
did it expand the coverage of VAT. Since the imposition of a tax is a burden on the taxpayer, it cannot
be presumed nor can it be extended by implication. A law will not be construed as imposing a tax
unless it does so clearly, expressly, and unambiguously. As it is, the power to impose amusement tax
on cinema/theater operators or proprietors remains with the local government.
Other discussions:
● Revenue Memorandum Circular No. 28-2001 is invalid
○ Considering that there is no provision of law imposing VAT on the gross receipts of
cinema/theater operators or proprietors derived from admission tickets, RMC No. 28-
2001 which imposes VAT on the gross receipts from admission to cinema houses
must be struck down. In view of the foregoing, there is no need to discuss whether
RMC No. 28-2001 complied with the procedural due process for tax issuances as
prescribed under RMC No. 20-86.
● Rule on tax exemption does not apply
Respondents need not prove their entitlement to an exemption from the coverage of VAT. The rule that
tax exemptions should be construed strictly against the taxpayer presupposes that the taxpayer is
clearly subject to the tax being levied against him. The reason is obvious: it is both illogical and
impractical to determine who are exempted without first determining who are covered by the provision.
Thus, unless a statute imposes a tax clearly, expressly and unambiguously, what applies is the equally
well-settled rule that the imposition of a tax cannot be presumed. In fact, in case of doubt, tax laws
must be construed strictly against the government and in favor of the taxpayer
COMMISSIONER OF INTERNAL REVENUE vs. THE PHILIPPINE AMERICAN ACCIDENT
INSURANCE COMPANY, INC., THE PHILIPPINE AMERICAN ASSURANCE COMPANY, INC.,
and THE PHILIPPINE AMERICAN GENERAL INSURANCE CO., INC.,
[G. R. No. 141658. March 18, 2005]
FACTS:
Respondents are domestic corporations licensed to transact insurance business in the country. From
August 1971 to September 1972, respondents paid the Bureau of Internal Revenue under protest the
3% tax imposed on lending investors by Section 195-A of Commonwealth Act No. 466 (CA 466), as
amended by Republic Act No. 6110 (RA 6110) and other laws. CA 466 was the National Internal
Revenue Code (NIRC) applicable at the time.
Respondents paid the following amounts: P7,985.25 from Philippine American (PHILAM) Accident
Insurance Company; P7,047.80 from PHILAM Assurance Company; and P14,541.97 from PHILAM
General Insurance Company. These amounts represented 3% of each company’s interest income
from mortgage and other loans. Respondents also paid the taxes required of insurance companies
under CA 466.
On 31 January 1973, respondents sent a letter-claim to petitioner seeking a refund of the taxes paid
under protest. When respondents did not receive a response, each respondent filed on 26 April 1973
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
a petition for review with the CTA. These three petitions, which were later consolidated, argued that
respondents were not lending investors and as such were not subject to the 3% lending investors tax
under Section 195-A.
The CTA archived respondents case for several years while another case with a similar issue was
pending before the higher courts. When respondents case was reinstated, the CTA ruled that
respondents were entitled to their refund.
CTA: Held that respondents are not taxable as lending investors because the term lending investors
does not embrace insurance companies. Philippine American Accident Insurance Co., Philippine
American Assurance Co., and Philippine American General Insurance Co., Inc. are not taxable on their
lending transactions independently of their insurance business.
CA: Affirmed the decision of CTA.
ISSUE:
Whether or not insurance companies are exempted from VAT?
HELD:
YES.
The current tax law does not treat insurance companies as lending investors. Under Section 108(A) of
the NIRC of 1997, lending investors and non-life insurance companies, except for their crop insurances,
are subject to value-added tax (VAT). Life insurance companies are exempt from VAT, but are subject
to percentage tax under Section 123 of the NIRC of 1997.
Indeed, the fact that Sections 195-A and 182(A)(3)(dd) of CA 466 failed to mention insurance
companies already implies the latters exclusion from the coverage of these provisions. When a statute
enumerates the things upon which it is to operate, everything else by implication must be excluded
from its operation and effect.
The rule that tax exemptions should be construed strictly against the taxpayer presupposes that the
taxpayer is clearly subject to the tax being levied against him. Unless a statute imposes a tax clearly,
expressly and unambiguously, what applies is the equally well settled rule that the imposition of a tax
cannot be presumed. Where there is doubt, tax laws must be construed strictly against the government
and in favor of the taxpayer. This is because taxes are burdens on the taxpayer, and should not be
unduly imposed or presumed beyond what the statutes expressly and clearly import.
Other issue:
Whether respondent insurance companies are subject to the 3% percentage tax as lending investors
under Sections 182(a)(3)(dd) and 195-a, respectively in relation to section 194(u), all of the NIRC.
HELD:
NO, because the Court held that when a company is taxed on its main business, it is no longer taxable
further for engaging in an activity or work which is merely a part of, incidental to and is necessary to its
main business. Respondents already paid percentage and fixed taxes on their insurance business. To
require them to pay percentage and fixed taxes again for an activity which is necessarily a part of the
Page 66
same business, the law must expressly require such additional payment of tax. There is, however, no Code from the payment of value-added tax and Code from the payment of value-added tax and
provision of law requiring such additional payment of tax. who is not a VAT-registered person shall pay a tax who is not a VAT-registered person shall pay a tax
equivalent to three percent (3%) of his gross equivalent to three percent (3%) of his gross
Section 182(A)(3)(dd) of CA 466 provides: quarterly sales or receipts: Provided, That quarterly sales or receipts: Provided, That
Sec. 182. Fixed taxes. (A) On business cooperatives shall be exempt from the three cooperatives, and beginning January 1, 2019, self-
(3) Other fixed taxes. The following fixed taxes shall be collected as follows, the amount stated being percent (3%) gross receipts tax herein imposed. employed and professionals with total annual
for the whole year, when not otherwise specified; gross sales and/or gross receipts not exceeding
(dd) Lending investors Five hundred thousand pesos (₱500,000) shall be
1. In chartered cities and first class municipalities, five hundred pesos exempt from the three percent (3%) gross
2. In second and third class municipalities, two hundred and fifty pesos; receipts tax herein imposed.”
3. In fourth and fifth class municipalities and municipal districts, one hundred and twenty-five
pesos; Provided, That lending investors who do business as such in more than one province ii. Section 117-118(Common Carrier's Tax)
shall pay a tax of five hundred pesos.

Section 195-A of CA 466 provides: Sec. 195-A. Percentage tax on dealers in securities; lending
investors. Dealers in securities and lending investors shall pay a tax equivalent to three per centum on
their gross income.
Neither Section 182(A)(3)(dd) nor Section 195-A mentions insurance companies. Section 182(A)(3)(dd)
provides for the taxation of lending investors in different localities. Section 195-A refers to dealers in
securities and lending investors. The burden is thus on petitioner to show that insurance companies are
lending investors for purposes of taxation.
In this case, petitioner does not dispute that respondents are in the insurance business. Petitioner
merely alleges that the definition of lending investors under CA 466 is broad enough to encompass
insurance companies. Petitioner insists that because of Section 194(u), the two principal activities of the
insurance business, namely, underwriting and investment, are separately taxable.
SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire driven
by the lessee, transportation contractors, including persons who transport passengers for hire, and
other domestic carriers by land, [81] for the transport of passengers [except owners of bancas] and
owners of animal-drawn two wheeled vehicle), and keepers of garages shall pay a tax equivalent to
three percent (3%) of their quarterly gross receipts.
The gross receipts of common carriers derived from their incoming and outgoing freight shall not be
subjected to the local taxes imposed under Republic Act No. 7160, otherwise known as the Local
Government Code of 1991.
In computing the percentage tax provided in this Section, the following shall be considered the
minimum quarterly gross receipts in each particular case:

Section 194(u) of CA 466 states:(u) Lending investor includes all persons who make a practice of Jeepney for hire -
lending money for themselves or others at interest.
1. Manila and other Cities P 2,400
As can be seen, Section 194(u) does not tax the practice of lending per se. It merely defines what 2. Provincial 1,200
lending investors are. The question is whether the lending activities of insurance companies make them
lending investors for purposes of taxation. The court agreed with the CTA and Court of Appeals that it
does not. Insurance companies cannot be considered lending investors under CA 466, as amended. Public utility bus -

Not exceeding 30 passengers P 3,600

Exceeding 30 but not exceeding 50 6,000
passengers 7,200
Exceeding 50 passengers
b. Other Percentage Taxes
i. Section 116(Tax on persons exempt from VAT) Taxis -
P 3,600
NIRC TRAIN LAW
1. Manila and other Cities 2,400
SEC. 116. Tax on Persons Exempt from Value- “Sec. 116. Tax on Persons Exempt from Value-
2. Provincial
Added Tax (VAT). - Any person whose sales or added Tax (VAT).— Any person whose sales or
receipts are exempt under Section 109(V) of this receipts are exempt under Section 109(BB) of this

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 67
 Car for hire (with chauffer) P 3,000 communication equipment service, a tax of ten percent (10%) on the amount paid for such services.
The tax imposed in this Section shall be payable by the person paying for the services rendered and
Car for hire (without chauffer) 1,800 shall be paid to the person rendering the services who is required to collect and pay the tax within
twenty (20) days after the end of each quarter.
SEC. 118 Percentage Tax on International Carriers. - [82]
(B) Exemptions. - The tax imposed by this Section shall not apply to:

(A) International air carriers doing; business in the Philippines on their gross receipts derived from
transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of their (1) Government. - Amounts paid for messages transmitted by the Government of the Republic
quarterly gross receipts. of the Philippines or any of its political subdivisions or instrumentalities;

(B) International shipping carriers doing business in the Philippines on their gross receipts derived from (2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and
transport of cargo from the Philippines to another country shall pay a tax equivalent to three percent consular offices of a foreign government;
(3%) of their quarterly gross receipts.
(3) International Organizations. - Amounts paid for messages transmitted by a public
international organization or any of its agencies based in the Philippines enjoying privileges,
exemptions and immunities which the Government of the Philippines is committed to recognize
pursuant to an international agreement; and
1. Revenue Regulations 11- 2011
(4) News Services. - Amounts paid for messages from any newspaper, press association, radio
or television newspaper, broadcasting agency, or newstickers services, to any other
iii. Section 119(Franchise Tax) newspaper, press association, radio or television newspaper broadcasting agency, or
iv. Section 120 (Overseas Communications Tax) newsticker service or to a bona fide correspondent, which messages deal exclusively with the
v. Section 121(Tax on banks and financial intermediaries) collection of news items for, or the dissemination of news item through, public press, radio or
television broadcasting or a newsticker service furnishing a general news service similar to that
of the public press.
SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding,
there shall be levied, assessed and collected in respect to all franchises on radio and/or television SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi- Banking Functions. -
broadcasting companies whose annual gross receipts of the preceding year do not exceed Ten million There shall be collected a tax on a gross receipt derived from sources within the Philippines by all
pesos (P10,000.00), subject to Section 236 of this Code, a tax of three percent (3%) and on gas and banks and non-bank financial intermediaries in accordance with the following schedule:
water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by
the law granting the franchise: Provided, however, That radio and television broadcasting companies (a) On interest, commissions and discounts from lending activities as well as income from financial
referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the leasing, on the basis of remaining maturities of instruments from which such receipts are derived:
tax due thereon: Provided, further, That once the option is exercised, said option shall not be
irrevocable. [83]
Maturity period is five years or less 5%
Maturity period is more than five years 1%
The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly
authorized representative, in accordance with the provisions of Section 128 of this Code, and the return
shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the (b) On dividends and equity shares and net income of subsidiaries 0%
contrary notwithstanding.

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -
(A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation
transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and other
(c) On royalties, rentals of property, real or personal, profits, from exchange and all other items treated
as gross income under Section 32 of this Code
7%
(d) On net trading gains within the taxable year on foreign currency, debt securities, derivatives, and

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 68
 other similar financial instruments.
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pre-
termination, then the maturity period shall be reckoned to end as of the date of pre-termination for
purposes of classifying the transaction and the correct rate of tax shall be applied accordingly.
Provided, finally, That the generally accepted accounting principles as may be prescribed by the Bangko
Sentral ng Pilipinas for the bank or non0bank financial intermediary performing quasi-banking functions
shall likewise be the basis for the calculation of gross receipts. [84]
Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.
1. 1. RA 7716 and RA 9238
CHINA BANKING CORPORATION vs. COURT OF APPEALS, COURT OF TAX
APPEALS, and COMMISSIONER OF INTERNAL REVENUE
G.R. No. 146749 and G.R. No. 147938, June 10, 2003
Facts:
CBC is a universal banking corporation organized and existing under Philippine law. CBC
paid P12,354,933.00 as gross receipts tax in 1994. On 2006 CTA in Asian Bank
Corporation v. Commissioner of Internal Revenue ruled that the 20% final
withholding tax on a bank’s passive interest income does not form part of its taxable gross
receipts.
CBC now claims for tax refund or credit of P1,140,623.82 from the P12,354,933.00 gross
receipts tax that CBC paid. Citing Asian Bank, CBC argued that it was not liable for the
gross receipts tax on the sums withheld by the Bangko Sentral ng Pilipinas as final
withholding tax on CBC’s passive interest income in 1994.
Commissioner claims that CBC paid the gross receipts tax pursuant to Section 119 (now
Section 121) of the NIRC. The Commissioner argued that the final withholding tax on a
bank’s interest income forms part of its gross receipts in computing the gross receipts tax.
The Commissioner contended that the term “gross receipts” means the entire income or
receipt, without any deduction.
Ruling of CTA
CTA ruled in favor of CBC and held that 20% Final withholding tax on interest income does
not form part of CBC’s taxable gross income based on the Asian Bank ruling.
Ruling of CA
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
CA affirmed7%
the CTA ruling
Issues:
Whether the 20% final withholding tax on interest income should form part of CBC’s gross
receipts in computing the gross receipts tax on banks?
Held:
The amount of interest income withheld in payment of the 20% final withholding tax forms
part of CBC’s gross receipts in computing the gross receipts tax on banks.
Ratio:
Definition of Gross Receipts
The Tax Code does not define the term “gross receipts” for purposes of the gross receipts
tax on banks. Absent a statutory definition, the BIR has applied the term in its plain and
ordinary meaning.
In ordinary terms “gross receipts” means the entire receipts without any deduction.
Deducting any amount from the gross receipts changes the result, and the meaning, to net
receipts. Any deduction from gross receipts is inconsistent with a law that mandates a tax
on gross receipts, unless the law itself makes an exception.
Under Revenue Regulations Nos. 12-80 and 17-84, as well as in several numbered rulings,
the BIR has consistently ruled that the term “gross receipts” does not admit of any
deduction.
The interpretation has yet to be changed until the present tax code. The legislature has
adopted the BIR’s interpretation, following the principle of legislative approval by re-
enactment.
The tax code does not define for gross receipts except for the amusement tax which is also
a business tax. It defines it as it “embraces all receipts of the proprietor, lessee or operator
of the amusement place.” The Tax Code further adds that “[s]aid gross receipts also include
income from television, radio and motion picture rights, if any.” This definition merely
confirms that the term “gross receipts” embraces the entire receipts without any deduction
or exclusion, as the term is generally and commonly understood.
Interest income forms part of Gross Receipts
In Asian Bank, the Court of Tax Appeals held that the final withholding tax is not part of
the bank’s taxable gross receipts.
In Collector of Internal Revenue v. Manila Jockey Club, which held that “gross
receipts of the proprietor should not include any money which although delivered to the
Page 69
amusement place has been especially earmarked by law or regulation for some person
other than the proprietor.” The tax court adopted the Asian Bank ruling in succeeding
cases involving the same issue.
CTA reversed its ruling in Asia Bank. In Far East Bank & Trust Co. v. Commissioner
and Standard Chartered Bank v. Commissioner,it ruled that the final withholding tax
forms part of the bank’s gross receipts in computing the gross receipts tax. The tax court
held that Section 4(e) of Revenue Regulations No. 12-80 did not prescribe the computation
of the gross receipts but merely authorized “the determination of the amount of gross
receipts on the basis of the method of accounting being used by the taxpayer.”
CBC also relies on the Tax Court’s ruling in Asian Bank that Section 4(e) of Revenue
Regulations No. 12-80 authorizes the exclusion of the final tax from the bank’s taxable
gross receipts. Section 4(e) states that the gross receipts “shall be based on all items of
income actually received.”
The Tax Court erred in interpreting Section 4(e) of Revenue Regulations No. 12-80.
Income may be taxable either at the time of its actual receipt or its accrual, depending on
the accounting method of the taxpayer. Thus, the interest income actually received by the
lending bank, both physically and constructively, is the net interest plus the amount
withheld as final tax.

Section 121 of the Tax Code includes “interest” as part of gross receipts, it refers to the
entire interest earned and owned by the bank without any deduction. “Interest” means the
gross amount paid by the borrower to the lender as consideration for the use of the lender’s
money. This definition does not allow any deduction. The entire interest paid by the
depository bank, without any deduction, is what forms part of the lending bank’s gross
receipts.
CBC’s reliance of Collector of Internal Revenue v. Manila Jockey Club
CBC cites Collector of Internal Revenue v. Manila Jockey Club as authority that the
final withholding tax on interest income does not form part of a bank’s gross receipts
because the final tax is “earmarked by regulation” for the government.
CBC’s claim amount to a tax exemption
CBC’s contention that it can deduct the final withholding tax from its interest income
amounts to a claim of tax exemption. The cardinal rule in taxation is exemptions are highly
disfavored and whoever claims an exemption must justify his right by the clearest grant of
organic or statute law. CBC must point to a specific provision of law granting the tax
exemption. The tax exemption cannot arise by mere implication and any doubt about
whether the exemption exists is strictly construed against the taxpayer and in favor of the
taxing authority. CBC failed to cite any provision of law allowing the final tax as an
exemption, deduction or exclusion

Manila Jockey Club paid amusement tax on its commission in the total amount of bets
called wager funds from the period November 1946 to October 1950. But such payment did
not include the 5 ½ % of the funds which went to the Board on Races and to the owners of
horses and jockeys. We ruled that the gross receipts of the Manila Jockey Club should not vi. Section 122 (Tax on finance companies)
include the 5 ½% because although delivered to the Club, such money has been especially vii. Section 123(Tax on Insurance Premiums
earmarked by law or regulation for other persons. viii. Section 124(Tax on agents of foreign insurance companies
lu Caadlan A9E/Amdinnmnnt Tosaml
The Manila Jockey Club does not apply to the cases at bar because what happened there is ix. Section 125 (Amusement Taxes)
earmarking and not withholding. Earmarking is not the same as withholding. Amounts x. Section 126(Tax on Winnings)
earmarked do not form part of gross receipts because these are by law or regulation xi. Section 127 (Tax on IPOs)
reserved for some person other than the taxpayer, although delivered or received. On the xii. Section 128 (Payment of Percentage Taxes)
contrary, amounts withheld form part of gross receipts because these are in constructive
possession and not subject to any reservation
SEC. 117. Percentage Tax on Domestic Carriers and Keepers of Garages. - Cars for rent or hire driven
In the instant case, CBC owns the interest income which is the source of payment of the by the lessee, transportation contractors, including persons who transport passengers for hire, and
final withholding tax. The government subsequently becomes the owner of the money other domestic carriers by land, [81] for the transport of passengers [except owners of bancas] and
constituting the final tax when CBC pays the final withholding tax to extinguish its obligation owners of animal-drawn two wheeled vehicle), and keepers of garages shall pay a tax equivalent to
to the government. This is the consideration for the transfer of ownership of the money three percent (3%) of their quarterly gross receipts.
from CBC to the government. Thus, the amount constituting the final tax, being
originally owned by CBC as part of its interest income, should form part of its
The gross receipts of common carriers derived from their incoming and outgoing freight shall not be
taxable gross receipts.
subjected to the local taxes imposed under Republic Act No. 7160, otherwise known as the Local
CBC’s reliance on Asian Bank ruling

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 70
Government Code of 1991. tax due thereon: Provided, further, That once the option is exercised, said option shall not be
irrevocable. [83]
In computing the percentage tax provided in this Section, the following shall be considered the
minimum quarterly gross receipts in each particular case: The grantee shall file the return with, and pay the tax due thereon to the Commissioner or his duly
authorized representative, in accordance with the provisions of Section 128 of this Code, and the return
shall be subject to audit by the Bureau of Internal Revenue, any provision of any existing law to the
Jeepney for hire -
contrary notwithstanding.

1. Manila and other Cities P 2,400

SEC. 120. Tax on Overseas Dispatch, Message or Conversation Originating from the Philippines. -
2. Provincial 1,200

(A) Persons Liable. - There shall be collected upon every overseas dispatch, message or conversation
Public utility bus -
transmitted from the Philippines by telephone, telegraph, telewriter exchange, wireless and other
communication equipment service, a tax of ten percent (10%) on the amount paid for such services.
Not exceeding 30 passengers P 3,600 The tax imposed in this Section shall be payable by the person paying for the services rendered and
Exceeding 30 but not exceeding 50 6,000 shall be paid to the person rendering the services who is required to collect and pay the tax within
passengers 7,200 twenty (20) days after the end of each quarter.
Exceeding 50 passengers
(B) Exemptions. - The tax imposed by this Section shall not apply to:
Taxis -
P 3,600 (1) Government. - Amounts paid for messages transmitted by the Government of the Republic
1. Manila and other Cities 2,400 of the Philippines or any of its political subdivisions or instrumentalities;
2. Provincial
P 3,000 (2) Diplomatic Services. - Amounts paid for messages transmitted by any embassy and
Car for hire (with chauffer) consular offices of a foreign government;
1,800
Car for hire (without chauffer) (3) International Organizations. - Amounts paid for messages transmitted by a public
international organization or any of its agencies based in the Philippines enjoying privileges,
SEC. 118 Percentage Tax on International Carriers. - [82] exemptions and immunities which the Government of the Philippines is committed to recognize
pursuant to an international agreement; and
(A) International air carriers doing; business in the Philippines on their gross receipts derived from
transport of cargo from the Philippines to another country shall pay a tax of three percent (3%) of their (4) News Services. - Amounts paid for messages from any newspaper, press association, radio
quarterly gross receipts. or television newspaper, broadcasting agency, or newstickers services, to any other
newspaper, press association, radio or television newspaper broadcasting agency, or
newsticker service or to a bona fide correspondent, which messages deal exclusively with the
(B) International shipping carriers doing business in the Philippines on their gross receipts derived from
collection of news items for, or the dissemination of news item through, public press, radio or
transport of cargo from the Philippines to another country shall pay a tax equivalent to three percent
television broadcasting or a newsticker service furnishing a general news service similar to that
(3%) of their quarterly gross receipts.
of the public press.

SEC. 119. Tax on Franchises. - Any provision of general or special law to the contrary notwithstanding,
SEC. 121. Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi- Banking Functions. -
there shall be levied, assessed and collected in respect to all franchises on radio and/or television
There shall be collected a tax on a gross receipt derived from sources within the Philippines by all
broadcasting companies whose annual gross receipts of the preceding year do not exceed Ten million
banks and non-bank financial intermediaries in accordance with the following schedule:
pesos (P10,000.00), subject to Section 236 of this Code, a tax of three percent (3%) and on gas and
water utilities, a tax of two percent (2%) on the gross receipts derived from the business covered by
the law granting the franchise: Provided, however, That radio and television broadcasting companies
referred to in this Section shall have an option to be registered as a value-added taxpayer and pay the

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 71
 (a) On interest, commissions and discounts from lending activities as well as income fromSecurities
financial and Exchange Commission for other non-bank financial intermediaries shall likewise be the
basis for the calculation of gross receipts. [86]
leasing, on the basis of remaining maturities of instruments from which such receipts are derived:

Maturity period is five years or Nothing

lessin 5%
this Code shall preclude the Commissioner from imposing the same tax herein provided on
Maturity period is more than five years persons performing
1% similar financing activities.

(b) On dividends and equity shares and net income of SEC. 123. Tax
subsidiaries 0% on Life Insurance Premiums. - There shall be collected from every person, company or
corporation (except purely cooperative companies or associations) doing life insurance business of any
sort in the Philippines a tax of two percent (2%) [87] of the total premium collected, whether such
premiums are paid in money, notes, credits or any substitute for money; but premiums refunded within
(c) On royalties, rentals of property, real or personal, profits, from exchange and all other items treated
six (6) months after payment on account of rejection of risk or returned for other reason to a person
as gross income under Section 32 of this Code
insured shall7%not be included in the taxable receipts; nor shall any tax be paid upon reinsurance by a
company that has already paid the tax; nor upon doing business outside the Philippines on account of
(d) On net trading gains within the taxable year on foreign currency, debt securities, derivatives,
any lifeand
insurance of the insured who is a nonresident, if any tax on such premium is imposed by the
other similar financial instruments. 7% where the branch is established nor upon premiums collected or received on account of
foreign country
any reinsurance , if the insured, in case of personal insurance, resides outside the Philippines, if any tax
Provided, however, That in case the maturity period referred to in paragraph (a) is shortened thru pre- on such premiums is imposed by the foreign country where the original insurance has been issued or
termination, then the maturity period shall be reckoned to end as of the date of pre-termination for perfected; nor upon that portion of the premiums collected or received by the insurance companies on
purposes of classifying the transaction and the correct rate of tax shall be applied accordingly. variable contracts (as defined in Section 232(2) of Presidential Decree No. 612), in excess of the
amounts necessary to insure the lives of the variable contract workers.
Provided, finally, That the generally accepted accounting principles as may be prescribed by the Bangko
Sentral ng Pilipinas for the bank or non0bank financial intermediary performing quasi-banking functions 'Cooperative companies or associations' are such as are conducted by the members thereof with the
shall likewise be the basis for the calculation of gross receipts. [84] money collected from among themselves and solely for their own protection and not for profit.

Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on
persons performing similar banking activities.
SEC. 122. Tax on Other Non-Bank Financial Intermediaries. [85] - There shall be collected a tax of five
percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in
the Philippines, from interests, commissions, discounts and all other items treated as gross income
under this code.: Provided, That interests, commissions and discounts from lending activities, as well as
income from financial leasing, shall be taxed on the basis of the remaining maturities of the instruments
from which such receipts are derived, in accordance with the following schedule:
Maturity period is five years or less
5%
SEC. 124. Tax on Agents of Foreign Insurance Companies. - Every fire, marine or miscellaneous
insurance agent authorized under the Insurance Code to procure policies of insurance as he may have
previously been legally authorized to transact on risks located in the Philippines for companies not
authorized to transact business in the Philippines shall pay a tax equal to twice the tax imposed in
Section 123: Provided, That the provision of this Section shall not apply to reinsurance: Provided,
however, That the provisions of this Section shall not affect the right of an owner of property to apply
for and obtain for himself policies in foreign companies in cases where said owner does not make use of
the services of any agent, company or corporation residing or doing business in the Philippines. In all
cases where owners of property obtain insurance directly with foreign companies, it shall be the duty of
said owners to report to the Insurance Commissioner and to the Commissioner each case where
insurance has been so effected, and shall pay the tax of five percent (5%)on premiums paid, in the
manner required by Section 123.

Maturity period is more than five SEC. 125. Amusement Taxes. - There shall be collected from the proprietor, lessee or operator of
1%
years cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, Jai-Alai and
racetracks, a tax equivalent to:
Provided, however, That in case the maturity period is shortened thru pre-termination, then the
maturity period shall be reckoned to end as of the date of pre-termination for purposes of classifying (a) Eighteen percent (18%) in the case of cockpits;
the transaction and the correct rate of tax shall be applied accordingly.
(b) Eighteen percent (18%) in the case of cabarets, night or day clubs;
Provided, finally, That the generally accepted accounting principles as may be prescribed by the

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 72
 (c) Ten percent (10%) in the case of boxing exhibitions: Provided, however, That boxing There shall be levied, assessed and collected on every
exhibitions wherein World or Oriental Championships in any division is at stake shall be exempt sale, barter, exchange, or other disposition of shares of
from amusement tax: Provided, further, That at least one of the contenders for World or stock listed and traded through the local stock exchange
Oriental Championship is a citizen[s] of the Philippines and said exhibitions are promoted by a other than the sale by a dealer in securities, a tax at the
citizen/s of the Philippines or by a corporation or association at least sixty percent (60%) of rate of one-half of one percent (1/2 of 1%) of the gross
the capital of which is owned by such citizens; selling price or gross value in money of the shares of stock
sold, bartered, exchanged or otherwise disposed which
(d) Fifteen percent (15%) in the case of professional basketball games as envisioned in shall be paid by the seller or transferor.
Presidential Decree No. 871: Provided, however, That the tax herein shall be in lieu of all other
percentage taxes of whatever nature and description; and (B) Tax on Shares of Stock Sold or Exchanged Through
Initial Public Offering. - There shall be levied, assessed and
collected on every sale, barter, exchange or other
(e) Thirty percent (30%) in the case of Jai-Alai and racetracks - of their gross receipts,
disposition through initial public offering of shares of stock
irrespective, of whether or not any amount is charged for admission.
in closely held corporations, as defined herein, a tax at the
rates provided hereunder based on the gross selling price
For the purpose of the amusement tax, the term 'gross receipts' embraces all the receipts of the or gross value in money of the shares of stock sold,
proprietor, lessee or operator of the amusement place. Said gross receipts also include income from bartered, exchanged or otherwise disposed in accordance
television, radio and motion picture rights, if any. A person or entity or association conducting any with the proportion of shares of stock sold, bartered,
activity subject to the tax herein imposed shall be similarly liable for said tax with respect to such exchanged or otherwise disposed to the total outstanding
portion of the receipts derived by him or it. shares of stock after the listing in the local stock exchange:
Shares of Stock Listed and Traded
through the Local Stock Exchange.—
There shall be levied, assessed and
collected on every sale, barter, exchange
or other disposition of shares of stock
listed and traded through the local stock
exchange other than the sale by a dealer
in securities, a tax at the rate of six-
tenths of one percent (6⁄10 of 1%) of the
gross selling price or gross value in
money of the shares of stock sold,
bartered, exchanged or otherwise
disposed which shall be paid by the seller
or transferor.
“x x x.”

The taxes imposed herein shall be payable at the end of each quarter and it shall be the duty of the Up to twenty-five percent (25%) 4%
proprietor, lessee or operator concerned, as well as any party liable, within twenty (20) days after the Over twenty-five percent (25%) but not 2%
end of each quarter, to make a true and complete return of the amount of the gross receipts derived over thirty-three and one third percent (33
during the preceding quarter and pay the tax due thereon. 1/3%)
Over thirty-three and one third percent (33 1%
SEC. 126. Tax on Winnings. - Every person who wins in horse races shall pay a tax equivalent to ten 1/3%)
percent (10%) of his winnings or 'dividends', the tax to be based on the actual amount paid to him for
every winning ticket after deducting the cost of the ticket: Provided, That in the case of winnings from
double, forecast/quinella and trifecta bets, the tax shall be four percent (4%). In the case of owners of The tax herein imposed shall be paid by the issuing
winning race horses, the tax shall be ten percent (10%) of the prizes. corporation in primary offering or by the seller in
secondary offering.
The tax herein prescribed shall be deducted from the 'dividends' corresponding to each winning ticket
For purposes of this Section, the term 'closely held
or the 'prize' of each winning race horse owner and withheld by the operator, manager or person in
corporation' means any corporation at least fifty percent
charge of the horse races before paying the dividends or prizes to the persons entitled thereto.
(50%) in value of outstanding capital stock or at least fifty
percent (50%) of the total combined voting power of all
The operator, manager or person in charge of horse races shall, within twenty (20) days from the date classes of stock entitled to vote is owned directly or
the tax was deducted and withheld in accordance with the second paragraph hereof, file a true and indirectly by or for not more than twenty (20) individuals.
correct return with the Commissioner in the manner or form to be prescribed by the Secretary of
Finance, and pay within the same period the total amount of tax so deducted and withheld. For purposes of determining whether the corporation is a
C. 127. Tax on Sale, Barter or Exchange of Shares of Stock “Sec. 127. Tax on Sale, Barter or closely held corporation, insofar as such determination is
Listed and Traded through the Local Stock Exchange or Exchange of Shares of Stock Listed and based on stock ownership, the following rules shall be
through Initial Public Offering. - Traded through the Local Stock Exchange applied:
or through Initial Public Offering.—
(A) Tax on Sale, Barter or Exchange of Shares of Stock (1) Stock Not Owned by Individuals. - Stock
Listed and Traded through the Local Stock Exchange.- “(A) Tax on Sale, Barter or Exchange of

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 73
 owned directly or indirectly by or for a of all the transactions effected through him during
corporation, partnership, estate or trust shall be the preceding week and of taxes collected by him
considered as being owned proportionately by its and turned over to the Bureau Of Internal
shareholders, partners or beneficiaries. Revenue.

(2) Family and Partnership Ownerships. - An (2) Return on Public Offerings of Shares of Stock.
individual shall be considered as owning the stock - In case of primary offering, the corporate issuer
owned, directly or indirectly, by or for his family, shall file the return and pay the corresponding tax
or by or for his partner. For purposes of the within thirty (30) days from the date of listing of
paragraph, the 'family of an individual' includes the shares of stock in the local stock exchange. In
only his brothers and sisters (whether by whole or the case of secondary offering, the provision of
half-blood), spouse, ancestors and lineal Subsection (C) (1) of this Section shall apply as to
descendants. the time and manner of the payment of the tax.

(3) Option. - If any person has an option acquire (D) Common Provisions. - any gain derived from the sale,
stock, such stock shall be considered as owned by barter, exchange or other disposition of shares of stock
such person. For purposes of this paragraph, an under this Section shall be exempt from the tax imposed in
option to acquire such an option and each one of Sections 24(C), 27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of
a series of options shall be considered as an this Code and from the regular individual or corporate
option to acquire such stock. income tax. Tax paid under this Section shall not be
deductible for income tax purposes.
(4) Constructive Ownership as Actual Ownership. SEC. 128. Returns and Payment of Percentage Taxes. - “Sec. 128. Returns and Payment of
- Stock constructively owned by reason of the Percentage Taxes.—
application of paragraph (1) or (3) hereof shall, (A) Returns of Gross Sales, Receipts or Earnings and
for purposes of applying paragraph (1) or (2), be Payment of Tax. - “(A) x x x
treated as actually owned by such person; but
stock constructively owned by the individual by (1) Persons Liable to Pay Percentage Taxes. - “(1) x x x
reason of the application of paragraph (2) hereof Every person subject to the percentage taxes
shall not be treated as owned by him for imposed under this Title shall file a quarterly “(2) Persons Retiring from Business.— x x
purposes of again applying such paragraph in return of the amount of his gross sales, receipts x
order to make another the constructive owner of or earnings and pay the tax due thereon within
such stock. twenty-five (25) days after the end of each “(3) Determination of Correct Sales or
taxable quarter: Provided, That in the case of a Receipts.— x x x
(C) Return on Capital Gains Realized from Sale of Shares of person whose VAT registration is cancelled and
Stocks. - who becomes liable to the tax imposed in Section “x x x.”
116 of this Code, the tax shall accrue from the
(1) Return on Capital Gains Realized from Sale of date of cancellation and shall be paid in
Shares of Stock Listed and Traded in the Local accordance with the provisions of this Section.
Stock Exchange. - It shall be the duty of every
stock broker who effected the sale subject to the (2) Person Retiring from Business. - Any person
tax imposed herein to collect the tax and remit retiring from a business subject to percentage tax
the same to the Bureau of Internal Revenue shall notify the nearest internal revenue officer,
within five (5) banking days from the date of file his return and pay the tax due thereon within
collection thereof and to submit on Mondays of twenty (20) days after closing his business.
each week to the secretary of the stock
exchange, of which he is a member, a true and (3) Exceptions. - The Commissioner may, by rules
complete return which shall contain a declaration and regulations, prescribe:

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 74
 (a) The time for filing the return at REPUBLIC OF THE PHILIPPINES, Represented by the COMMISSIONER OF INTERNAL
intervals other than the time prescribed REVENUE, petitioner, vs. SUNLIFE ASSURANCE COMPANY OF CANADA, respondent.
in the preceding paragraphs for a
particular class or classes of taxpayers FACTS: Sun Life is a mutual life insurance company organized and existing under the laws of Canada.
after considering such factors as volume It is registered and authorized by the SEC and the Insurance Commission to engage in business in the
of sales, financial condition, adequate Philippines as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi Village,
measures of security, and such other Makati City.
relevant information required to be
submitted under the pertinent provisions On October 20, 1997, Sun Life filed with the CIR its insurance premium tax return for the third quarter
of this Code; and of 1997 and paid the amount of P31,485,834.51. For the period covering August 21 to December 18,
1997, petitioner filed with the CIR its documentary stamp tax (DST) declaration returns and paid
(b) The manner and time of payment of P30,000,000.00.
percentage taxes other than as
hereinabove prescribed, including a On December 29, 1997, the CTA rendered its decision in Insular Life Assurance Co. Ltd. v. CIR, which
scheme of tax prepayment. held that mutual life insurance companies are purely cooperative companies and are exempt from the
payment of premium tax and DST. Sun Life surmised that being a mutual life insurance company, it
(4) Determination of Correct Sales or Receipts. - was likewise exempt from the payment of premium tax and DST. Hence, Sun Life filed with the CIR an
When it is found that a person has failed to issue administrative claim for tax credit of its alleged erroneously paid premium tax and DST for the
receipts or invoices, or when no return is filed, or aforestated tax periods.
when there is reason to believe that the books of
accounts or other records do not correctly reflect For failure of the CIR to act upon the administrative claim for tax credit and with the 2-year period to
the declarations made or to be made in a return file a claim for tax credit or refund was about to expire, Sun Life filed with the CTA a petition for review
required to be filed under the provisions of this on August 23, 1999. It prayed for the issuance of a tax credit certificate in the amount
Code, the Commissioner, after taking into account ofP61,485,834.51 representing P31,485,834.51 of erroneously paid premium tax and P30,000,000.00 of
the sales, receipts or other taxable base of other DST. Sun Life stood firm on its contention that it is a mutual life insurance company vested with all the
persons engaged in similar businesses under characteristic features and elements of a cooperative company or association as defined in Section 121
similar situations or circumstances, or after of the Tax Code. Primarily, the management and affairs of Sun Life were conducted by its members;
considering other relevant information may secondly, it is operated with money collected from its members; and, lastly, it has for its purpose the
prescribe a minimum amount of such gross mutual protection of its members and not for profit or gain.
receipts, sales and taxable base and such amount In its answer, the CIR, then respondent, raised as special and affirmative defenses.
so prescribed shall be prima facie correct for
purposes of determining the internal revenue tax On November 12, 2002, the CTA ruled that a mutual life insurance company is a purely cooperative
liabilities of such person. company; thus, exempted from the payment of premium and documentary stamp taxes. Petitioner Sun
Life is without doubt a mutual life insurance company
(B) Where to File. - Except as the Commissioner otherwise
permits, every person liable to the percentage tax under Seeking reconsideration of the decision of the CTA, the CIR argued that Sun Life ought to have
this Title may, at his option, file a separate return for each registered, foremost, with the Cooperative Development Authority before it could enjoy the exemptions
branch or place of business, or a consolidated return for all from premium tax and DST extended to purely cooperative companies or associations and for its failure
branches or places of business with the authorized agent to register, it could not avail of the exemptions prayed for. Moreover, the CIR alleged that Sun Life
bank, Revenue District Officer, Collection Agent or duly failed to prove that ownership of the company was vested in its members who are entitled to vote and
authorized Treasurer of the city or municipality where said elect the Board of Trustees among them. The CTA denied the CIR’s motion for reconsideration.
business or principal place of business is located, as the
case may be. Ruling of the Court of Appeals

In upholding the CTA, the CA reasoned that respondent was a purely cooperative corporation duly
G.R. No. 158085. October 14, 2005.* licensed to engage in mutual life insurance business in the Philippines. Thus, respondent was deemed

JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends Page 75
exempt from premium and documentary stamp taxes, because its affairs are managed and conducted
by its members with money collected from among themselves, solely for their own protection, and not
for profit. Its members or policyholders constituted both insurer and insured who contribute, by a
system of premiums or assessments, to the creation of a fund from which all losses and liabilities were
paid. The dividends it distributed to them were not profits, but returns of amounts that had been
overcharged them for insurance. For having satisfactorily shown with substantial evidence that it had
erroneously paid and seasonably filed its claim for premium and documentary stamp taxes, respondent
was entitled to a refund, the CA ruled.
ISSUE:
Whether or not respondent is a purely cooperative company or association under Section 121 of the
NIRC and a fraternal or beneficiary society, order or cooperative company on the lodge system or local
cooperation plan and organized and conducted solely by the members thereof for the exclusive benefit
of each member and not for profit under Section 199 of the NIRC.
HELD:
The Petition has no merit.
The Tax Code defines a cooperative as an association "conducted by the members thereof with
the money collected from among themselves and solely for their own protection and not
for profit."8 Without a doubt, respondent is a cooperative engaged in a mutual life insurance business.
First, it is managed by its members. Both the CA and the CTA found that the management and affairs
of respondent were conducted by its member-policyholders.9
A stock insurance company doing business in the Philippines may "alter its organization and transform
itself into a mutual insurance company." Respondent has been mutualized or converted from a stock
life insurance company to a nonstock mutual life insurance corporation pursuant to Section 266 of the
Insurance Code of 1978. On the basis of its bylaws, its ownership has been vested in its member-
policyholders who are each entitled to one vote;13 and who, in turn, elect from among themselves the
members of its board of trustees.Being the governing body of a nonstock corporation, the board
exercises corporate powers, lays down all corporate business policies, and assumes responsibility for
the efficiency of management.
Second, it is operated with money collected from its members. Since respondent is composed entirely
of members who are also its policyholders, all premiums collected obviously come only from them.
The member-policyholders constitute "both insurer and insured" who "contribute, by a system of
premiums or assessments, to the creation of a fund from which all losses and liabilities are paid." The
premiums pooled into this fund are earmarked for the payment of their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit of anyone.
As early as October 30, 1947, the director of commerce had already issued a license to respondent -- a
corporation organized and existing under the laws of Canada -- to engage in business in the
Philippines.Pursuant to Section 225 of Canada’s Insurance Companies Act, the Canadian minister of
state (for finance and privatization) also declared in its Amending Letters Patent that respondent would
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
be a mutual company effective June 1, 1992. In the Philippines, the insurance commissioner also
granted it annual Certificates of Authority to transact life insurance business, the most relevant of which
were dated July 1, 1997 and July 1, 1998.
A mutual life insurance company is conducted for the benefit of its member-policyholders, who pay into
its capital by way of premiums. To that extent, they are responsible for the payment of all its losses.
"The cash paid in for premiums and the premium notes constitute their assets x x x." In the event that
the company itself fails before the terms of the policies expire, the member-policyholders do not
acquire the status of creditors.Rather, they simply become debtors for whatever premiums that they
have originally agreed to pay the company, if they have not yet paid those amounts in full, for
"[m]utual companies x x x depend solely upon x x x premiums." Only when the premiums will have
accumulated to a sum larger than that required to pay for company losses will the member-
policyholders be entitled to a "pro rata division thereof as profits."
Contributing to its capital, the member-policyholders of a mutual company are obviously also its
owners.Sustaining a dual relationship inter se, they not only contribute to the payment of its losses, but
are also entitled to a proportionate share30 and participate alike31 in its profits and surplus.
Sharing in the common fund, any member-policyholder may choose to withdraw dividends in cash or to
apply them in order to reduce a subsequent premium, purchase additional insurance, or accelerate the
payment period. Although the premium made at the beginning of a year is more than necessary to
provide for the cost of carrying the insurance, the member-policyholder will nevertheless receive the
benefit of the overcharge by way of dividends, at the end of the year when the cost is actually
ascertained. "The declaration of a dividend upon a policy reduces pro tanto the cost of insurance to the
holder of the policy. That is its purpose and effect."
A stipulated insurance premium "cannot be increased, but may be lessened annually by so much as the
experience of the preceding year has determined it to have been greater than the cost of carrying the
insurance x x x."35 The difference between that premium and the cost of carrying the risk of loss
constitutes the so-called "dividend" which, however, "is not in any real sense a dividend." It is a
technical term that is well understood in the insurance business to be widely different from that to
which it is ordinarily attached.
The so-called "dividend" that is received by member-policyholders is not a portion of profits set aside
for distribution to the stockholders in proportion to their subscription to the capital stock of a
corporation.37 One, a mutual company has no capital stock to which subscription is necessary; there are
no stockholders to speak of, but only members. And, two, the amount they receive does not partake of
the nature of a profit or income. The quasi-appearance of profit will not change its character. It remains
an overpayment, a benefit to which the member-policyholder is equitably entitled.
Verily, a mutual life insurance corporation is a cooperative that promotes the welfare of its own
members. It does not operate for profit, but for the mutual benefit of its member-policyholders. They
receive their insurance at cost, while reasonably and properly guarding and maintaining the stability
and solvency of the company.39 "The economic benefits filter to the cooperative members. Either
equally or proportionally, they are distributed among members in correlation with the resources of the
association utilized."
Page 76
It does not follow that because respondent is registered as a nonstock corporation and thus exists for a
purpose other than profit, the company can no longer make any profits.41 Earning profits is merely its
secondary, not primary, purpose. In fact, it may not lawfully engage in any business activity for profit,
for to do so would change or contradict its nature as a non-profit entity. It may, however, invest its
corporate funds in order to earn additional income for paying its operating expenses and meeting
benefit claims. Any excess profit it obtains as an incident to its operations can only be used, whenever
necessary or proper, for the furtherance of the purpose for which it was organized.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution are AFFIRMED.
G.R. No. 150947. July 15, 2003.*
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MICHEL J. LHUILLIER PAWNSHOP,
INC., respondent.
FACTS:
On 1991, the CIR issued Revenue Memorandum Order (RMO) No. 15-91, which was clarified by RMO
No. 43-91 imposing a 5% lending investors tax on pawnshops. It held that the principal activity of
pawnshops is lending money at interest and incidentally accepting personal property as security for the
loan. Moreover, to give effect to the provisions of Section 246 of the Tax Code, pawnshop owners or
operators shall become liable to the lending investor’s tax on their gross income beginning January 1,
1991. Since pawnshops are considered as lending investors effective, they also become subject to
documentary stamp taxes.
On 1997, the Bureau of Internal Revenue (BIR) issued an Assessment Notice against Lhuillier
demanding payment of deficiency percentage.
Lhuillier filed an administrative protest with the Office of the Revenue Regional Director contending that
neither the Tax Code nor the VAT Law expressly imposes 5% percentage tax on the gross income of
pawnshops; that pawnshops are different from lending investors, which are subject to the 5%
percentage tax under the specific provision of the Tax Code; that RMO No. 15-91 is not implementing
any provision of the Internal Revenue laws but is a new and additional tax measure on pawnshops,
which only Congress could enact, and that it impliedly amends the Tax Code, and that it is a class
legislation as it singles out pawnshops.
On 1998, the BIR issued Warrant of Distraint and/or Levy against Lhuilliers property for the
enforcement and payment of the assessed percentage tax.
When Lhuiller's protest was not acted upon, they elevated it to the CIR which was also not acted upon.
Lhuiller filed a Notice and Memo on Appeal with the CTA.
On 2000, the CTA held the the RMOs were void and that the Assessment Notice should be cancelled.
The CIR filed a motion for review with the CA which only affirmed the CTA's decision thus this case in
bar.
ISSUE: Whether pawnshops included in the term lending investors for the purpose of imposing the
5% percentage tax under the NIRC.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
HELD:
NO.
The held that even though the RMOs No were issued in accordance with the power of the CIR, they
cannot issue administrative rulings or circulars not consistent with the law sought to be applied. It
should remain consistent with the law they intend to carry out. Only Congress can repeal or amend the
law.
In the NIRC, the term lending investor includes all persons who make a practice of lending money for
themselves or others at interest. A pawnshop, on the other hand, is defined under Section 3 of P.D. No.
114 as a person or entity engaged in the business of lending money on personal property delivered as
security for loans.
While it is true that pawnshops are engaged in the business of lending money, they are not considered
lending investors for the purpose of imposing the 5% percentage taxes citing the following reasons:
First, pawnshops and lending investors were subjected to different tax treatments as per the NIRC.
Second, Congress never intended pawnshops to be treated in the same way as lending investors. Third,
Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects to percentage tax dealers in
securities and lending investors only. There is no mention of pawnshops. And fourth, the BIR had ruled
several times prior to the issuance of the RMOs that pawnshops were not subject to the 5% percentage
tax imposed by Section 116 of the NIRC of 1977. As Section 116 of the NIRC of 1977 was practically
lifted from Section 175 of the NIRC of 1986, and there being no change in the law, the interpretation
thereof should not have been altered.
G.R. No. 174134. July 30, 2008.*
FIRST PLANTERS PAWNSHOP, INC., petitioner, vs. COMMISSIONER OF INTERNAL
REVENUE, respondent.
FACTS:
In a Pre-assessment Notice, petitioner was informed by the BIR that it has an existing tax deficiency on
its VAT and Documentary Stamp Tax (DST) liabilities for the year 2000. Petitioner protested the
assessment for lack of legal and factual bases.
Petitioner subsequently received a Formal Assessment Notice, directing payment of VAT deficiency and
DST deficiency, inclusive of surcharge and interest. Petitioner filed a protest, which was denied by the
Acting Regional Director.
Petitioner then filed a petition for review with the CTA, which upheld the deficiency assessment.
Petitioner filed an MR which was denied.
Petitioner appealed to the CTA En Banc which denied the Petition for Review. Petitioner sought
reconsideration but this was denied by the CTA.. Hence, the present petition for review under Rule 45
of the ROC.
Page 77
The core of petitioner’s argument is that it is not a lending investor within the purview of Section
108(A) of the NIRC, as amended, and therefore not subject to VAT. Petitioner also contends that a
pawn ticket is not subject to DST because it is not proof of the pledge transaction, and even assuming
that it is so, still, it is not subject to tax since a DST is levied on the document issued and not on the
transaction.
ISSUE: Whether or not the petitioner in this case is liable for:
1. VAT (Value-Added Tax)
2. DST (Documentary Stamp Tax)
HELD:
1. NO. The determination of petitioner’s tax liability depends on the tax treatment of a pawnshop
business. It was the CTA’s view that the services rendered by pawnshops fall under the
general definition of “sale or exchange of services” under Section 108(A) of the Tax Code of
1997.The Court finds that pawnshops should have been treated as non-bank financial
intermediaries from the very beginning, subject to the appropriate taxes provided by law.
At the time of the disputed assessment, that is, for the year 2000, pawnshops were not subject to 10%
VAT under the general provision on “sale or exchange of services” as defined under Section 108(A) of
the Tax Code of 1997. Instead, due to the specific nature of its business, pawnshops were then subject
to 10% VAT under the category of non-bank financial intermediaries, as provided in the same Section
108(A), which reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.–
(A) xx
The phrase “sale or exchange of services” means the performance of all kinds or services in the
Philippines for others for a fee, remuneration or consideration, including x x x services of banks,
non-bank financial intermediaries and finance companies; and non-life insurance companies
(except their crop insurances), including surety, fidelity, indemnity and bonding companies..xx
Coming now to the issue at hand – Since petitioner is a non-bank financial intermediary, it is subject to
10% VAT for the tax years 1996 to 2002; however, with the levy, assessment and collection of
VAT from non-bank financial intermediaries being specifically deferred by law, then
petitioner is not liable for VAT during these tax years. But with the full implementation of the
VAT system on non-bank financial intermediaries starting January 1, 2003, petitioner is liable for 10%
VAT for said tax year. And beginning 2004 up to the present, by virtue of R.A. No. 9238, petitioner is
no longer liable for VAT but it is subject to percentage tax on gross receipts from 0% to 5 %, as the
case may be.
JMC College of Law | Taxation II Reviewer| Based on the Lectures of Atty. Raymund Ong-Abrantes; Prepared by Migrio Vina O. Cagampang; Case digest from #TreamFriends
2. YES. Applying jurisprudence, it was ruled that the subject of DST is not limited to the document
alone. Pledge, which is an exercise of a privilege to transfer obligations, rights or properties incident
thereto, is also subject to DST, thus –
xx.. the subject of a DST is not limited to the document embodying the enumerated transactions. A
DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties
incident thereto… xx
Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined as an
accessory, real and unilateral contract by virtue of which the debtor or a third person delivers to the
creditor or to a third person movable property as security for the performance of the principal
obligation, upon the fulfillment of which the thing pledged, with all its accessions and accessories, shall
be returned to the debtor or to the third person.
True, the law does not consider said ticket as an evidence of security or indebtedness. However, for
purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshop’s
obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is
therefore no basis in petitioner’s assertion that a DST is literally a tax on a document and that no tax
may be imposed on a pawn ticket.
Also, Section 195 of the NIRC unqualifiedly subjects all pledges to DST. It states that “[o]n every
x x x pledge x x x there shall be collected a documentary stamp tax x x x. ” It is clear, categorical, and
needs no further interpretation or construction.
In the instant case, there is no law specifically and expressly exempting pledges entered into by
pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents which
are not subject to stamp tax; but a pawnshop ticket is not one of them.
Hence, petitioner’s nebulous claim that it is not subject to DST is without merit.
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