Taxation

Review
Notes
(Under Judge Sylvia P. Lamoste)

Transcribed by: Lynde Rose I. Tajo

With special thanks to Ate Glaicee Paner, Ate

Lea Ortiz, Kuya JM Manibay and Ate Soren Yape
for their recordings.

Case digests were excluded from this transcript, and only the relevant
portions and those discussed by Judge L are included herein.

[For General Principles: read on your own]
CTA AND ITS JURISDICTION
We cannot discuss remedies without first discussing
about the Court of Tax Appeals (CTA).
History of the CTA
Originally, the CTA was created by virtue RA 1125
composed only of a presiding justice and 2 members (so
it was only one division). However, its jurisdiction has
been expanded; the composition turned into 6: a
presiding justice and 5 associate justices. With this
expanded jurisdiction, the CTA is now considered to be a
collegiate body with specialized jurisdiction. Collegiate,
because it is of the same level with the Court of Appeals
(CA).
One of the features of this expanded jurisdiction is the
fact that decisions of the CTA are no longer appealed to
the CA. Why? Because the CTA and CA are collegiate;
hence, are in the same level. Justices of the CTA are in
the same level as those justices in the CA. That is why
decisions of the CTA (en banc) should be elevated
directly to the Supreme Court.
The 6 members of the CTA has further been increased
to 9. The current CTA now has one presiding justice, and
8 associate justices with 3 divisions.
Originally the CTA‟s jurisdiction was only on CIVIL
matters. But with its expanded jurisdiction, it now also
covers criminal cases which used to be with the RTC
and CA. It has also jurisdiction over real property taxes
as well as local taxes, which used to be with the RTC
and CA.
RA 9289, Sec. 7 – Jurisdiction.
a. Exclusive appellate jurisdiction to review by appeal, as
herein provided:
1. Decisions of the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relation thereto, or
other matters arising under the National Internal Revenue or
other laws administered by the Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal Revenue in cases
involving disputed assessments, refunds of internal revenue
taxes, fees or other charges, penalties in relations thereto, or
other matters arising under the National Internal Revenue
Code or other laws administered by the Bureau of Internal
Revenue, where the National Internal Revenue Code provides
a specific period of action, in which case the inaction shall be
deemed a denial;
LRVIOLET | 1
Taxation Review Notes 2018-2019
3. Decisions, orders or resolutions of the Regional Trial Courts
in local tax cases originally decided or resolved by them in the
exercise of their original or appellate jurisdiction;
4. Decisions of the Commissioner of Customs in cases
involving liability for customs duties, fees or other money
charges, seizure, detention or release of property affected,
fines, forfeitures or other penalties in relation thereto, or other
matters arising under the Customs Law or other laws
administered by the Bureau of Customs;
5. Decisions of the Central Board of Assessment Appeals in
the exercise of its appellate jurisdiction over cases involving
the assessment and taxation of real property originally decided
by the provincial or city board of assessment appeals;
6. Decisions of the Secretary of Finance on customs cases
elevated to him automatically for review from decisions of the
Commissioner of Customs which are adverse to the
Government under Section 2315 of the Tariff and Customs
Code;
7. Decisions of the Secretary of Trade and Industry, in the case
of nonagricultural product, commodity or article, and the
Secretary of Agriculture in the case of agricultural product,
commodity or article, involving dumping and countervailing
duties under Section 301 and 302, respectively, of the Tariff
and Customs Code, and safeguard measures under Republic
Act No. 8800, where either party may appeal the decision to
impose or not to impose said duties.
What are the matters to be elevated in the CTA?
1. Decisions of the Commission of Internal
Revenue (CIR) on disputed assessments,
claim for refund, and other matters which are
under the National Internal Revenue Code
(NIRC);
2. Inaction of the CIR
- If and when there is a protest or there is a
dispute on an assessment and the CIR
will not act on it within the period allowed
by law, then the same is then deemed
denied. This inaction will then be
appealed to the CTA
3. Decisions of the Collector of Customs, on
matters regarding customs protest and seizure
and forfeiture proceedings.
- NOTE: The equivalent of the Collector of
Customs in the BIR is the Bureau
Director. The Collector of Customs is
different from the Commissioner of
Customs.
- What is a customs protest? They are
protests on assessments made by the
Bureau of Customs (BoC) in regard to
liability for customs duties, fees, and
charges.
 Taxation Review Notes 2018-2019

EXAMPLE: The taxpayer or the importer
does not agree on the assessment or
liquidation of the imported articles, the
remedy of the importer is to make a
protest on the assessment or liquidation.
The decision of the Collector of Customs
is elevated to the Commissioner of
Customs. If still the decision of the
Commissioner of Customs, is adverse to
the importer/taxpayer, the matter is
elevated to the CTA.
- Note however that if the decision of the
Commissioner is still adverse to the
government, it is to be elevated to the
Secretary of Finance
- It is then the decision of the Sec. of
Finance in either case (whenever it is still
adverse to the government) which is to be
appealed to the CTA.
Decision of the Collector of Customs is ADVERSE
TO THE GOVT.

With the BoC, there are only 2 proceedings:

If the amount involved If the amount involved
a. Customs protest – when the taxpayer does does not exceed, exceeds P500,000, and it
not agree with the assessment for customs P500,000, and it is still is still adverse to the
duties, fees, and charges adverse to the government, there is an
b. Seizure and forfeiture proceedings – it government, there is an AUTOMATIC REVIEW to
AUTOMATIC REVIEW to the SECRETARY OF
involves imported articles
the COMMISSIONER OF FINANCE.
-EXAMPLE: Smuggling/smuggled goods. If the
CUSTOMS.
Collector of Customs‟ decision on the
smuggled goods is adverse to the importer, he
has to elevate the matter to the Commissioner If it is still adverse, the
of Customs. When the Commissioner issues a decision of the
decision, still adverse, taxpayer/importer must Commissioner will be
afterwards raise the decision to the CTA. appealed to the
SECRETARY OF
Smuggling - if and when imported goods enter FINANCE.
Philippine jurisdiction, and there is an intention to lay
these goods in the Philippines, and there is no payment
of customs duties, fees and charges, then there is If still adverse, appeal now to the CTA
smuggling.
Why is there an automatic review when it is adverse
Importation begins when the imported articles arrive in
to the government? – Because nobody else will review
Philippine jurisdiction and are entered in the customs
the same, since it will be already favorable to the
house. It terminates when there is payment of the
taxpayer, in the interest of fair play and due process on
customs, fees, and charges. When there is no payment,
the part of the government.
there is smuggling. Forfeiture proceedings of these
smuggled imported articles will then begin. 5. Decisions of the Central Board of Assessment
Appeals (CBAA) on matters relative to real
4. Decisions of the Secretary of Finance on
property assessment.
matters which are automatically reviewed by
- Real Property assessment is made by the
him whenever the decision of the
owner of the real property. He is required
Commissioner of Customs is adverse to the
to make a declaration of the real property
GOVERNMENT.
as to its value.
- When the decision of the Collector of
- Although the owners sometimes evade
Customs is adverse to the government, it
taxes and don‟t make declarations, they
will result in an automatic review to the
cannot escape because the LGC provides
Commissioner, if the amount involved is
that when the owner or the party who has
not more than 500,000 pesos.
legal title over the real property does not
- If the amount involved is more than
make a declaration/fails to make a
P500,000, it will go automatically/directly
declaration, it is the ASSESSOR WHO
to the Secretary of Finance.
WILL MAKE the declaration for purposes

LRVIOLET | 2

of real property taxation in the form of an
assessment.
- Before the assessor can make an
assessment on the real property, there
has to be a classification (i.e. residential,
mining, industrial) of the real property.
- The assessment level will depend upon
the classification of the real property.
When the property for example is
commercial in nature, it has a higher
assessment level as compared to the
other classifications of real property.
If the taxpayer does not agree with the
assessment of the assessor, he should make a
PROTEST.
If the real property is in the city, the taxpayer
has to file his protest with the City Board of
Assessment Appeals. If it is in a municipality,
he has to file the protest with the Provincial
Board of Assessment Appeals, since
assessment of real property taxation is by the
said boards.
The decision of the City Board of Assessment
Appeals and the Provincial Board of
Assessment Appeals is appealed to the
Central Board of Assessment Appeals.
If the decision of the CBAA is still adverse to
the taxpayer/owner, said decision will then be
elevated to the CTA.
Remember also that real property taxation is
imposed under the Local Government Code,
so it is a local tax. But then, when there is
question as to the assessment of real property
tax, this is within the jurisdiction of the City
Board of Assessment Appeals and Provincial
Board of Assessment Appeals, as the case
may be.
6. Decisions of RTC in local tax cases in the
exercises of their original or appellate
jurisdiction
With respect to local taxes, fees and charges, it is within
the Local Government Code. When the taxpayer does
not agree with the assessment of local taxes, fees, and
charges, the protest of the taxpayer is with the Local
Treasurer (City Treasurer or Provincial Treasurer, or
Municipal Treasurer, as the case may be).
LRVIOLET | 3
Taxation Review Notes 2018-2019
If the protest is denied by the treasurer, the taxpayer
goes to the regular courts, depending on the amount
involved. For first level courts within Metro Manila, not
exceeding 400,000 pesos. In excess thereof, it falls
within the second level courts. For provinces, the
jurisdictional amount is 300,000 pesos – if above or in
excess, RTC; if below, it shall be with the MTC.
NOTE: Decisions of first level courts, if adverse to the
taxpayer, will be appealed to the RTC.
What will be the difference if the decision of the RTC
is in the exercise of its original jurisdiction and if the
decision is in the exercise of its appellate
jurisdiction?
If in appellate jurisdiction, the appeal to the CTA will be
directly the CTA en banc. If in its original, it is to be
elevated to the CTA by division. In other words, it is the
CTA division who will review
There are only two matters that may be appealed and
which can be decided by the CTA en banc:
1. Decisions of CBAA;
2. Decisions of the CTA re: local taxes fees and
charges, in the exercise of its appellate
jurisdiction
- Decided by the CTA en banc, it is to be
elevated to the CA by petition for review
analogous to that of Rule 43, in the
Revised Rules of Court.
All other appeals to the CTA will be by petition for review
analogous to Rule 42 of the Revised Rules of Court. This
appeal under Rule 42 will be decided by the CTA
division.
If a party (taxpayer, CIR, Commissioner of Customs) is
aggrieved by a decision of the CTA division, the appeal
will be made to the CTA en banc. But before the
aggrieved party may appeal the decision of the CTA
division, he has to file a Motion for Reconsideration/New
Trial with the same division that rendered it, within 15
days from receipt of the adverse decision.
Otherwise, it is a jurisdictional matter, because the CTA
en banc will not recognize the appeal if and when there
is no MR/MNT that has been decided upon by the CTA
Division.
The decision of the CTA en banc, whether in the
exercise of its original or appellate jurisdiction will be
appealed directly to the Supreme Court via Petition for

Review under Rule 45 of the Revised Rules of Court
within 30 days from receipt of the decision.
7. Decisions of Secretary of Agriculture and the
Secretary of Trade and Industry which has
something to do with the decision of WON to
impose dumping or countervailing duties on
imported goods.
- If the imported articles are agricultural
products, the decision whether or not to
impose dumping or countervailing duties
falls on the Secretary of Agriculture. If
the importer is aggrieved by the decision,
he can appeal to the CTA.
- On the other hand, if the articles or goods
which are subjected to
dumping/countervailing duties are not
agricultural, the decision is with the
Secretary of Trade and Industry. They
are also appealable to the CTA.
Dumping duties and countervailing duties are in the
Customs and Tariff Codes. Both may be imposed by the
government in order to protect local industries against its
foreign competitors. Aside from the primary objective of
taxation which is to raise revenue for governmental
needs, there are other non-revenue raising objectives of
the exercise of taxation. One of which is to protect local
industries against foreign competition by the imposition
of dumping duties and countervailing duties; the local
industries will play in the same level with that of imported
goods.
Dumping duty – refers to a special duty imposed on the
importation of a product, commodity or article of
commerce into the Philippines at less than its normal
value when destined for domestic consumption in the
exporting country, which is the difference between the
export price and the normal value of which product,
commodity or article.
Countervailing duty – this is a duty imposed on articles
upon the production, manufacture, or export of which any
subsidy is directly or indirectly granted in the country of
origin and/or exportation of which into the Philippines will
likely injure an industry in the Philippines or retard the
establishment of such industry.
-oOo-
What is the requirement in order that an appeal may
be made to the Court of Tax Appeals en banc? In
order to constitute a timely appeal, the aggrieved party
must first file a Motion for Reconsideration or New Trial
LRVIOLET | 4
Taxation Review Notes 2018-2019
within 15 days from receipt of the adverse decision.
From the denial of the MR/MNT, he elevates the matter
to CTA en banc within 30 days.
What is doctrine of exhaustion of administrative
remedies and how is it relevant to taxation?
Before the courts can interfere on any matter, it is
emphasized that taxpayers should exhaust
administrative remedies. What are these remedies which
are being referred to? One is protest, wherein you file
the same with the CIR if it‟s for an internal revenue tax,
and with the Commissioner of Customs, if it‟s for
payment of custom taxes, fees and charges.
The purpose is for the administrative officer to deal with it
in a manner within its jurisdiction. Otherwise, if the
taxpayer fails to exhaust administrative remedies, it can
be fatal to his cause when he goes to court without first
exhausting the same because it can be a ground for
dismissal. The court will not take cognizance of the
petition if administrative remedies are not exhausted.
This leads us to the distinction between a mere
assessment, a disputed assessment, and a decision.
- You have not raised/protested your
assessment before the CIR. You failed to
protest said assessment, or if you had
protested, you did not wait for the resolution of
such dispute, and you immediately went to
court with this mere assessment. This goes
against the doctrine of exhaustion of
administrative remedies.
- Before you go to court, you have to protest the
assessment, in order to come up with the so
called disputed assessment.
- This disputed assessment is the basis of the
CIR to make a decision. Without a dispute or
controversy being raised by the taxpayer, there
is nothing to be decided upon by the CIR.
- The decision of the CIR (or the Commissioner
of Customs or the Local Treasurer as the case
may be) is what the taxpayer must appeal or
elevate to the courts (CTA for Internal
Revenue taxes, Regular Courts for local taxes)
- Hence, the absence of a disputed assessment
or a controversy firstly before the respective
administrative officers (the CIR, COC, Local
Treasurer) would then mean an absence of a
decision to be taken to court and therefore,
said case would be deemed premature for not
complying with the exhaustion of administrative
remedies.

In the case of Asiatrust Development Bank vs. CIR, in
order for the CTA en banc to take cognizance of an
appeal via a petition for review, a timely motion for
reconsideration or new trial must first be filed with the
CTA Division that issued the assailed decision or
resolution. Failure to do so is a ground for the dismissal
of the appeal as the word "must" indicates that the filing
of a prior motion is mandatory, and not merely
directory. Without MR/MNT that has been denied by
the CTA division, the CTA en banc can dismiss the
case.
In the case of CIR vs. Liquigaz, a distinction has been
made between an assessment and a decision. A mere
assessment is not a decision that is appealable to the
CTA.
What is an assessment under Sec. 228?
If the taxpayer received or he has been informed by the
BIR that he has a deficiency tax, and he has been
required to pay within a certain period of that tax liability
– this is only an assessment. Assessment is an
information/notice in writing to the taxpayer informing him
that he has a tax liability, and there is demand/he is
expected to pay the amount of tax within a certain period
of time. Otherwise, he is supposed to show proof that he
is not liable or no longer liable to pay the said tax
referred to in the assessment.
This assessment received by the taxpayer however is
not the one being elevated to the CTA. Before it can be
elevated, the taxpayer must first file a protest if he does
not agree on the assessment. The assessment, when
there is already a protest by the taxpayer, becomes a
disputed assessment.
In the case of CIR vs. CTA and Petron Corp, the SC
reversed and set aside the decision of the CTA, giving
due course the petition of Petron, for the assessment
that has been made by the CIR on the imposition of
excise of tax and importation of alcohol. In this case, the
Supreme Court had the opportunity of distinguishing the
CIR‟s quasi-legislative power and quasi-judicial power
under Sec. 4 of the NIRC.
It is said that the basis of the Customs Commissioner to
impose the excise tax was the memorandum
interpretation by the CIR of the MC 164-2012, on that
memorandum, the CC imposed excise tax.
This interpretation made by the CIR was in the exercise
of quasi-legislative function. And in such exercise, the
appeal to review whether or not such interpretation is
LRVIOLET | 5
Taxation Review Notes 2018-2019
correct, falls within the jurisdiction of the Secretary of
Finance.
What can be appealed to the CTA are decisions by the
CIR and Commissioner of Customs in the exercise of
quasi-judicial powers in the scope of its jurisdiction
provided for in the NIRC and Customs Laws,
respectively.
In this case then, according to the SC, there was no
decision to warrant an appeal to the CTA. It was just an
assessment, which was based on the interpretation of
the CIR, which was in the exercise of its quasi-legislative
function. Therefore there was nothing here to be
reviewed by the CTA. The resolution of the CTA was
reversed and set aside by the SC on the ground of
prematurity.
For more on the exhaustion of administrative remedies,
see Province of Zamboanga del Norte vs. CA.
-oOo-
General Rule: No court shall be allowed/shall have the
authority to grant an injunction or restrain the collection
of any national internal revenue (NIR) tax.
EXCEPTION: However, if and that is, if the
case is pending before the CTA, the CTA may
enjoin the collection of an national internal
revenue tax if in its opinion, it may jeopardize
the interest of the government, or the taxpayer,
or both that government and the taxpayer.
If and when the CTA enjoins the CIR to collect the tax
that is being claimed, the taxpayer will either be:
1. Required by the CTA to deposit the amount
that is being claimed by the BIR.
2. Or if the taxpayer files a surety bond, the bond
must not be more than double the amount of
the tax being claimed.
NOTE: This power by the CTA (to enjoin) cannot be
exercised independently, if there is no appeal of the case
pending before the CTA.
The case of Angeles City vs. Angeles Electric
Corporation, wherein the SC upheld the issuance of the
writ of injunction by the RTC of Angeles City,
demonstrated that the prohibition of the court to issue a
writ of injunction is applicable only to internal revenue
taxes under the NIRC. When it comes to local taxes,
fees and charges, the RTC may issue an injunction

because there is no same prohibition under the Local
Government Code.
When you are confronted with a problem, you have to
identify the facts involved. If and when internal revenue
taxes are involved, the court cannot enjoin or issue a writ
of injunction (except if the same is already with the CTA
on appeal and it finds that without otherwise, it may
jeopardize the interest of the government, the taxpayer,
or both). If it involves local taxes, fees, and charges, and
real property tax, jurisprudence dictates that under the
LGC there is no similar prohibition of Sec. 218 under the
NIRC.
REMEDIES
Remedies are available both to the government and to
the aggrieved taxpayer. They are considered to be
advantageous to the government and to taxpayer
because:
 On the part of the government, it insures the
collection of taxes; and
 In the case of the taxpayer, it assures that the
government officials, internal revenue
commissioners, and local treasurers, will not
abuse the power of taxation arbitrarily, unjustly
and unfairly. Taxpayers are assured that
imposition of taxes is in accordance with law.
On assessment and collection of internal
revenue taxes, the period to assess and the period
to collect is within 3 years from the last day
prescribed by law to file the return.
The last day prescribed by law for the filing of the
return would depend on the kind of tax involved.
EXAMPLE: a. If it is an INCOME TAX, and the
taxpayer is following the calendar year
(January – December), the Income Tax Return
is to be filed, on or before April 15 of the
following year.
b. If it is an ESTATE TAX, the Estate Tax
Return must be filed within 6 months from the
date of death.
Upon filing of the return or from the examination by the
BIR, assessment is to be made within 3 years, and
collection shall likewise be made within 3 years from the
time prescribed by law to file the return.
1. If the taxpayer files the return beyond the
period prescribed by law, then the 3 year
LRVIOLET | 6
Taxation Review Notes 2018-2019
period is to be reckoned with from the date of
filing.
EXAMPLE: Deadline is April 15. But the
taxpayer filed his return on April 30. Then the 3
year period to assess shall be reckoned with
on April 30.
2. If the taxpayer filed earlier than the deadline
to file the return, it shall be deemed as filed on
the last day as prescribed by law.
EXAMPLE: Deadline is April 15. But the
taxpayer filed his return on April 10. The 3 year
period to assess shall be reckoned with on
April 15, or the last day for filing of the
return.
What happens if assessment is done by the BIR
beyond the 3-year period?
The assessment shall be considered VOID. The
taxpayer can raise that issue when he files his protest.
That can be a ground for a protest under Sec. 228 of the
NIRC wherein the taxpayer is allowed if and when such
an assessment is received by the taxpayer.
How about payment of the tax?
NIR Tax is supposedly to be paid upon the filing of the
return. We have the concept of paying as you file. When
the taxpayer files his return, he is required to pay the
amount that is due, as reflected or as appearing in the
return.
In local taxes, fees, and charges, the assessment is
within 5 years from the date they became due. And these
local taxes, fees, and charges accrue on the first day of
January of every year. In other words, when it comes to
these taxes, they then become due every January 1.
BUT, it has to be filed on or before January 20 of that
year. OR if the taxpayer opts for an installment payment,
this is also allowed. It is payable on or before the
subsequent quarter.
BASICALLY, for local taxes, the taxpayer has two
options wherein he can file his return:
1. If he chooses to pay one-time-big-time, since
the local taxes accrue on January 1, he has to
pay it on or before January 20 of that year.
2. If he chooses to pay on an installment, he
pays at a quarterly basis.
- Taxpayer for the first installment shall pay on
or before January 20. The second quarter will
be on April 20, the third quarter on July 20, and

the last quarter on December 20 – this then will
be the last installment.
The period to collect local taxes, fees, and charges shall
also be within 5 years from the date of assessment.
How about real property tax?
For purposes of assessment, the taxpayer or owner or
administrator of the real property is required to make a
declaration every 3 years, starting January up to June.
However, if he fails to make a declaration, it is the
assessor (municipal, city, or provincial, as the case may
be) who makes the declaration. On the basis of the
declaration, assessment of the real property is to be
made. And based on that assessment, real property tax
shall be imposed.
Real property tax accrues every January 1 of each year.
But, it is payable on or before March 31, of the same
year. The taxpayer is again given two options similar to
the payment for local taxes.
1. If he chooses to pay one-time-big-time, he
has to pay it on or before March 31 of that
year.
2. If he chooses to pay on an installment, he
pays at a quarterly basis.
- Taxpayer for the first installment shall pay on
or before March 31. The second quarter will be
on June 30, the third quarter on September 30,
and the last quarter on December 31 – this
then will be the last installment.
In these installment payments in both local taxes fees
and charges and real property taxes, there is NO
INTEREST yet that is imposed by the local government
unit. If and when the taxpayer fails to pay the installment
or fails to pay the tax for that year, interest payment is
then imposed.
In the case of customs duties, fees and charges, there is
no similar provision as to the period of assessment
and collection. The reason is that imported articles are
supposedly to be appraised and evaluated, and the
customs duties, fees and charges of which, are to be
collected immediately upon the arrival of the goods
within Philippine jurisdiction. These imported articles will
be placed in a customs house, and these articles will not
be released from said house, until and unless there is
payment of the customs duties, fees, and charges.
LRVIOLET | 7
Taxation Review Notes 2018-2019
EXCEPTIONS:
Sec. 222 – Exceptions as to Period of Limitation of
Assessment and Collection of Taxes
(a) In the case of a false or fraudulent return with intent to evade
tax or of failure to file a return, the tax may be assessed, or a
proceeding in court for the collection of such tax may be filed
without assessment, at any time within ten (10) years after the
discovery of the falsity, fraud or omission: Provided, That in a
fraud assessment which has become final and executory, the
fact of fraud shall be judicially taken cognizance of in the civil or
criminal action for the collection thereof.
(b) If before the expiration of the time prescribed in Section 203
for the assessment of the tax, both the Commissioner and the
taxpayer have agreed in writing to its assessment after such
time, the tax may be assessed within the period agreed upon.
The period so agreed upon may be extended by subsequent
written agreement made before the expiration of the period
previously agreed upon.
(c) Any internal revenue tax which has been assessed within the
period of limitation as prescribed in paragraph (a) hereof may be
collected by distraint or levy or by a proceeding in court within
five (5) years following the assessment of the tax.
(d) Any internal revenue tax, which has been assessed within the
period agreed upon as provided in paragraph (b) hereinabove,
may be collected by distraint or levy or by a proceeding in court
within the period agreed upon in writing before the expiration of
the five (5) -year period. The period so agreed upon may be
extended by subsequent written agreements made before the
expiration of the period previously agreed upon.
(e) Provided, however, That nothing in the immediately
preceding and paragraph (a) hereof shall be construed to
authorize the examination and investigation or inquiry into any
tax return filed in accordance with the provisions of any tax
amnesty law or decree.
General Rule: The right to asses must be exercised
within 3 years from:
1. The day the return was actually filed OR;
2. From the last day for filing the return, whichever is
LATER.
Sec 222 of the NIRC enumerates the exception to this
general rule.
SEC 222 (a) speaks about FALSE OR FRADULENT
RETURN, or failure to file, with intent to evade tax.
In the case of a false or fraudulent return with intent to
evade tax or of failure to file a return, the situations here
are:
1. The taxpayer filed a return, but it was a false or
fraudulent return
2. The taxpayer failed to file a return with
intention to evade tax

The period to assess is within 10 years from the
discovery of the falsity, fraud or omission by the
taxpayer.
SEC 222 (e) speaks about a TAX AMNESTY. Why is
this considered to be an exception?
[The following questions were left unanswered during
class and were not discussed in the next meeting. The
answers herein are mine and COULD BE WRONG.
Read at your own risk.]
What is in a tax amnesty that makes it an exception
to the rule as to the period of limitation of
assessment and collection of taxes? What is the
effect if the taxpayer avails of an amnesty?
Tax amnesty partakes of an absolute waiver by the
government of its right to collect what is due and to give
tax evaders to start anew like a clean slate. A tax
amnesty, much like a tax exemption, is never favored or
presumed by law. The grant of tax amnesty must be
construed strictly against the taxpayer and liberally in
favor of the taxing authority. Since it is in the form of a
tax exemption, once the taxpayer is cleared of his tax
liability by virtue of a tax amnesty, there is nothing to
assess nor collect; therefore no period of limitation may
apply, which makes it an exception.
In case of income tax, aside from the accounting
period that you have to consider, what if the
taxpayer follows the fiscal year? When is the last day
to file the return if the taxpayer follows the fiscal
year?
Fiscal year mostly applies to Corporate Income Tax.
Sec. 77 (b) of the NIRC provides for the time of filing the
return which states that: The corporate quarterly
declaration shall be filed within sixty (60) days following
the close of each of the first three (3) quarters of the
taxable year. The final adjustment return shall be filed on
or before the fifteenth (15th) day of April, or on or before
the fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be.
EXAMPLE: The fiscal year started June 2018
so it ends on May 2019. The 4th month
following May will be September so the filing of
the final adjustment return will be on
September 15, 2019 for the said period.
-oOo-
SEC 222 (b) speaks about a WRITTEN WAIVER
With the above exception, this means that the
prescription is NOT TOLLED. What happens here is that
the CIR and the taxpayer will come up with an
LRVIOLET | 8
Taxation Review Notes 2018-2019
agreement to make an assessment beyond the period of
limitation, but they must do this before that said period
ends.
EXAMPLE: 2018 Income Tax Return - the filing of
which must be on or before April 15, 2019.
APRIL 15, APRIL 15,
JUNE
30,
2019 2022
2025
Generally, the period of assessment must be within the 3
year limit. Therefore, there must be an assessment
within the period of (counted from) April 15, 2019 to April
15, 2022. By way of exception, the CIR and the taxpayer
may come to an agreement or waiver to have the
assessment and collection BEYOND April 2022 at a later
date. In the above example, they decided to have it on
June 30, 2025. HOWEVER, they must come up with the
agreement to extend the period of assessment and
collection between April 15, 2019 – April 15, 2022. If they
come up with the waiver beyond the period of limitation,
such waiver is VOID. During the period of April 15, 2022
to June 30, 2025, assessment may be made at any time.
The period to assess will not prescribe so long as there
is a valid written waiver to extend such period on the part
of the taxpayer, accepted by the Commissioner of
Internal Revenue.
In the case of CIR vs. Kudos Metal Corporation, the
agreement or waiver to be valid must comply with the
following requirements:
1. Must be in proper form prescribed by RM-2090
2. Must be signed by the taxpayer himself or his
duly authorized representative:
 In the case of a corporation, the
waiver must be signed by ant of its
responsible officials.
 In case the authority is delegated by
the taxpayer to a representative,
such delegation should be in writing
and duly notarized.
3. The waiver should be duly notarized
4. The CIR or the revenue official authorized by
him must sign the waiver indicating that the
BIR has accepted and agreed to the waiver.
BEFORE signing the waiver, the CIR or
revenue official authorized by him must make
sure that the waiver is the prescribed form,
duly notarized, and executed by the taxpayer
or his duly authorized representative.

5. BOTH the date of execution by the taxpayer
and date of acceptance by the BIR should be
before the expiration of the period of
prescription or before the lapse of the period
agreed upon in case a subsequent agreement
is executed.
6. Must be executed in 3 copies, the original copy
to be attached to the docket of the case, the
2nd copy for the taxpayer, and the 3rd copy for
the office accepting the waiver.
Date of receipt of taxpayer‟s copy must be shown as
proof that the taxpayer was notified of the acceptance of
the BIR in the perfection of the agreement. NO
PERFECTION OF THE AGREEMENT = NO VALID
WAIVER
No valid waiver = the period of assessment will prescribe
because the validity of the waiver would have suspended
the period. As to collection, the period to collect: 5 years,
to be reckoned with from the time of the assessment.
The same is true if the assessment is based on fraud.
Although assessment period is within 10 years from the
discovery of the fraud, collection is done within 5 years
from the time assessment is already given. For Local
Taxes, fees and charges as well as Real Property Tax,
10 years from discovery, in case of fraud or falsity or
intent to evade payment of a local tax or real property tax
and similarly, the period to collect is also within 5 years
from the time of its assessment.
NOTE: waivers are only applicable to taxes under the
NIRC; there is no similar provision under the Local
Government Code so it cannot apply to local taxes and
real property tax.
Sec. 223 – Suspension of Running of Statute of
Limitations
The running of the Statute of Limitations provided in Sections
203 and 222 on the making of assessment and the beginning
of distraint or levy a proceeding in court for collection, in
respect of any deficiency, shall be suspended for the period
during which the Commissioner is prohibited from making the
assessment or beginning distraint or levy or a proceeding in
court and for sixty (60) days thereafter; when the taxpayer
requests for a reinvestigation which is granted by the
Commissioner; when the taxpayer cannot be located in the
address given by him in the return filed upon which a tax is
being assessed or collected: Provided, that, if the taxpayer
informs the Commissioner of any change in address, the
running of the Statute of Limitations will not be suspended;
when the warrant of distraint or levy is duly served upon the
taxpayer, his authorized representative, or a member of his
household with sufficient discretion, and no property could be
located; and when the taxpayer is out of the Philippines.
LRVIOLET | 9
Taxation Review Notes 2018-2019
Instances where the running of the prescriptive
period for both the power to assess and the power to
collect can be suspended:
1. When the CIR is prohibited from making an
assessment or from beginning to distraint
and levy or from filing a proceeding in court
and for 60 days thereafter.
- The CIR is prohibited from initiating an
action to collect the amount tax due.
- Remember the injunction under Sec. 217,
when for instance, there is an appeal to
the CTA (although an appeal therein in
itself, will not toll/prohibit the CIR to
continue with the collection), if the CIR is
enjoined by the CTA while the protest is
on appeal to the same court, then it can
suspend the running of the period. The
running of the prescription period will not
start if there is a
PROHIBITION/INJUNCTION against the
CIR for the assessment and collection of
the tax.
2. The taxpayer requests for reinvestigation
which is granted by the CIR.
- In the meantime that the CIR is to decide
WON to grant the reinvestigation, the
period of prescription TO COLLECT IS
SUSPENDED. NOTE: at this point, the
assessment has already been done so
only the period to collect is suspended.
3. When the taxpayer cannot be located in the
Philippines
- Naturally, because how can the taxpayer
be notified of its deficiencies, how can it
be served of its assessment, if he cannot
be located by the address given by him in
the return filed?
EXCEPTION: when the taxpayer informs
the CIR of any change of address, which
by then, the period of prescription will
continue to run.
4. When the warrant of distraint and levy is
duly served upon the taxpayer or
authorized representative and no property
could be located.
- While there is such a warrant, but no
property could be located, the period of
collection is suspended. There is already
an initial step in order to collect the tax,
but no properties are present. NOTE: at
this point, the assessment has already

been done so only the period to collect is
suspended.
5. When the taxpayer is out of the country.
In your LGC, with respect to local taxes, fees, and
charges, we have the same instances wherein the
running of the prescriptive period will also apply:
LGC, Sec. 194 – Period of Assessment and Collection
(d) The running of the periods of prescription provided in the
preceding paragraphs shall be suspended for the time during
which:
1. The treasurer is legally prevented from making the
assessment of collection;
2. The taxpayer requests for a reinvestigation and executes a
waiver in writing before expiration of the period within which to
assess or collect; and
3. The taxpayer is out of the country or otherwise cannot be
located.
The same is true for real property tax. The interruption of
the prescription period to collect RP tax would be under
the same instances similar to that of local taxes, fees,
and charges. (Sec. 270)
Sec. 204 – Authority of the Commissioner to Compromise,
Abate and Refund or Credit Taxes.
The Commissioner may -
A. Compromise the payment of any internal revenue tax, when:
(1) A reasonable doubt as to the validity of the claim
against the taxpayer exists; or
(2) The financial position of the taxpayer demonstrates
a clear inability to pay the assessed tax.
The compromise settlement of any tax liability shall be
subject to the following minimum amounts:
For cases of financial incapacity, a minimum
compromise rate equivalent to ten percent (10%) of
the basic assessed tax; and
For other cases, a minimum compromise rate
equivalent to forty percent (40%) of the basic
assessed tax.
Where the basic tax involved exceeds One million
pesos (P1,000.000) or where the settlement offered is
less than the prescribed minimum rates, the
compromise shall be subject to the approval of the
Evaluation Board which shall be composed of the
Commissioner and the four (4) Deputy
Commissioners.
B. Abate or cancel a tax liability, when:
(1) The tax or any portion thereof appears to be
unjustly or excessively assessed; or
(2) The administration and collection costs involved do
not justify the collection of the amount due.
All criminal violations may be compromised except: (a)
those already filed in court, or (b) those involving
fraud.
LRVIOLET | 10
Taxation Review Notes 2018-2019
C. Credit or refund taxes erroneously or illegally received or
penalties imposed without authority, refund the value of
internal revenue stamps when they are returned in good
condition by the purchaser, and, in his discretion, redeem or
change unused stamps that have been rendered unfit for use
and refund their value upon proof of destruction. No credit or
refund of taxes or penalties shall be allowed unless the
taxpayer files in writing with the Commissioner a claim for
credit or refund within two (2) years after the payment of the
tax or penalty: Provided, however, That a return filed showing
an overpayment shall be considered as a written claim for
credit or refund.
A Tax Credit Certificate validly issued under the provisions of
this Code may be applied against any internal revenue tax,
excluding withholding taxes, for which the taxpayer is directly
liable. Any request for conversion into refund of unutilized tax
credits may be allowed, subject to the provisions of Section
230 of this Code: Provided, That the original copy of the Tax
Credit Certificate showing a creditable balance is surrendered
to the appropriate revenue officer for verification and
cancellation: Provided, further, That in no case shall a tax
refund be given resulting from availment of incentives granted
pursuant to special laws for which no actual payment was
made.
The Commissioner shall submit to the Chairmen of the
Committee on Ways and Means of both the Senate and House
of Representatives, every six (6) months, a report on the
exercise of his powers under this Section, stating therein the
following facts and information, among others: names and
addresses of taxpayers whose cases have been the subject of
abatement or compromise; amount involved; amount
compromised or abated; and reasons for the exercise of
power: Provided, That the said report shall be presented to the
Oversight Committee in Congress that shall be constituted to
determine that said powers are reasonably exercised and that
the Government is not unduly deprived of revenues.
Compromise vs. Abatement
Compromise – the purpose of the taxpayer and the CIR
is in order to avoid litigation. The taxpayer does not
have to go to court, so they agree on a compromise on
the amount.
EXAMPLE: Deficiency Income Tax, as determined by
the BIR as per their examination. In the assessment,
Deficiency IT = 1Million. Since the taxpayer is not in a
financial position to pay the 1Million, they come to a
compromise in order to avoid further litigation.
There are grounds in order for the BIR/CIR to enter
into a compromise:
1. There is reasonable doubt as to the validity
of the claim against the taxpayer
- They don‟t have so much basis in the
examination which creates the doubt
2. Financial position of taxpayer demonstrates a
clear inability to pay the assessed tax.

The compromise settlement of any tax liability shall be
subject to the following minimum compromise rates:
1. If based on financial incapacity, the
minimum compromise rate: 10% of the basic
assessed tax
- EXAMPLE: 1Million. The 10% of which is
100,000. The taxpayer should then be
required to pay at least the compromise
amount of the 100,000 if the basis for the
compromise is financial inability.
2. If based on reasonable doubt – 40% of the
basic assessed tax
- EXAMPLE: 1Million. The 40% of which is
400,000.
There is what we call an Evaluation Board, which is
composed of the Commissioner and 4 Deputy
Commissioners. The following are instances wherein
the compromise settlement will be subjected to
approval of the Evaluation Board:
1. Where the basic tax involved exceeds One
Million Pesos; or
2. Where the settlement offered is less than
the prescribed minimum rates
- EXAMPLE: The taxpayer incurred a
liability based on financial incapacity. His
basic tax is 1Million. The minimum
required of him is 100,000 but he seeks to
lower it to only 75,000. In this case, it is
not the Commissioner who gets to decide,
but the compromise settlement must be
approved by the Evaluation Board.
Abatement – the taxpayer is absolved of his liability, the
assessment is cancelled.
What are the reasons for abatement?
1. The taxes or any portion thereof appears to be
unjustly or excessively assessed; OR
2. The administration and collection costs do not
justify the collection of the amount due.
- EXAMPLE: If the amount due is only 100
pesos, and the collection cost will require
more than 100, there will cancellation or
abatement of the tax.
NOTE: It is the CIR who determines what is to be
compromised and what is to be abated.
LRVIOLET | 11
Taxation Review Notes 2018-2019
No compromise could be made under the following
instances: (See book, Judge did not complete the
enumeration below haha)
1. All criminal violations may be compromised
EXCEPT those filed in court and those
involving fraud
- If fraud is involved, no compromise is
allowed
The power to enter into compromise on the part of the
CIR is discretionary, and such power once exercised by
the CIR cannot be reviewed or interfered by the courts.
Since it is discretionary on the part of the CIR, he cannot
be compelled to exercise the power to compromise.
In the case of Asiatrust Development Bank vs. CIR,
the Supreme Court said that “an application for tax
abatement is considered approved only upon the
issuance of a termination letter.” This means to have the
tax abated or cancelled, it is not automatic. Just because
the taxpayer had already applied, remember that it is the
CIR/BIR who determines what is to be abated, and it is
up to them to likewise determine the grounds on which
the abatement will anchor, whether the tax has been
unjustly or excessively assessed or the collection costs
is more than the amount due.
The BIR will determine, but the taxpayer will have to
apply for tax abatement. Without a termination letter, as
in this case, a tax assessment is not considered to be
closed and terminated. The taxpayer only produced a
certification issued by the BIR to prove that it availed of
tax abatement. The SC said it is not sufficient – in order
for the tax assessment to be closed, there has to be a
termination letter from the BIR as this is an indication
that the tax abatement has been approved.
Sec. 224 (c) pertains to Tax Credit/Refund for excessive
or erroneously or illegally collected taxes or penalties
imposed without authority.
In all decisions of the SC, the claim for refund is to be
interpreted strictly against the taxpayer.
What are the requirements for Tax Refund?
The claim for tax refund must be made within 2 years
after the payment of the tax or penalty; provided
however, the return filed showing an overpayment shall
be considered as a written claim for credit or refund.
EXCEPTION: Instead of a written claim for refund, if
the return filed showed an overpayment, the same

shall be considered as a written claim for credit or a
refund.
Sec. 229 – Recovery of Tax Erroneously or Illegally
Collected. - no suit or proceeding shall be maintained in any court
for the recovery of any national internal revenue tax hereafter
alleged to have been erroneously or illegally assessed or
collected, or of any penalty claimed to have been collected without
authority, of any sum alleged to have been excessively or in any
manner wrongfully collected without authority, or of any sum
alleged to have been excessively or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with
the Commissioner; but such suit or proceeding may be
maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the
expiration of two (2) years from the date of payment of the tax or
penalty regardless of any supervening cause that may arise after
payment: Provided, however, That the Commissioner may, even
without a written claim therefor, refund or credit any tax, where on
the face of the return upon which payment was made, such
payment appears clearly to have been erroneously paid.
Under Sec. 204, it is the power of the CIR to grant (or not
to grant) the claim for refund or claim for tax credit. Sec
229 are the requirements that should be made by the
taxpayer.
TAKE NOTE: In claim for refund of an NIR Tax, the
reckoning of the 2-year period is from the date of
payment of the tax or penalty, without regard of any
supervening cause that may arise after payment.
In a claim for refund of Local Taxes, Fees, and charges,
the 2-year period is to be reckoned with from the time the
taxpayer is entitled to the refund. Hence, it considers the
supervening cause/event that may happen after
payment.
This is the difference between Claim for Refund for an
NIR Tax from a Claim for Refund of a Local Tax, Fee or
Charge.
1. In a Claim for Refund for an NIR Tax
EXAMPLE: There is a protest, and it is still in
court. While the taxpayer‟s claim is pending in
court, the 2 year period continues to run. If the
decision of the court will come out after the 2-
year period, the taxpayer is not anymore be
allowed to the claim. The protest here is
considered as a supervening cause, but under
the NIRC regardless of which, the 2-year
period shall still continue to run.
2. In a Claim for Refund for Local Taxes, Fees,
and Charges
LRVIOLET | 12
Taxation Review Notes 2018-2019
EXAMPLE: The taxpayer questions the
ordinance w/c imposes the local tax. He goes
to Sec of Justice in order to question the
ordinance. In the meantime while he questions
the same, he pays for the imposed local tax
under protest. If the protest will be for a longer
period than 2 years, the taxpayer will still be
entitled to the local tax refund. Here, the
protest is considered to be a supervening
cause, but it suspends the running of the
period unlike in the NIRC.
-oOo-
LEVY AND DISTRAINT
Sec. 205 - Remedies for the Collection of Delinquent
Taxes. The civil remedies for the collection of internal revenue
taxes, fees or charges, and any increment thereto resulting
from delinquency shall be:
(a) By distraint of goods, chattels, or effects, and
other personal property of whatever character,
including stocks and other securities, debts, credits,
bank accounts and interest in and rights to personal
property, and by levy upon real property and
interest in rights to real property; and
(b) By civil or criminal action.
Either of these remedies or both simultaneously may be
pursued in the discretion of the authorities charged with the
collection of such taxes: Provided, however, That the remedies
of distraint and levy shall not be availed of where the amount of
tax involve is not more than One hundred pesos (P100).
The judgment in the criminal case shall not only impose the
penalty but shall also order payment of the taxes subject of the
criminal case as finally decided by the Commissioner.
The Bureau of Internal Revenue shall advance the amounts
needed to defray costs of collection by means of civil or
criminal action, including the preservation or transportation of
personal property distrained and the advertisement and sale
thereof, as well as of real property and improvements thereon.
This section speaks of distraint and levy as a
mode/means in order to collect taxes. When we speak of
distraint, it refers to the taking of personal property of the
taxpayer in order to satisfy a tax obligation, while levy on
the other hand speaks of the taking of real property in
order to satisfy a tax obligation. In both cases, there
must be observance by the government of due process.
If the properties of the taxpayer, be it personal or real, be
taken to satisfy the tax delinquency, there must be the
observance of both procedural and substantive due
process. If otherwise there is no observance, particularly
on hearing and giving notice to the taxpayer, then the
taking of the property will be questioned and may even
be considered as null and void.

Civil action or criminal action- This is how the filing of
the action in court in order to collect taxes: If the
government will decide to file a criminal case because
there is a violation of the NIRC and for which there is a
penalty imposable, the judgment/decision will not only
include the imposition of that penalty, but it will likewise
include the payment of the deficiency or delinquency tax,
because in every criminal action, the civil liability is
deemed instituted.
How do you avail of the remedy of distraint and
levy?
The government may avail of these remedies,
successively or simultaneously:
1. The government can first avail of distraint; if
the amount of personal property is insufficient,
they can go after real property; OR
2. They can altogether exercise or avail of these
remedies simultaneously then file a case in
court. There is no prohibition, because of the
lifeblood theory.
TAKE NOTE: If the amount of tax involved is not more
than 100 pesos, these remedies are not available.
Actual Distraint vs. Constructive Distraint
While in actual distraint, the taking of the personal
property in order to satisfy the tax delinquency and later
the personal property is sold in a public auction, the
same is not true in constructive distraint.
Sec. 206 - Constructive Distraint of the Property of a
Taxpayer. To safeguard the interest of the Government, the
Commissioner may place under constructive distraint the
property of a delinquent taxpayer or any taxpayer who, in his
opinion, is retiring from any business subject to tax, or is
intending to leave the Philippines or to remove his property
therefrom or to hide or conceal his property or to perform any
act tending to obstruct the proceedings for collecting the tax
due or which may be due from him.
The constructive distraint of personal property shall be affected
by requiring the taxpayer or any person having possession or
control of such property to sign a receipt covering the property
distrained and obligate himself to preserve the same intact and
unaltered and not to dispose of the same; in any manner
whatever, without the express authority of the Commissioner.
In case the taxpayer or the person having the possession and
control of the property sought to be placed under constructive
distraint refuses or fails to sign the receipt herein referred to,
the revenue officer effecting the constructive distraint shall
proceed to prepare a list of such property and, in the presence
of two (2) witnesses, leave a copy thereof in the premises
where the property distrained is located, after which the said
property shall be deemed to have been placed under
constructive distraint.
In paragraph 1 of Sec. 206, it gives us the instances
where constructive distraint could be made:
LRVIOLET | 13
Taxation Review Notes 2018-2019
1. If the taxpayer is retiring from any business
subject to tax
2. Is intending to leave the country
3. Intends to remove his property from the
country
4. Hides or conceals his property
5. Performs any act tending to obstruct the
collection of the tax due him
In constructive distraint, there is no actual taking of the
personal property. The taxpayer or the person who is in
possession of the personal property to be distrained shall
be required to sign a receipt or undertaking to the effect
that the property to be distrained is to be preserved intact
and unaltered, and that he will not dispose of the same in
whatever manner without the express authority of the
commissioner.
If said person refuses to sign the receipt or undertaking,
then the revenue officer will make an inventory or list of
properties to be distrained; in the presence of 2 witness,
he has to leave a copy of the inventory or list of
properties to be distrained with the taxpayer or the
person who is in possession of these properties –
constructive distraint is then effected.
If the personal property to be distrained is in a form of
cash this is called garnishment. How is this effected?
Garnishment is effected by serving a warrant of
garnishment upon the taxpayer or the president,
manager, treasurer, or other responsible officer of the
bank where the deposit of the taxpayer has been made.
Upon receipt of such warrant, the bank shall turn over to
the CIR that amount of cash from the bank accounts as
may be sufficient to satisfy the claim of the government.
When there is a warrant of distraint and/or levy, then the
CIR must make a notice of tax lien which must be filed
with the proper registry.
EXAMPLE: If it is a real property, the notice of
tax lien must be with the Office of the Registry
of Deeds of the place where the property is
situated; if it is a personal property, such as a
car, it will be filed with the LTO. Likewise, any
other agency of the government which has the
registry of the property sought to be distrained
or levied.
When a property, be it personal or real, is taken to satisfy
a tax obligation, it will be sold in a public auction. If there
will be any bidders, it shall be sold to the highest bidder.
If there will be no bidders, the government shall be
considered as the lone bidder.
The sale to the highest bidder will be for the price of the
property to be sold and the price will include the amount
of the delinquency tax, interest, cost (advertisement,
notices) and other expenses.

EXAMPLE: There are 3 bidders: A, B, and C. The bid
price is at P500,000. A bids 550,000, B bids 600,000 and
C bids 580,000. Who is the highest bidder? It is B.
How much is to paid to the government? The
delinquency tax, the cost of the advertisement, etc. only
amounts to 500,000. Out of the 600,000, 500,000 will be
paid to the government/BIR and the excess of 100K will
go to the taxpayer. This is the situation if there are
bidders.
If there will be no bidders, being the government the lone
bidder, nothing goes to the taxpayer. The taxpayer will
not receive anything.
In case the taxpayer decides to redeem the property, he
is given, under Sec. 214, one year in order to redeem the
property sold. Whether it was sold to the highest bidder
or to the government, the redemption price shall consist
of the amount paid (by the highest bidder, as the case
may be) plus interest of 15% per annum.
During the redemption period, what are the rights of
the taxpayer?
1. The delinquent taxpayer has the right to
redeem to the property sold in a public auction
within 1 year, paying the redemption price, plus
interest of 15%
2. He is entitled to the possession of the said
property
3. He shall be entitled to the rents and other
income thereof until the expiration of the time
allowed for its redemption. (Sec. 214, last
paragraph)
Tax Lien – it is an encumbrance upon a property of the
taxpayer. It is a legal claim or charge on property; it is
established by law as a sort of security for the payment
of a tax obligation. Since a tax lien is created in favor of
the government, it is superior to all other claims or
preferences. Tax lien involving a national internal
revenue tax is also superior to a tax lien involving
local/municipal taxes.
Sec. 224 - Remedy for Enforcement of Forfeitures. The
forfeiture of chattels and removable fixtures of any sort shall be
enforced by the seizure and sale, or destruction, of the specific
forfeited property. The forfeiture of real property shall be
enforced by a judgment of condemnation and sale in a legal
action or proceeding, civil or criminal, as the case may require.
Forfeiture Proceedings vs. Seizure Proceedings
In forfeiture proceedings, in case of sale of the chattel or
property forfeited, the proceeds of the sale will entirely
go to the government. In seizure proceedings, after
deducting the tax liability and the expenses, the residue
of which goes to the taxpayer.
In both proceedings, even if the government has already
forfeited the property of the taxpayer, the latter may still
be subjected to criminal action.
LRVIOLET | 14
Taxation Review Notes 2018-2019
For forfeited or seized items, the government may either
sell it or destroy. In what instances can the government
destroy these items? Answer is Sec. 225 paragraph 2.
Sec. 225 - When Property to be Sold or Destroyed, 2nd
paragraph.
Distilled spirits, liquors, cigars, cigarettes, other manufactured
products of tobacco, and all apparatus used I or about the illicit
production of such articles may, upon forfeiture, be destroyed
by order of the Commissioner, when the sale of the same for
consumption or use would be injurious to public health or
prejudicial to the enforcement of the law.
As a rule, when the articles forfeited are illegal per se,
automatically, they are to be destroyed, because it can
no longer be sold. Forfeited property shall not be
destroyed until at least 20 days after seizure.
PROTEST
Under Sec. 228, in protesting an assessment, take note
of the following instances no longer require a preliminary
assessment notice:
1. When the finding for any deficiency tax is the
result of mathematical error in the computation
of the tax as appearing on the face of the
return; or
2. When a discrepancy has been determined
between the tax withheld and the amount
actually remitted by the withholding agent; or
3. When a taxpayer who opted to claim a refund
or tax credit of excess creditable withholding
tax for a taxable period was determined to
have carried over and automatically applied
the same amount claimed against the
estimated tax liabilities for the taxable quarter
or quarters of the succeeding taxable year; or
4. When the excise tax due on excisable articles
has not been paid; or
5. When the article locally purchased or imported
by an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries
and spare parts, has been sold, traded or
transferred to non-exempt persons.
Take note also that in order for assessment to be valid,
the taxpayers shall be informed in writing of the law and
the facts on which the assessment is made; otherwise,
the assessment shall be void.
The taxpayer is supposed to respond, to answer upon
the preliminary assessment notice. Usually the taxpayer
is given 10 days to answer from the receipt of the
preliminary assessment notice. If he fails to respond to
preliminary assessment notice, the Commissioner or his
duly authorized representative shall issue an
assessment based on his findings for the Commissioner
to come up with the Final Assessment Notice (FAN). The
FAN may be protested administratively by the taxpayer.
By what mode will the taxpayer make a protest? He
makes protest within 30 days from the receipt of the FAN

by either a Request for Reconsideration (of the
assessment) OR a Request for Reinvestigation
Reconsideration vs. Reinvestigation
In a request for reconsideration, it is merely a review
of the assessment without presenting additional or newly
discovered evidence. It is based on existing evidence.
Reinvestigation on the other hand is based upon newly
discovered evidence. Hence, logically, it would take
more time for the CIR to come up with the result for the
latter.
30-60-180:
Within 60 days from the filing of the protest, all the
relevant supporting documents shall have been
submitted; otherwise the assessment shall become final.
You file a protest for a request for
reconsideration/reinvestigation, and you don‟t have any
supporting documents, within 60 days from the filing of
that request, the assessment shall become final.
The CIR is supposed to decide on the protest (whether it
is reconsideration or a reinvestigation) within 180 days
from the submission of the documents.
BASICALLY: From receipt of the assessment, the
taxpayer is given 30 days to make his protest. From the
time the protest is made, the taxpayer is given 60 days to
substantiate the protest. The CIR is given 180 days to
decide on the protest, to be reckoned from the time the
60-day period had lapsed or from the time of the
submission of the supporting documents.
The taxpayer adversely affected by the decision or
inaction of the CIR can appeal to the CTA within 30 days
from the receipt of the decision, or in case of inaction
(there being no decision it shall be deemed as a denial),
from the lapse of the 180 day.
Remedies on VALUE ADDED TAX
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 or importation of goods:
(i) For sale; or
(ii) For conversion into or intended to form part of a
finished product for sale including packaging materials;
or
(iii) For use as supplies in the course of business; or
(iv) For use as materials supplied in the sale of
service; or
(v) For use in trade or business for which deduction for
depreciation or amortization is allowed under this
Code.
(b) Purchase of services on which a value-added tax has
been actually paid.
LRVIOLET | 15
Taxation Review Notes 2018-2019
(2) The input tax on domestic purchase or importation of goods
or properties by a VAT-registered person shall be creditable:
(a) To the purchaser upon consummation of sale and
on importation of goods or properties; and
(b) To the importer upon payment of the value-added
tax prior to the release of the goods from the custody
of the Bureau of Customs.
Provided, that the input tax on goods purchased or imported in a
calendar month for use in trade or business for which deduction
for depreciation is allowed under this Code shall be spread
evenly over the a month of acquisition and the fifty-nine (59)
succeeding months if the aggregate acquisition cost for such
goods, excluding the VAT component thereof, exceeds One
million pesos (P 1, 000, 000): Provided, however, That if the
estimated useful life of the capital good is less than five (5) years,
as used for depreciation purposes, then the input VAT shall be
spread over such a shorter period: Provided, finally, that in the
case of purchase of services, lease or use of properties, the input
tax shall be creditable to the purchaser, lessee or license upon
payment of the compensation, rental, royalty or free.
(3) A VAT-registered person who is also engaged in transactions
not subject to the value-added tax shall be allowed tax credit as
follows:
(a) Total input tax which can be directly attributed to
transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be
directly attributed to either activity.
The term "input tax" means the value-added tax due from or paid
by a VAT-registered person in the course of his trade or business
on importation of goods or local purchase of goods or services,
including lease or use of property, from a VAT-registered person.
It shall also include the transitional input tax determined in
accordance with Section 111 of this Code.
The term "output tax" means the value-added tax due on the
sale or lease of taxable goods or properties or services by any
person registered or required to register under Section 236 of this
Code.
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. Provided, however, That any input tax
attributable 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.
C. Determination of Creditable Input Tax - The sum of the
excess input tax carried over from the preceding month or quarter
and the input tax creditable to a VAT-registered person during the
taxable month or quarter shall be reduced by the amount of claim
for refund or tax credit for value-added tax and other adjustments,
such as purchase returns or allowances and input tax attributable
to exempt sale.
The claim for tax credit referred to in the foregoing paragraph
shall include not only those filed with the Bureau of Internal
Revenue but also those filed with other government agencies,
such as the Board of Investments and the Bureau of Customs.
 Taxation Review Notes 2018-2019

OUTPUT TAX XXX OUTPUT TAX =

PURCHASES 88,000 The 78,571 is the
(LESS INPUT TAX) XXX defined the VAT on
DIVIDE IT BY THE VAT OF 1.12 amount/price of his
VAT PAYABLE (Excess VAT) XXX the SALES of the
purchases net of the
goods and services (This is the 100% without the VAT) = 78,571
If the output tax is greater Value-added tax.
INPUT TAX = it is
than the input tax, the the VAT on the
result will be a VAT PURCHASE of the 78,751 x 12% = 9,429 is now your Input Tax.
PAYABLE. If the input tax goods and services.
is greater than the output OUTPUT TAX 12,000
tax, the result is an (LESS INPUT TAX) 9,429
VAT PAYABLE = 2,571
EXCESS VAT OR
UNREALIZED INPUT TAX.
Since the output tax is greater than the input tax, the
difference is a tax payable. So, out of the 12,000 VAT on
How do we determine output tax? the sale, what is being paid by the seller is only the
2,571, because he has an input tax of 9,429 on the
Under our present system, whatever amount that purchases of the goods.
appears in the invoice is deemed to include the output
tax. If you are a seller, you are supposed to issue an In instances wherein the input tax exceeds the output
invoice to the purchaser. Whatever the amount that tax, the difference now is the one subject to a tax return.
appears in the invoice is considered to include the VAT; This is what you call the unutilized input VAT.
hence, it is the inclusive approach to the VAT. Note: VAT
is constant at 12%. TAKE NOTE:

EXAMPLE: Assuming the invoice price is P112,000. To
determine your output tax (which is the VAT to be paid/or
is imposed upon the seller), since the invoice price
includes already the VAT of 12%, how much then is the
VAT therein?
You divide the amount by its equivalent of 1.12. Why?
Because 100% + 12% VAT = 112%. So, basically, in
order to obtain how much exactly the Output VAT is, you
have to look for the 100% in the invoice:
INVOICE 112,000
DIVIDE IT BY THE VAT OF 1.12 The 100,000 is the
amount/price of your
(This is the 100% without the VAT) = 100,000 commodity net of the
Value-added tax.
100,000 x 12% = 12,000 which is now your Output
Tax
OUTPUT TAX 12,000
(LESS INPUT TAX) XXX
VAT PAYABLE (Excess VAT) XXX
How do we determine input tax?
Remember that your output tax is the VAT on the sale of
goods and services. Before the trader or merchant can
sell, he has to purchase commodities. For the cost of the
commodities, the input tax now comes in, which is
included in the purchase/importation of goods or services
intended to be used in the business, or intended to be
used for sale. (See paragraph 1 of Sec. 110.)
EXAMPLE: From the above example, assuming that the
goods he is going to sell, he only spent or was able to
purchase the same for P88,000. How much then would
be the input tax? Since the input tax is already included
in that amount, you answer in the same process
1. 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.
2. If the input tax exceeds the output tax, the
excess shall be carried over to the succeeding
quarter, in which any input tax attributable to
the purchase of capital goods or zero-rated 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.
What is the remedy of the taxpayer under Sec. 110?
In Section 110, take note of the remedy of the taxpayer.
If the output tax > input tax, the result is to be paid by the
tax payer (VAT Payable); if the input tax > output tax, the
excess shall be carried over to the succeeding
quarter/quarters, to be applied to future VAT payable.
But in the case of CIR vs. Ironcon Builders, the
Supreme Court allowed the claim for tax refund, because
it comes under the purview of the “erroneously collected”
under Sec. 204 and 229 – although as a general rule, the
remedy offered by Sec. 110, is when there is an excess
of input tax over the output tax, the same shall be carried
over to the succeeding quarter/quarters to be applied to
future VAT payables.
Sec. 111 - Transitional/Presumptive Input Tax Credits.
A. Transitional Input Tax Credits. - A person who becomes
liable to value-added tax or any person who elects to be a
VAT-registered person shall, subject to the filing of an
inventory according to rules and regulations prescribed by the
Secretary of finance, upon recommendation of the
Commissioner, be allowed input tax on his beginning inventory
of goods, materials and supplies equivalent to two percent
(2%) of the value of such inventory or the actual value-added
tax paid on such goods, materials and supplies, whichever is
higher, which shall be creditable against the output tax.

LRVIOLET | 16

B. Presumptive Input Tax Credits. - Persons or firms
engaged in the processing of sardines, mackerel and milk, and
in manufacturing refined sugar and cooking oil, shall be
allowed a presumptive input tax, creditable against the output
tax, equivalent to four percent (4%) of the gross value in money
of their purchases of primary agricultural products which are
used as inputs to their production.
As used in this Subsection, the term 'processing' shall mean
pasteurization, canning and activities which through physical or
chemical process alter the exterior texture or form or inner
substance of a product in such manner as to prepare it for
special use to which it could not have been put in its original
form or condition.
TRANSITIONAL INPUT TAX
When we speak of transitional, it refers to being a non-
VAT-registered taxpayer to that of becoming a VAT-
registered taxpayer. During that transition period, the
taxpayer is given an allowance for input tax equivalent to
2% of its beginning inventory as a VAT-registered
taxpayer.
When one is a non-VAT taxpayer, his purchases most
likely do not come from a VAT-registered taxpayer.
When one is a non-VAT taxpayer, he is not entitled or he
cannot claim input tax as refund.
What is the ceiling in order for the gross sales of the
taxpayer considers him as a VAT-taxpayer? 3 Million.
EXAMPLE: Let‟s say the taxpayer in 2017 had gross
sales of 1.5 million. Then in 2018, he already had 3.5
million. In 2018, he decides to register as a VAT
taxpayer. In 2017, he is still not
YEAR GROSS SALES
yet a VAT-taxpayer
2017 1,500,000
2018 3,500,000 because he has not
yet reached the
ceiling.
2017 Ending Inventory 100,000
In 2018, he has to
At the end of 2017, let‟s say his ending
now register as a
inventory amounts to 100,000. There is
VAT-taxpayer
no input tax in which the taxpayer can
because his gross
claim in the 100,000 because he is still a
sales have exceeded
non-VAT taxpayer and this purchase of
the ceiling.
100,000 was mostly likely purchased
from a non-VAT as well.
From the same above example, the ending inventory of
100,000 will now be your beginning inventory of 2018.
This 100,000 pesos inventory worth of purchases will be
sold in the year 2018.
2018 Beginning Inventory 100,000
SUPPOSING, that for 2018, he was able to sell his
goods/services for P124,000:
SALES 124,000
(LESS COST/BEG. INV) 100,000
GROSS PROFIT = 24,000
LRVIOLET | 17
Taxation Review Notes 2018-2019
The input tax shall now be imposed upon the taxpayer,
because as of 2018 in the above example, he already
reached the threshold of 3 million, which then subjects
him into being a VAT- registered taxpayer.
With the sale of the 124,000, he will get the output tax:
The 110,714 is the
SALES 124,000 amount/price of your
DIVIDE IT BY THE VAT OF 1.12 commodity net the
VAT. MULTIPLY IT
(This is the 100% without the VAT) = 110,714 BY 12%
110,714 x 12% = 13,286  YOUR OUTPUT TAX
Since the 100,000
How about the input tax? was never taxed as
VAT because the
COST/BEG. INVENTORY 100,000
taxpayer was not yet
MULTIPLY IT BY THE
VAT-registered, what
TRANSITIONAL VAT OF x 2%
we will apply now is
the transitional vat
100,000 x 2% = 2,000  YOUR INPUT TAX
of only 2%, not the
12%.
THEREFORE:
OUTPUT TAX 13,286
(LESS INPUT TAX) 2,000
VAT PAYABLE =11,286
PRESUMPTIVE INPUT TAX CREDIT
This is allowed to persons or firms engaged in the
processing of sardines, mackerel and milk, and in the
manufacturing of refined sugar and cooking oil,
creditable against the output tax, equivalent to four
percent (4%) of the gross value in money of their
purchases of primary agricultural products.
When you are a manufacturer of sardines, your raw
material is the tamban which you can buy from
fishermen. These fishermen do not issue receipts
however because of Sec. 109 of the NIRC, which
provides that agricultural and marine products are
exempt transactions, hence you don‟t have value-
added tax on these products. That is also why, under
Sec. 111 of the same code, the taxpayer who is a
manufacturer or in the business of processing sardines,
mackerel, or milk, etc are allowed a presumptive input
tax credit of 4% based on the value of their purchases,
which are to be used as inputs to their production.
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 of properties or services, and the amount
of creditable input tax due or paid cannot be directly and
entirely attributed to any one of the transactions, it shall be
allocated proportionately on the basis of the volume of sales.
Provided, finally, That for a person making sales that are zero-
rated under Section 108(B) (6), the input taxes shall be
allocated ratably between his zero-rated and non-zero-rated
sales.
ZERO-RATED or EFFECTIVELY ZERO-RATED
SALES
What are zero-rated transactions?
Those which are enumerated under Section 106(A)(2)
and Section 108(B) are considered to be zero-rated.
When we speak of zero-rated transactions, they are
transactions which are subject to VAT but at a rate of
0%.
What about effectively zero-rated sales? What makes
it effectively zero-rated?
When we speak of effectively zero-rated transactions,
these are sales of goods and services or supplies of
services to persons or entities, whose exemptions under
special laws or international agreements wherein the
Philippines is a signatory, effectively subjects said
transaction to a zero rate. Because the sale is made to
an exempt person or entity, the transaction or service
which is being rendered to these entities effectively
subjects the same to a zero rate.
What is the difference between the two?
The difference lies in the source:
1. For zero-rated, the source is enumerated or
indicated in the National Internal Revenue
Code
2. For effectively zero-rated, it arises because
the sale is made to entities who are VAT-
exempt.
EXAMPLE (effectively zero-rated transaction): those
entities within the economic zones are given certain
privileges. In fact, when we speak of economic zones,
they are considered to be beyond the territory of the
Philippines. [Recall the case of CIR vs. Seagate
Techonology case, and also the concept of the
Destination Principle and Cost-border principle.]
Under Sec. 112, what would be the remedy of the
taxpayer if the sale is a zero-rated or an effectively
zero-rated transaction?
The remedy of the taxpayer in case he overpays or in
case of unutilized input tax credit, may claim for refund or
tax credit certificate within 2 years from the close of each
taxable quarter. Why? Because a VAT-taxpayer pays the
VAT on a quarterly basis; but for every quarter, he has to
LRVIOLET | 18
Taxation Review Notes 2018-2019
have a monthly return – it is lumped/consolidated in each
quarter. EXAMPLE: January to March, by March there
has to be monthly returns of January to March, within
which they will all be consolidated to close the quarter.
The 2-year period to claim a refund/tax credit certificate
shall be reckoned with from the close of that quarter.
TAKE NOTE: This Section 112 pertains to claim for
refund of zero-rated and effectively zero-rated
transactions. As for that in Sec. 204 and Sec. 229, the 2-
year period from date of payment pertains to a claim for
refund for other National Internal Revenue taxes. The 2
year period here is reckoned from the close of the
taxable quarter and only to zero-rated/effectively zero-
rated transactions.
Sec. 112 - Refunds or Tax Credits of Input Tax
(D) Period within which Refund or Tax Credit of Input
Taxes shall be Made. - In proper cases, the Commissioner
shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support
of the application filed in accordance with Subsections (A)
hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
Under Sec. 112(d), filing with the CIR is called the
administrative claim. The CIR has 120 days to decide
on the claim for refund or tax credit. If he grants the claim
for refund, he issues the amount or the tax credit
certificate. If he denies, the taxpayer can appeal the
decision of the CIR to the CTA within 30 days from
receipt of the decision – this is what you call the judicial
claim. OR in case of inaction on the claim for refund, the
taxpayer after the lapse of 120 days, within 30 days from
the last day of the 120, he has to file a judicial claim.
Otherwise if the 30 days will lapse, he can no longer file
for a claim for refund.
Sec. 112 – Refunds or Tax Credits of Input Tax
(B) Capital Goods - VAT-registered person may apply for the
issuance of a tax credit certificate or refund of input taxes paid
on capital goods imported or locally purchased, to the extent
that such input taxes have not been applied against output
taxes. The application may be made only within two (2) years
after the close of the taxable quarter when the importation or
purchase was made.
Take note under the above law, there is the purchase of
capital goods. Purchase of capital goods is included in
Sec. 112.

What are capital goods?
As compared to goods which are intended for sale, they
are intended to be used subject to depreciation. They are
not intended for sale, they are intended for use: like
equipment, machineries, etc. If the taxpayer purchases
or imports machineries, the input tax on these
machineries may be claimed as tax credit under Sec.
112, within 2 years from the close of the quarter from
which the purchase or import was made.
EXAMPLE: Machinery was purchased in April;
since that is already the second quarter, and
the close for the second quarter is in June, the
2 year period will begin to run after the close of
that quarter.
What is the effect if the taxpayer will not be able to
follow the 120-30 day rule for the judicial and
administrative claim?
The claim will be denied and if the judicial claim is not
made, the CTA cannot take cognizance of the Petition
for Review; the compliance of the 120-30 day rule is both
mandatory and jurisdictional.
-oOo-
Still on REFUND under Sec. 112: If the output tax is
less than the input tax, then there is that excess input
tax. That excess input tax under Sec. 110 (b) is to be
carried over to the next succeeding quarter/s. In other
words, any input tax attributable to the purchase of
capital goods on 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.
Sec 112 gives us the requirements/requisites in order
that refund or tax credit of input VAT arising from zero
rated or effectively zero rated transactions would be
allowed.
Zero-rated vs. Effectively Zero Rated Transactions (just
reconcile with the distinction already made earlier):
 Zero-rated transactions are those transactions
which are subjected to VAT at a rate of zero percent
(0%) under Sec. 106 paragraph 2: export sales of
goods and supplies of services, foreign currency
denominated sales etc.
 Effectively zero-rated transactions refers to those
transactions of sales of goods or supplies of
services to persons/entities whose exemption under
special laws or international agreements by which is
LRVIOLET | 19
Taxation Review Notes 2018-2019
a signatory effectively subjects the transaction to a
zero rate. Because the transaction is between a
VAT-registered taxpayer and an entity that is
exempt from VAT under special or international
agreement by which the PH is a signatory, the effect
is it becomes a zero rate.
What about EXEMPT TRANSACTION vs. ZERO-
RATED/EZR TRANSACTIONS?
 If you are a VAT-taxpayer but the transaction
is exempt under Sec. 109 of the NIRC, you
are no longer allowed to claim input tax.
Because the transaction is exempt as
enumerated under Sec. 109, there is no value-
added tax. Because there is no VAT, it will not
result in an output tax; hence the taxpayer is
not allowed to pay input tax on the purchase of
the goods that are sold.
 If the transaction is subject to zero percent,
or it is an effectively zero-rated transaction,
the VAT-registered taxpayer will be allowed to
deduct input VAT.
EXAMPLE: The output tax is 1M, but
it is a transaction subject to zero-rate
or is an EZR transaction. Since 1M x
0% = 0, the input VAT paid shall be
an excess Input VAT.
That is why it results to excess input VAT. If
the excess input VAT results from a zero-rated
transaction/EZR, what is the remedy of the
taxpayer? The remedy is under Sec. 112(a),
refunds or claim for a tax credit.
Sec. 112 - Refunds or Tax Credits of Input Tax
(C) Period within which Refund or Tax Credit of Input
Taxes shall be Made. - In proper cases, the Commissioner
shall grant a refund or issue the tax credit certificate for
creditable input taxes within one hundred twenty (120) days
from the date of submission of complete documents in support
of the application filed in accordance with Subsections (A)
hereof.
In case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the
decision denying the claim or after the expiration of the one
hundred twenty day-period, appeal the decision or the unacted
claim with the Court of Tax Appeals.
In relation to Sec. 112(a), under Sec. 112(c) the claim for
refund or issue the tax credit certificate for creditable
input tax is to be decided by the CIR within 120 days
(but 90 days under the TRAIN law) from the date of
submission of complete documents in support of the
application filed. This is what you call the administrative
claim.

The taxpayer is given a period of 30 days to file his
judicial claim if and when there is no decision by the
CIR within the period of 120 days/90 days as the case
may be. This 120 (or 90 if TRAIN) + 30 day period is
considered both mandatory and jurisdictional.
Since there is an amendment in the TRAIN law, you
have to consider the date of the VAT return. If it is prior
to January 1, 2018, the old law shall apply. But if the
period occurred after January 1, 2018, you apply the
TRAIN. Qualify your answer, to show the examiner that
you are aware of the amendment.
The CTA cannot entertain or acquire jurisdiction if the
taxpayer will proceed to file an appeal therein without
complying the periods for administrative and judicial
claims. That is what is being dealt with in the case of
CBK Power Company vs. CIR. According to the SC, it
must comply with the above periods.
CONSIDER THIS:
The rule is that the filing of the claim for refund is within 2
years from the close of the taxable quarter. For 2005, the
taxable quarter for CBK closed in the respective dates
under the CBK QUARTER column. The 2-year period
shall be counted from the close of the quarter, as
reflected in the LAST DAY TO FILE ADMIN CLAIM
column.
The taxpayer filed their claims for refund for the
respective quarters under the DATE FILED column and
all of these dates fall within the 2-year period to file an
administrative claim.
From the filing of the claim, the CIR is to decide for 120
days. If you are given a situation after the effectivity of
the TRAIN, use 90 days. The LAST DAY TO FILE
JUDICIAL CLAIM is counted 30 days after the expiration
of the 120-day period. The judicial claim was only filed
on April 8, 2007 – which is no longer within the
respective period to file a judicial claim.
That is why the SC declared that the noncompliance with
the 120+30 day rule justified the denial for the claim of
LRVIOLET | 20
Taxation Review Notes 2018-2019
refund because the CTA had not acquired jurisdiction
over the appeal as the periods for the claim are both
mandatory and jurisdictional. For failure to comply, the
claim for refund is denied.
TAKE NOTE: For the output tax/input tax on the
importation or purchase of goods, the same shall be
claimed as a tax refund/tax credit, within 2 years after the
close of such taxable quarter when the importation or
purchase was made. So instead of sale, there is
purchase, because we also have VAT on imported
goods.
Pertinent Cases: Western Mindanao Corporation vs.
CIR and CIR vs Team Sual
One of the requirements under Sec. 112 is that the
taxpayer must be engaged in zero-rated or effectively
zero rated transaction. If the taxpayer wants to claim for
a refund or tax credit, he must substantiate his claim. To
substantiate his claim, he must comply with the
INVOICING REQUIREMENTS under Sec. 113, because
without such compliance, what is the proof that his sale
or transaction is one which is zero rated or effectively
zero rated sale.
Under Sec. 113 it requires that a VAT-registered person
shall issue for every sale, issue an invoice or receipt. In
addition to the information required under Sec. 238, the
following information shall be indicated in the invoice or
receipt:
(1) A statement that the seller is a VAT-registered
person, (2) followed by his Taxpayer‟s Identification
Number (TIN) and (3) the total amount which the
purchases pays or is obligated to pay to the seller with
the indication that such amount includes the value-added
tax.
When it is found that a person has failed to issue
receipts and invoices in violation of the requirements of
Sections 113 and 237 of this Code, or when there is
reason to believe that the books of accounts or other
records do not correctly reflect the declarations made or

to be made in a return required to be filed under the
provisions of this Code, the Commissioner, after taking
into account the sales, receipts, income or other taxable
base of other persons engaged in similar businesses
under similar situations or circumstances or after
considering other relevant information may prescribe a
minimum amount of such gross receipts, sales and
taxable base, and such amount so prescribed shall be
prima facie correct for purposes of determining the
internal revenue tax liabilities of such person.
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
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 where the receipt is issued to
cover payment made as rentals, commissions, compensations,
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.
Sec. 238. Printing of Receipts or Sales or Commercial
Invoices. - 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.
No authority to print receipts or sales or commercial invoices
shall be granted unless the receipts or invoices to be printed
are serially numbered and shall show, among other things, the
name, business style, Taxpayer Identification Number (TIN)
and business address of the person or entity to use the same,
and such other information that may be required by rules and
regulations to be promulgated by the Secretary of Finance,
upon recommendation of the Commissioner.
All persons who print receipt or sales or commercial invoices
shall maintain a logbook/register of taxpayers who availed of
their printing services. The logbook/register shall contain the
following information:
(1) Names, Taxpayer Identification Numbers of the persons or
entities for whom the receipts or sales or commercial invoices
were printed; and
(2) Number of booklets, number of sets per booklet, number of
copies per set and the serial numbers of the receipts or
invoices in each booklet.
LRVIOLET | 21
Taxation Review Notes 2018-2019
You cannot just print receipts anywhere. The receipts to
substantiate your claim, in order to be valid, must be
printed by a printer authorized by the BIR. If the receipt
issued to the taxpayer/purchaser is without authority of
the BIR, it could not be a valid proof in order to
substantiate your claim for refund. and on that basis,
your claim for refund may be denied.
There is jurisprudence that in order the claim for refund
arising from zero-rated/EZR transactions, it requires also
that the receipt must bear the words “zero-rated
transaction/effectively zero rated” transaction.
[For the enumeration of zero rated, EZR, and exempt
transactions: read on your own]
To wind up the discussion on remedies, Sec. 228
discuss about preliminary assessment notice and the
final assessment notice.
GENERAL RULE: When the CIR or his duly authorized
representative finds that proper taxes should be
assessed, he shall have to first notify the taxpayer of his
findings.
EXCEPTION: Sec. 228 enumerated already earlier – are
those instances which no longer require a PAN, thus the
notice issued to them is already considered as a final
assessment notice (FAN).
In other words, since it is already a FAN, if the taxpayer
does not agree, he has to make the necessary protest.
The taxpayer must also be informed in writing of the law
and the facts on which the assessment is made;
otherwise, the assessment shall be void.
Within the period prescribed by the implementing rules
and regulations, the taxpayer is required to respond to
said notice. If the taxpayer fails to respond, the CIR or
his duly authorized representative shall issue an
assessment based on his findings. This then is the
preliminary assessment notice. If there is a PAN,
usually the comment will be filed within 15 days, if there
is no comment, it then becomes a Final Assessment
Notice, after the expiry of the prescribed period.
For the FAN, the assessment may be protested
administratively by filing a request for reconsideration or
reinvestigation within 30 days from receipt of the
assessment in such form and manner as may be
prescribed.
ON CAPITAL GOODS (more of its discussion under
Passive Income):
 Taxation Review Notes 2018-2019

Sec. 39 – Capital Gains and Losses

(A) Definitions. - As used in this Title - depreciation, because a difference lies whether it can be
(1) Capital Assets. - The term 'capital assets' means property considered as a capital asset, or just a mere ordinary
held by the taxpayer (whether or not connected with his trade asset.
or business), but does not include stock in trade of the
taxpayer or other property of a kind which would properly be
included in the inventory of the taxpayer if on hand at the close INCOME TAXATION
of the taxable year or property held by the taxpayer primarily
for sale to customers in the ordinary course of his trade or What are the kinds of taxpayers for income taxation
business, or property used in the trade or business, of a purposes and why is it necessary to determine the
character which is subject to the allowance for depreciation kind of taxpayer? (Sec. 23, NIRC)
provided in Subsection (F) of Section 34; or real property used
in trade or business of the taxpayer. 1. For individual taxpayers, we have a resident
citizen of the Philippines, resident alien,
Sec. 39 of the NIRC defines capital goods/capital assets
nonresident citizen, and nonresident alien.
in the negative. They are the assets that are held by the
For nonresident alien, he may or may not be
taxpayer, whether or not they are connected or engaged
engaged in trade or business in the
in trade or business, but does NOT include stock in
Philippines. We also have an individual citizen
trade. Stock in trade means that the taxpayer is
of the Philippines working abroad as
engaged in the sale of shares of stocks, those stock in
overseas contract worker; they are also
trade which he intends to sell do not form part of his
considered as taxpayers.
capital goods/assets.
2. For corporations, domestic corporations and
Those included in the inventory of the taxpayer if on foreign corporations, which the latter may or
hand at the end of the taxable year are also NOT may not be engaged in business in the
considered as capital goods. So if the taxpayer is in the Philippines.
business of buy-and-sell of goods, those goods he
Why is there a need to know the classification of
purchased which are intended for sale are not
taxpayers? Because not all taxpayers pay income tax on
considered capital goods. Or if the taxpayer is engaged
all of their income: some only pay for those sourced
in the manufacturing of products, the raw materials which
within the Philippines, while other taxpayers pay income
he purchased, in order to be processed into a finished
tax on income derived from both within and outside the
product which is intended for sale, is not considered to
Philippines.
be capital goods, because those goods form part of the
inventory. They are NOT capital assets but merely form In the case of overseas contract workers, an individual
part of the inventory as ordinary assets. citizen of the PH who is working and deriving income
from abroad as an overseas contract worker (i.e. OFW,
For property held by the taxpayer primarily for sale to
seaman), is only taxed for income derived from sources
customers in the ordinary course of his trade or
within the Philippines. No matter which country there
business, or property used in the trade or business, of a
income is from, if it is derived from an outside source,
character which is subject to the allowance for
they will not be taxed for their salaries/income earned
depreciation are NOT likewise included as capital
abroad. Even if those salaries are remitted to the
assets/goods.
Philippines, they are not subjected to income tax.
EXAMPLE: if the taxpayer purchased a
On the other hand, a citizen who is a resident of the
delivery truck, which is intended to be used by
Philippines, who works and is employed only in the
him for several years subject to depreciation,
Philippines, will be taxed on income derived from
that is only considered as an ordinary asset.
sources within AND outside the Philippines.
On the other hand, if there is importation of
equipment/machineries, but not to be EXAMPLE: I am a government employee who
subjected to depreciation, those makes an official travel to the United States of
equipment/machineries are to be considered America. With that official travel, I am given
as capital goods/assets. travel allowance, stipend or whatever in
dollars; the same will be subject to income tax.
In other words, capital goods are goods which are
Why? Because a resident citizen of the
acquired by the company/taxpayer, intended to be used
Philippines is taxed on income derived within
by the company/taxpayer but not intended for sale. Take
and without the Philippines.
note also, if such properties are subjected to

LRVIOLET | 22

 For a nonresident citizen, he is taxable only on
income derived from sources within the
Philippines.
 A resident alien is also taxed on income
derived from sources within the Philippines
only.
 A domestic corporation is taxed on income
derived from sources within AND without the
Philippines.
 A foreign corporation is taxed on income
derived from sources within the Philippines
only.
Under Sec. 23, the basis of income tax may either the
TAXABLE INCOME or the GROSS INCOME. You also
have to consider this basis in classifying the taxpayers
because there are those whose income is taxable here
only in the Philippines but their basis is the GROSS
income.
GROSS INCOME – ALLOWABLE DEDUCTIONS =
TAXABLE INCOME
When we speak of TAXABLE income – that is, the gross
income less the allowable deductions – it shall be the
basis if the taxpayer is engaged in trade or business
in the Philippines.
CONSIDER THIS: A resident alien engaged in trade
here in the Philippines is taxed on income based on
TAXABLE income: his gross income less the allowable
expenses, if those expenses were incurred in order to
earn income.
In the case of a non-resident alien, they are only taxed
on income derived from sources within the Philippines
and the basis is GROSS income if they are one who is
NOT engaged in trade or business.
Thus, if you‟re a non-resident alien not engaged in
business in the Philippines, you are also taxed on
income derived from sources within the Philippines but it
based on your gross income.
EXAMPLE: You are an artist. You hold a
concert in the Philippines and for that you earn
1M for the sale of tickets. That 1M will be taxed
based on gross income. Since the artist had
earned it in the Philippines, it is sourced within
the Philippines and therefore it is subject to
tax. What will be the basis of that tax? It will be
taxed based on gross income, since he is not
engaged in trade or business.
LRVIOLET | 23
Taxation Review Notes 2018-2019
But for non-resident alien who is engaged in business
here in the Philippines and who by reason of his
business incurs expenses in order to earn that income,
his income tax shall be based on taxable income since
the expenses are allowable as a deduction from the
gross.
Under Sec. 24 of the TRAIN law, we have a new tax
schedule. If the taxable income does not exceed
250,000, it is exempt.
TAKE NOTE: under the TRAIN Law, we no longer have
additional or personal exemptions. The taxable income
exemption was increased to 250,000 but there is no
longer a personal exemption of 50,000 for a working
taxpayer and the additional exemption when you have
qualified defendants. Thus, the sections under the old
NIRC regarding personal and additional exemptions
have been properly repealed.
PASSIVE INCOME
Passive income consists of items of income received by
the taxpayer which are no longer included as part of the
gross income in order to compute taxable income
because that have been subjected to final tax e.g.
interests, royalties, prizes, and winnings.
Sec. 24 – Income Tax Rates
(A) Rate of Tax on Certain Passive Income -
(1) Interests, Royalties, Prizes, and Other Winnings. - A
final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest from any currency bank deposit
and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements;
royalties, except on books, as well as other literary works and
musical compositions, which shall be imposed a final tax of ten
percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax
under Subsection (A) of Section 24; and other winnings (except
Philippine Charity Sweepstakes and Lotto winnings), derived
from sources within the Philippines

Provided, however, That interest income received by an individual
taxpayer (except a nonresident individual) from a depository bank
under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income: Provided, further, That
interest income from long-term deposit or investment in the form of
savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments
evidenced by certificates in such form prescribed by the Bangko
Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed
under this Subsection: Provided, finally, That should the holder of
the certificate pre-terminate the deposit or investment before the
fifth (5th) year, a final tax shall be imposed on the entire income
and shall be deducted and withheld by the depository bank from
the proceeds of the long-term deposit or investment certificate
based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%
(2) Cash and/or Property Dividends. - A final tax at the following
rates shall be imposed upon the cash and/or property dividends
actually or constructively received by an individual from a
domestic corporation or from a joint stock company, insurance or
mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the
distributable net income after tax of a partnership (except a
general professional partnership) of which he is a partner, or on
the share of an individual in the net income after tax of an
association, a joint account, or a joint venture or consortium
taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999;
Ten percent (10%) beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on
income earned on or after January 1, 1998. Income forming part of
retained earnings as of December 31, 1997 shall not, even if
declared or distributed on or after January 1, 1998, be subject to
this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in
the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares
of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.
Not over P 100,000 5%
On any amount in excess of P 100,000 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding,
a final tax of six percent (6%) based on the gross selling price or
current fair market value as determined in accordance with
Section 6(E) of this Code, whichever is higher, is hereby imposed
upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro
sales and other forms of conditional sales, by individuals, including
estates and trusts: Provided, That the tax liability, if any, on gains
from sales or other dispositions of real property to the government
or any of its political subdivisions or agencies or to government-
owned or controlled corporations shall be determined either under
Section 24 (A) or under this Subsection, at the option of the
taxpayer;
LRVIOLET | 24
Taxation Review Notes 2018-2019
(2) Exception. - The provisions of paragraph (1) of this
Subsection to the contrary notwithstanding, capital gains
presumed to have been realized from the sale or disposition
of their principal residence by natural persons, the proceeds
of which is fully utilized in acquiring or constructing a new
principal residence within eighteen (18) calendar months
from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided,
That the historical cost or adjusted basis of the real property
sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer
within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the
said tax exemption can only be availed of once every ten
(10) years: Provided, finally, That if there is no full utilization
of the proceeds of sale or disposition, the portion of the gain
presumed to have been realized from the sale or disposition
shall be subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time of sale,
whichever is higher, shall be multiplied by a fraction which
the unutilized amount bears to the gross selling price in order
to determine the taxable portion and the tax prescribed under
paragraph (1) of this Subsection shall be imposed thereon.
1. Interests, Royalties, Prizes, and Other Winnings
EXAMPLE: when you deposit money in the
bank, the interest shown in your bank deposit,
what you will receive is actually already net of
income tax which is 20%. Let‟s say will earn
1,000 as your interest income, what you will
actually receive is only 1000 less the 20% (so
800) because it is already net of withholding
tax.
Remember that since interest income is a passive
income, it is no longer included as part of your gross
income. You already paid for it, in a sense; therefore it is
no longer necessary that it be reflected and form part of
your gross income.
Take note that under the old NIRC, interest income
received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded
foreign currency deposit system shall be subjected to
a final income tax at a rate of 7 1/2%.
However under the TRAIN, the interest income received
by an individual taxpayer except a nonresident individual
from a depository bank under the expanded foreign
currency deposit system shall be subject to a final
income tax at the rate of 15% of such interest income.
There has been increase from 7 1/2% to 15%.
Foreign currency deposit involves deposits in the form of
dollars, euros, or other foreign currency which earns

interest income and the rate of interest is 15% in dollar,
euro, or whatever currency was used.
2. Cash and property dividends are likewise
subjected to final tax therefore you need not report the
same as part of gross income.
3. Capital Gains from Sale of Shares of Stock not
traded in the Stock Exchange
When a taxpayer invests in shares of stocks, he earns by
way of dividend and dividend income is also a passive
income subject to final withholding tax. Since these
shares of stocks are investments, should you decide to
sell them, you may derive a gain or incur a loss.
Under Sec. 24(c), the provisions of Sec. 39(B),
notwithstanding, a final tax at the rate of 15% is hereby
imposed upon the NET CAPITAL GAINS realized during
the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock
exchange.
The rate of your capital gains tax is 15% under the train
law.
Sec. 39. Capital Gains and Losses
(B) Percentage Taken into Account - In the case of a
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or
exchange of a capital asset shall be taken into account in
computing net capital gain, net capital loss, and net income.
(1) One hundred percent (100%) if the capital
asset has been held for not more than twelve (12)
months; and
(2) Fifty percent (50%) if the capital asset has been
held for more than twelve (12) months;
This provision speaks of the percentage to be taken into
consideration if and when the taxpayer sells or disposes
of a capital asset. These periods are referred to as the
holding period.
1. When the taxpayer held the capital asset for
more than 12 months, there is a long-term
holding period. If the sale or disposal of the
capital assets results to a gain or loss, the gain
or loss to be recognized is only 50%.
2. On the other hand, if the holding period is
short-term, that is, NOT more than 12 months,
the capital gain or capital loss to be recognized
will be in full (100%).
If it is only 12 months, it is still considered as
short term.
LRVIOLET | 25
Taxation Review Notes 2018-2019
The sale of a capital asset could either be a net capital
gains or a net capital loss. It is a capital gain if the selling
price is greater than the cost; if the selling price is less
than the cost, there is a capital loss.
Take note that the holding period under Sec. 39(B) is
only applicable if the capital asset involved is not
shares of stocks. A capital gains tax is imposed upon
the NET CAPITAL GAINS on the sale of shares of stocks
not traded in the stock exchange at the rate of 15%. If
the sale resulted to a capital loss, then there is no capital
gains tax of 15%. The basis of the CGT is the net capital
gains.
Capital Assets – Sec. 39(A) defines capital asset in the
negative. The term capital asset means property held by
the taxpayer whether or not connected with his trade or
business), but does not include:
1. stock in trade of the taxpayer or other property of a
kind which would properly be included in the inventory
of the taxpayer if on hand at the close of the taxable year
2. property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business
3. property used in the trade or business, of a character
which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34 or
4. real property used in trade or business of the
taxpayer.
EXAMPLES: If the asset is acquired by the
taxpayer forms part of his inventory which is
intended for sale, it is NOT a capital asset, only
an ordinary asset. Reason? See number 1
above.
Equipment is bought by the taxpayer for
500,000. But then this equipment is to be used
in the business, subject to depreciation. If you
sold such equipment, it is still NOT capital
asset, but only an ordinary asset. Reason?
See number 3 above.
If a corporation engaged in real estate acquires
vast of lands/properties to be sold, this is also
NOT a capital asset. Why? See number 2
above. Since the lands or properties acquired
by the corporation taxpayer are those which
are to be sold, since he is engaged in the
business of real estate, these cannot be
considered as capital assets, but only ordinary
assets.
But in the case where an ordinary taxpayer, for
example just a normal government employee

who bought an agricultural land and later on
decided to sell such property because he
intends to move to another country, the real
property therein shall be considered as a
capital asset. Why? The property is not
among those enumerated in the definition
above. It is a property sold by a taxpayer who
is not engaged in trade or business.
4. Capital Gains from Sale of Real Property
The real property subjected to CPT being referred to
here is the same enumeration of real property under the
Civil Code.
CGT from Sale of Real Property - a final tax of six
percent (6%) based on the gross selling price or
current fair market value as determined in accordance
with Section 6(E) of this Code, whichever is higher.
Unlike the CGT for sale of shares of stocks where the
basis for it is the net capital gains, for the sale of real
property, the basis will be the gross selling price – so
regardless of a gain or loss, such a sale shall always be
subjected to a capital gains tax of 6%.
The term “sale” includes whatever kind of transfer of
real property. It does not only refer to sale as one where
there is a transfer involving money/cash, but also even a
pacto de retro sale or a dacion en pago where there is
an exchange of properties – that is also subjected to
capital gains tax. Even a foreclosure sale where it
involves a real property collateral, a capital gains tax
may be imposed.
Even property which is levied by the government and
sold in a public auction is subject to CGT. Remember
that levy is sometimes a mode used by the government
in order to satisfy a tax obligation; the government will
take a real property belonging to the taxpayer to satisfy
his tax obligation. Once they take such property, it will be
sold in a public auction where there will be bidders.
When there is already sale/transfer of that property to the
bidder, you impose a capital gains tax.
What happens if there is no payment of the capital
gains tax?
No registration may be allowed. The registry of deeds
cannot register the property under the applicant‟s name
without evidence that he had paid the capital gains tax
for such property. The BIR will not issue the so-called
Certificate of Authority to Register if there is no payment
of the capital gains tax.
LRVIOLET | 26
Taxation Review Notes 2018-2019
EXCEPTIONS to the Rule on Capital Gains Tax:
1. If the real property is sold in favor of the
government under expropriation proceedings
(involving the power of eminent domain).
In the exercise of the power of eminent domain, a
property is taken by the government to use for a public
purpose upon payment of just compensation. The tax
liability if any on gains from sales or other disposition of
real property to the government or any of its political
subdivisions or agencies or to government-owned or
controlled corporations shall be determined at the option
of the taxpayer.
When the taxpayer receives the just compensation, he
has two options under the law:
1. Include/report the capital gains/loss in his
gross income for taxable income
2. Subject it to capital gains tax at 6%
EXAMPLE: Consider this: Assume that an individual
taxpayer receives a salary or wage of 250,000. During
the year his property, which he bought only for 300,000,
was expropriated in favor of the government and he was
paid just compensation of 1Million.
Gross Selling Price 1,000,000
Less Cost of Property 300,000
Capital Gain 700,000
Since there is sale of real property to the government,
the taxpayer is given an option either to (1) include such
capital gain in the computation of his gross income or (2)
subject it in accordance to the income rates under Sec.
24 OR he may immediately impose a capital gains tax
rate of 6% and this will be reflected as a final tax.
For option 1:
Salaries/Wages 250,000
+ Capital Gain 700,000
Taxable Income 950,000
Based on the tax schedule in Sec. 24(A), the rate of the
tax due shall be over 800,000 but not over 2M so:
130,000
(950,000 – 800,000) = 150,000 excess
X 30%
45,000 + 45,000
Tax Due = 175,000
Thus the taxpayer shall pay 175,000 if he includes the
capital gain as part of his gross income.

For option 2:
He is going to report as gross income the salaries/wages
of 250,000 only. Under the tax schedule, the income of
250,000 is considered to be exempt. Then, he is to tax
the 1M, which is the GROSS SELLING PRICE for the
property sold, separately for a capital gains tax of 6%:
Gross Selling Price 1,000,000
CGT Rate 6%
Tax Due = 60,000
If you are the taxpayer, the better option here would then
be option 2. This is an example of Tax Avoidance.
2. If the taxpayer sells his principal place of
residence because he will be transferring to another
place, and from the proceeds of the sale of the first
principal residence he utilizes the same to acquire
the new principal residence.
EXAMPLE: The taxpayer decides to live in Baguio so he
sells his property here in Tacloban. If the proceeds from
the sale of the principal residence here in Tacloban will
be utilized to acquire a new principal residence in
Baguio, then the gross selling price on the sale of the
real property in Tacloban will be exempt from Capital
Gains Tax.
Requirements in order for the Exemption to be Valid:
1. The entire proceeds will be fully utilized in
acquiring or constructing a new principal
residence
2. It must be within 18 calendar months from
the date of sale or disposition
3. Taxpayer must give notice within 30 days
to the CIR through a prescribed return of his
intention to avail of the tax exemption
4. The taxpayer can only avail of this
exemption once every 10 years.
Suppose for the fourth requirement, if after a year of
transferring to Baguio, he feels too cold to stay there and
decides to move again to Vigan, he can no longer avail
of the
Suppose for the first requirement, the taxpayer was not
able to utilize fully the proceeds from his sale. For
example, the proceeds of his sale amounted to 1Million
but only 900,000 was used to construct his new principal
residence. The 100,000 difference or unutilized
LRVIOLET | 27
Taxation Review Notes 2018-2019
portion will then be subjected to capital gains tax of
6%.
TAKE NOTE: This exception is applicable ONLY to
individual taxpayers. This cannot apply to corporations.
SENIOR CITIZEN ACT OF 2010
This act has already been amended at least twice. Now
we have the expanded version wherein there are so
many privileges given to senior citizens, not limited to
hospitalization and medical expenses, but also include
even amusements like the cinema and discounts in
restaurants.
The discounts granted to senior citizens under this act,
do have an implication or an effect on both the senior
citizen and the taxpayer involved. The taxpayer grants
the senior citizen‟s discount. What are the implications?
1. On the part of the senior citizen under this
act, they are supposedly exempt from VAT.
This then is an exempt transaction so they do
not have to pay a 12% value added tax –
sometimes it is said that they have a 32%
discount but actually, in the first place, it is an
exempt transaction, therefore they are not
really subjected to any 12% VAT.
2. On the part of the taxpayer who grants the
Senior Citizen discount, how will he treat that
discount?
There are cases which you may have read that the
senior citizens discounts granted by the business to the
senior citizen are to be treated as tax credit. But under
the new law, it is now considered as a tax deduction.
Tax credit vs. Tax Deduction (via Senior Citizens Act):
CONSIDER THIS: Let‟s say during the year, the
taxpayer granted a senior citizens discount of 500,000
pesos.
Tax Deduction: items of expenses which are deducted
from the gross income to arrive at the taxable income
Gross Sales 3,000,000 Since the Senior
Less Expenses other than Citizens Discount is
Senior Citizens Discount 800,000 claimed as TAX
Less Senior Citizens Discount 500,000 DEDUCTION, it will
Taxable Income 1,700,000 be deducted from the
gross sales in order
The taxable income will be the basis for income tax. to arrive at the
taxable income.
 Taxation Review Notes 2018-2019

In the case of a corporation subject to tax under Sections 27(A)

When the taxpayer is an individual taxpayer, refer to the and 28 (A)(1), it may elect a standard deduction in an amount
tax schedule under Sec. 24(A), wherein the rate of the not exceeding forty percent (40%) of its gross income as
tax due shall be based on the taxable income. Since the defined in Section 32 of this Code. Unless the taxpayer
signifies in his return his intention to elect the optional standard
taxable income is 1,700,000, it belongs to the schedule deduction, he shall be considered as having availed himself of
for Over 800,000 but not over 2M so: the deductions allowed in the preceding Subsections. Such
130,000 election when made in the return shall be irrevocable for the
(1,700,000 – 800,000) = 900,000 excess taxable year for which the return is made: Provided, That an
X 30% individual who is entitled to and claimed for the optional
270,000 + 270,000 standard deduction shall not be required to submit with his tax
return such financial statements otherwise required under this
Code: Provided, further, That except when the Commissioner
Tax Due = 400,000
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said
The tax due is 400,000 if he claims it as a tax deduction. corporation shall keep such records pertaining to his gross
Under the old law, the taxpayer was allowed to claim it income as defined in Section 32 of this Code during the taxable
as a tax credit. year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon,
recommendation of the Commissioner.
Tax Credit: deduction from the Philippine income tax
itself/from the taxable income tax itself. There two kinds of deductions:
Gross Sales 3,000,000
Less Expenses other than 1. Itemized Deductions – The taxpayer has to
Senior Citizens Discount 800,000 substantiate his claim for deduction. If the taxpayer is
Taxable Income 2,200,000 claiming salaries and wages from the business, he has
to substantiate his claim whether it in rentals, utilities and
For tax credit what happens here is you do not deduct
so on. Without the necessary required receipts as proof
the senior citizens discount of 500,000, and instead,
of the existence of this claim, the taxpayer will not be
immediately look up which bracket under the tax
allowed to claim a deduction.
schedule the taxable income belongs, which is Over
2,000,000 but not over 8,000,000. Thus: 2. Optional Standard Deductions (OSD) – As an
490,000
alternative, the taxpayer may opt for an optional standard
(2,200,000 – 2,000,000) = 200,000 excess deduction. Here, he is not required to substantiate his
X 32% claim. So long as individual taxpayer is engaged in
64,000 + 64,000 business and that he must be a resident in the
Tax Due = 554,000 Philippines, he may be allowed (therefore, nonresident
aliens, whether engaged in business or not, cannot claim
The senior citizens discount is to be claimed as a tax OSD).
credit. Claiming it as tax credit, it will then become a tax
deduction from the Philippine tax/tax due itself. Domestic corporations under RA 9337 are already
allowed to claim/opt for OSD instead of itemized
Tax Due 554,000
Less Senior Citizens Discount (as Tax Credit) 500,000 deduction; prior to RA 9337, they were prohibited to
Net Tax Due 54,000 claim optional standard deduction.

The difference between corporations and that of

This is why in some cases some companies or taxpayers
individual taxpayers when it comes to claiming OSD lies
who grant senior citizens‟ discount strongly oppose the
on the basis. The tax rate is the same at 40%. The basis
amendment for the senior citizens act, changing tax
however is different because for the individual taxpayer,
credit into tax deduction because of the huge variance in
it is on gross sales (meaning there are no deductions –
what they ought to have paid.
what he receives will not have any deductions) while for
OPTIONAL STANDARD DEDUCTION corporations, the basis for OSD is gross income or
gross profit.
Sec. 34 Deductions from Gross Income
(L) Optional Standard Deduction (OSD) - In lieu of the In order to be able to Gross Sales 1,500,000
deductions allowed under the preceding Subsections, an sell, you need your Less Cost of Sales 800,000
individual subject to tax under Section 24, other than a puhunan or Cost of Gross Profit 700,000
nonresident alien, may elect a standard deduction in an Sales
amount not exceeding forty percent (40%) of his gross sales or
gross receipts, as the case maybe.

LRVIOLET | 28
 Taxation Review Notes 2018-2019

If the taxpayer opts for OSD, the 40% OSD will be based taxable income. When we say taxable income, he is
on gross sales: 40% of 1,500,000 is 600,000. Thus: allowed to deduct expenses incurred in order to earn the
Gross Sales 1,500,000 income. However, they are only to deduct expenses
Less Cost of Sales 800,000 which were incurred in the Philippines, because a
Gross Profit 700,000 resident alien who is engaged in business and a NRA,
Less OSD (40%) 600,000
who is also likewise engaged in business, are taxable on
Taxable Income 100,000
income derived from sources within the Philippines only.
Since the taxable income is below 250,000, according to So as to income that is derived outside of the country,
the present tax schedule, he is tax-exempt. the Philippines has no jurisdiction, taxpayer is not taxed
on that income, and therefore he cannot claim such
In the case of a corporation, it is slightly different: outside expenses as a deduction because they were
Gross Sales 1,500,000 incurred outside.
Less Cost of Sales 800,000
Gross Profit 700,000 Take Note: if there is capital asset transaction by an
individual resident alien and an NRA, the rate of tax for
The corporation decides to also claim optional standard capital gains tax is similar to an individual citizen – 6%
deduction. The rate is the same as that of an individual on the gross selling price still if from the sale of property,
taxpayer (40%) but the basis will no longer be the gross and 15% on from the sale of shares of stock not traded
sales; instead, it is the gross profit: 40% of 700,000 is in the stock exchange.
280,000. Thus:
However also take note that we had an exception under
Gross Sales 1,500,000
the capital gains tax for real property wherein there is an
Less Cost of Sales 800,000
Take note that for Gross Profit 700,000 exemption when the sale proceeds of the principal
corporations, the Less OSD (40%) 280,000 residence is utilized to construct a new principal
tax rate is fixed at Taxable Income 420,000 residence – this exemption is NOT applicable to NRA
30%.
Tax Due: 420,000 x 30% = 126,000 NOT engaged in trade or business.

When can we say that a nonresident alien is engaged

BASICALLY: Claiming an OSD by an individual
taxpayer has for its basis the gross sales, while for
corporation it is based on gross profit.
Income Tax on a Nonresident Alien (Sec. 25)
Under this section, there are two classification of
nonresident alien: (1) a nonresident alien (NRA)
engaged in trade or business in the Philippines; (2) a
nonresident alien not engaged in trade or business in the
Philippines.
Sec. 25 Tax on Nonresident Alien Individual -
(A) Nonresident Alien Engaged in trade or Business Within
the Philippines. -
(1) In General. - A nonresident alien individual engaged in
trade or business in the Philippines shall be subject to an
income tax in the same manner as an individual citizen and a
resident alien individual, on taxable income received from all
sources within the Philippines. A nonresident alien individual
who shall come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a 'nonresident alien
doing business in the Philippines.‟ Section 22 (G) of this Code
notwithstanding.
A nonresident alien doing business in the Philippines
and a resident alien are taxed similarly on income
derived from sources within the Philippines based on
in trade or business in the Philippines?
There is a presumption under Sec. 25(A)(1) of the NIRC
that if the NRA stays in the Philippines for more than 180
days, he is deemed to engaged in business. Taxable
income is the basis for taxing a nonresident alien
engaged in business so is with a resident alien and the
rate of tax is the same as that in the table for individual
taxpayer because the basis is the same, still taxable
income. However, it would be different if the taxpayer is
a NRA not engaged in trade or business. A NRA NOT
engaged in business in the Philippines shall be taxed
based on gross income, or whatever is received from
sources within the Philippines.
(B) Nonresident Alien Individual Not Engaged in Trade or
Business Within the Philippines. - There shall be levied,
collected and paid for each taxable year upon the entire income
received from all sources within the Philippines by every
nonresident alien individual not engaged in trade or business
within the Philippines as interest, cash and/or property dividends,
rents, salaries, wages, premiums, annuities, compensation,
remuneration, emoluments, or other fixed or determinable annual
or periodic or casual gains, profits, and income, and capital gains,
a tax equal to twenty-five percent (25%) of such income. Capital
gains realized by a nonresident alien individual not engaged in
trade or business in the Philippines from the sale of shares of
stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and
(D) of Section 24.

LRVIOLET | 29

For a NRA not engaged in trade or business in the
Philippines, if and when the income is derived from rents,
salaries, wages, premiums and other earnings in the
Philippines, e.g. the taxpayer comes to the Philippines to
hold a concert or art performance or presentations,
whatever is earned here in the Philippines since they are
considered to be NRA not engaged in trade or business
in the Philippines, they will be taxed based on their gross
at a rate of 25%.
EXAMPLE: they received 1Million for a month
of performing here in the Philippines, the
entirety of it is subjected to the final tax of 25%
rate and the tax due will be 250,000.
But if the income derived by the NRA not engaged in
business in the Philippines is from the sale of real
property for example in a capital asset transaction, the
same will be subjected to same rate of 6% capital gains
tax. The same rule is similar too with the sale of shares
of stock. The same rate is applied.
We also have alien individual employed by regional
or area headquarters and regional operating
headquarters of multinational companies. So if you
are an alien individual employee of a multinational
corporation your salaries/wages, annuities etc shall be
subjected to 15% tax based on gross. Whatever income
is received, that will be subjected in its entirety or based
its gross income. Same is true for alien individual
taxpayers employed by offshore banking units and
for alien individual employed by service contractor
and subcontractor – they will also be subject to 15%
tax on their salaries, wages, etc based on gross.
General Professional Partnership (GPP) – Usually
when two or more professionals are practicing the same
profession, what is being created is a GPP and seldom
do they form a corporation.
In partnerships, except a GPP, is taxed similar to that of
a corporation. A GPP shall not be subject to the income
tax imposed under the said chapter. Persons engaged
in business as partners in a GPP shall be liable for
income tax only for their separate and individual
capacities. That GPP will not be subjected to income
tax, but then, it must determine how much is the net
income/taxable income, and the amount of share of the
each of the partners from the GPP because the partners
in the GPP will be the one to report/reflect such shares
from the GPP as part of their gross income.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
LRVIOLET | 30
Taxation Review Notes 2018-2019
computed in the same manner as a corporation. Each
partner shall report as gross income his distributive
share actually or constructively received in the net
income of the partnership.
The computation of the net income of a partnership shall
be similar to that of a corporation. Since it is a service
company, you only have gross receipts such as
professional fee, consultancy fee, acceptance fee –
these are included in the gross receipts of the GPP.
It will be also be entitled to claim/deduct expenses
because it is similar to a corporation; the difference will
be net income. So, say for example, there are 3
partners in the GPP and they have an income of
120,000, each partner will then have a 40,000 share and
this 40,000 must be reported as part of their respective
income tax return/part of his gross income.
To sum it up, GPP are not required to file income tax
return – they are not subjected to income tax, but it has
to determine its net income during the taxable year in
order to determine the distributive share of the partners
from the GPP because the partners will report these
respective shares in their individual income tax return.
TAX ON CORPORATIONS
Sec. 27 Rates of Income tax on Domestic Corporations -
(A) In General. - Except as otherwise provided in this Code, an
income tax of thirty-five percent (35%) is hereby imposed upon
the taxable income derived during each taxable year from all
sources within and without the Philippines by every
corporation, as defined in Section 22(B) of this Code and
taxable under this Title as a corporation, organized in, or
existing under the laws of the Philippines: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally
for each month of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
The article above speaks about income tax of domestic
corporations. Domestic corporations are organized in
accordance with the laws of the Republic of the
Philippines – they exist under the laws of the Philippines.
The rate of tax is 30% based on taxable income.
To Recap: GROSS SALES – COST OF SALES =
GROSS INCOME/PROFIT
GROSS INCOME/PROFIT – ALLOWABLE
DEDUCTION = TAXABLE INCOME

If the corporation will opt for an OSD, it will be based on
the gross profit/income. Usually though, corporations opt
for the itemized deduction because they receive more
from it, and that‟s okay as long as they are able to
substantiate their claim.
(B) Proprietary Educational Institutions and Hospitals. -
Proprietary educational institutions and hospitals which are
nonprofit shall pay a tax of ten percent (10%) on their taxable
income except those covered by Subsection (D) hereof:
Provided, that if the gross income from 'unrelated trade,
business or other activity' exceeds fifty percent (50%) of the
total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For
purposes of this Subsection, the term 'unrelated trade,
business or other activity' means any trade, business or other
activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or
hospital of its primary purpose or function. A 'proprietary
educational institution' is any private school maintained and
administered by private individuals or groups with an issued
permit to operate from the Department of Education, Culture
and Sports (DECS), or the Commission on Higher Education
(CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with
existing laws and regulations.
They have a certain privilege when it comes to the rate
of income tax. If you want to start a business,
educational institutions are good. Why? Because the rate
of their income tax is only 10% based on taxable
income. Same is true with a private hospital.
A proprietary educational institution is any private
school maintained and administered by private
individuals or groups with an issued permit to operate
from the DEPED, CHED or TESDA.
HOWEVER, the rate of tax will be at 10% SO LONG AS
the gross income from unrelated business will not
exceed 50% of the total income. What are unrelated
businesses that the educational institution, private
hospital, etc. may engage in?
EXAMPLE: RTR hospital and the DVOREF College of
Law.
COMPUTATION OF GROSS INCOME
Which of these are
Tuition 8,000,000 considered to be
Matriculation 5,000,000 unrelated business
Miscellaneous 7,000,000 to an educational
institution?
Rentals 4,000,000
Agricultural Land Rentals and
Proceeds 3,000,000 Agricultural Land
School bus 1,000,000 Proceeds are
Canteen 1,500,000
EXCLUDED.
GROSS INCOME 29,500,000
Therefore, there is 7 million pesos income coming
from unrelated business. Since 7 million over 29.5
million is not 50% of the total income, the rate of
income tax will remain at 10%.
LRVIOLET | 31
Taxation Review Notes 2018-2019
NEVERTHELESS, if the income from the unrelated
business exceeds 50% of the total gross income, the
rate of 10% income tax will no longer apply and what will
be applied to the determine the income tax of an
educational institution, private hospital etc, shall be that
under Sec. 27 which is 30%.
RTR is actually very wise – because they separated their
school and their hospital; so they have a 10% for the
school and 10% for their hospital. Although if and when,
the school operates a hospital as a training ground for
their nursing students, midwifery, medicine, etc, there is
jurisprudence which says that operating a hospital as
training ground for these medical students is considered
to be related, the income of the hospital is related to the
school – hence it will be taxed at the rate of 10%. But
here in RTR it is different: therefore, it has a 10% for the
hospital alone and 10% for the RTR School.
(C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities - The provisions of existing
special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled
by the Government, except the Government Service Insurance
System (GSIS), the Social Security System (SSS), the
Philippine Health Insurance Corporation (PHIC), the local water
districts (LWDs), and the Philippine Charity Sweepstakes
Office (PCSO) and the Philippine Amusement and Gaming
Corporation (PAGCOR), shall pay such rate of tax upon their
taxable income as are imposed by this Section upon
corporations or associations engaged in a similar business,
industry, or activity.
Under RA 9337, the only included exempted agencies
are the GSIS and the SSS. All others such as
PhilHealth, PSCO, and PAGCOR and others have been
excluded (but see also amendment in TRAIN).
Among the inherent limitations for the exercise of
the power of taxation is that the government does
not tax itself, but under this section, the GOCCs are
taxed at such a rate upon their taxable income. How
do we reconcile this provision under the NIRC with
the general principle that the government does not
tax itself?
Although it is a limitation that the government does not
tax itself, in the exercise of proprietary functions the
government if and when it engages in business and it
competes with other private entities, it goes down to the
level of a private individual. That‟s why the limitation of
the exercise of the power of taxation cannot apply in this
case when the government taxes its GOCCs because
the latter engages business in its proprietary functions.
For Capital Asset Transactions of Corporations, such
as the sale of real property or the shares of stock not
 Taxation Review Notes 2018-2019

traded in the stock market, it shall be treated similarly as The MCIT is applicable only on the 4 th year of operations
that an individual taxpayer at their respective rates. of a corporation. For the first three years, the MCIT is not
yet applicable because it is presumed that this early on
-oOo- in a corporation‟s life, it is expected that it suffers mostly
from losses. Thus, the MCIT will apply only on the 4th
MINIMUM CORPORATE INCOME TAX (MCIT)
year.
It is applicable to domestic corporations and resident
CONSIDER THIS:
foreign corporations engaged in business in the
Philippines. How does the MCIT apply? 4th year 5th year 6th year 7th year
Sec. 27 Rates of Income tax on Domestic Corporations - Gross Sales 1.5M 1.7M 1.8M 2M
(E) Minimum Corporate Income Tax on Domestic
COS 900,000 1M 1,250,000 1,380,000
Corporations.
(1) Imposition of Tax. - A minimum corporate income tax of Gross
600,000 700,000 650,000 620,000
two percent (2%) of the gross income as of the end of the Income
taxable year, as defined herein, is hereby imposed on a Less
corporation taxable under this Title, beginning on the fourth Allowable 580,000 600,000 580,000 570,000
taxable year immediately following the year in which such Deductions
corporation commenced its business operations, when the Taxable
20,000 100,000 70,000 50,000
minimum income tax is greater than the tax computed under Income
Subsection (A) of this Section for the taxable year. MCIT (2%) *12,000 14,000 13,000 12,400
(2) Carry Froward of Excess Minimum Tax. - Any excess of Normal 30,000
the minimum corporate income tax over the normal income tax Income 6,000 (6,000) *21,000 *15,000
as computed under Subsection (A) of this Section shall be Tax 24,000*
carried forward and credited against the normal income tax for Excess:
the three (3) immediately succeeding taxable years. 6,000
(3) Relief from the Minimum Corporate Income Tax Under
Certain Conditions. - The Secretary of Finance is hereby
*tax due in each respective years
authorized to suspend the imposition of the minimum corporate
income tax on any corporation which suffers losses on account The MCIT is to 2% based on the GROSS INCOME –
of prolonged labor dispute, or because of force majeure, or minimum suggests is the amount of tax the taxpayer is
because of legitimate business reverses. supposed to pay applicable on the 4th year of operation.
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, the necessary For the normal income tax on the other hand, the basis
rules and regulation that shall define the terms and conditions will be TAXABLE INCOME at a rate of 30%.
under which he may suspend the imposition of the minimum
corporate income tax in a meritorious case. Take note that whichever is higher between the MCIT
(4) Gross Income Defined. - For purposes of applying the and the Normal Income Tax, that will be the tax due the
minimum corporate income tax provided under Subsection (E)
hereof, the term 'gross income' shall mean gross sales less taxpayer.
sales returns, discounts and allowances and cost of goods
sold. 'Cost of goods sold' shall include all business expenses So from the example above, the 2% of 600,000 is
directly incurred to produce the merchandise to bring them to 12,000. This is your MCIT. For the normal income tax,
their present location and use.
30% of 20,000 is 6,000. The higher income due is the
For a trading or merchandising concern, 'cost of goods sold'
shall include the invoice cost of the goods sold, plus import MCIT so that will be the one paid by the corporation
duties, freight in transporting the goods to the place where the taxpayer instead of the normal income tax. However,
goods are actually sold including insurance while the goods are since the MCIT is greater than the normal income tax,
in transit.
For a manufacturing concern, 'cost of goods manufactured and there will be an excess MCIT.
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing What then will be the remedy of the taxpayer with
overhead, freight cost, insurance premiums and other costs that excess MCIT? The remedy of the taxpayer is to
incurred to bring the raw materials to the factory or warehouse. carry forward the 6,000 excess MCIT to the next
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances, succeeding three years THAT IS if the normal income
discounts and cost of services. 'Cost of services' shall mean all tax is greater than the MCIT. If the MCIT is greater than
direct costs and expenses necessarily incurred to provide the the normal, that cannot be carried over.
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
So for the 5th year for example, the taxpayer‟s MCIT is
specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as 14,000 as opposed to the normal tax of 30,000. This
depreciation or rental of equipment used and cost of supplies: means the 6,000 excess from the 4th year may be carried
Provided, however, That in the case of banks, 'cost of services' over to be deducted against the normal income tax of
shall include interest expense.

LRVIOLET | 32

30,000. 30,000 less the 6,000 excess equals 24,000.
Since 24,000 > 14,000, the taxpayer is ought to pay the
normal income tax instead of the MCIT. The similar
years follow; just remember that whichever is higher will
be the tax due. This is what you call the Carry Forward
of the Excess Minimum Tax.
Take note of paragraph 3 of Sec. 27(E), the Secretary of
Finance is authorized to suspend the imposition of the
minimum corporate income tax on any corporation
which suffers losses on account of the following:
1. prolonged labor dispute
2. force majeure
3. legitimate business reverses
But of course, in order to suspend such an imposition,
the taxpayer has to apply and inform the BIR and show
cause/substantiate his application as to why he should
be entitled to such a suspension on the imposition of the
MCIT based on account of prolonged labor dispute, force
majeure or legitimate business reverses. Otherwise, the
application for suspension may be properly denied.
Resident Foreign Corporations doing business in the
Philippines (Sec. 28)
SEC. 28. Rates of Income Tax on Foreign Corporations. -
(A) Tax on Resident Foreign Corporations. -
(1) In General. - Except as otherwise provided in this Code, a
corporation organized, authorized, or existing under the laws of
any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to
thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income
tax shall be thirty percent (30%).
In the case of corporations adopting the fiscal-year accounting
period, the taxable income shall be computed without regard to
the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each
month of the period. The corporate income tax rate shall be
applied on the amount computed by multiplying the number of
months covered by the new rate within the fiscal year by the
taxable income of the corporation for the period, divided by
twelve. Provided, however, That a resident foreign corporation
shall be granted the option to be taxed at fifteen percent (15%)
on gross income under the same conditions, as provided in
Section 27 (A).
A resident foreign corporation doing business in the
Philippines is taxed based on taxable income, that is,
gross income minus the allowable deductions on the
expenses incurred within the Philippines. Since it is
only taxed on income derived from sources within the
Philippines, it is also allowed to deduct the expenses it
incurred only within the Philippines. The rate of tax is
also at 30%.
LRVIOLET | 33
Taxation Review Notes 2018-2019
The only difference between a resident foreign
corporation and a domestic corporation is that the latter
is taxed from all sources – within and outside the
Philippines, while a resident foreign corporation doing
business in the Philippines is taxed only on income
derived from sources within the Philippines.
The MCIT is also applicable to foreign resident
corporations.
(3) International Carrier. - An international carrier doing
business in the Philippines shall pay a tax of two and one-half
percent (2 1/2 %) on its 'Gross Philippine Billings' as defined
hereunder:
(a) International Air Carrier. - 'Gross Philippine Billings' refers
to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective
of the place of sale or issue and the place of payment of the
ticket or passage document: Provided, That tickets revalidated,
exchanged and/or indorsed to another international airline form
part of the Gross Philippine Billings if the passenger boards a
plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any part outside the
Philippines on another airline, only the aliquot portion of the
cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of
Gross Philippine Billings.
(b) International Shipping. - 'Gross Philippine Billings' means
gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the
place of sale or payments of the passage or freight documents.
The rate of tax is 2 ½% on gross Philippine billings.
When you say “Gross”, there is no deduction of
expenses.
Gross Philippine Billings – this is the amount that is
collected as gross revenue derived from carrying of
persons, excess baggage, cargo and mail
ORIGINATING from the PHILIPPINES, irrespective of
the place of sale or issue and the place of payment of
the ticket or passage document. This is especially
important nowadays with the internet where we can
purchase of tickets online. As long as the flight originates
from the Philippines, there is income earned by the
international air carrier/international shipping from
Philippines up to the destination.
EXAMPLE: The ticket is from Manila to Hong
Kong. The international carrier earns income
and the purchase of the ticket for that particular
passenger will compose or will be included as
part of the Gross Philippine billings.
However there are instances wherein the
passenger for example the passenger

originates from the Philippines. His flight his
Manila to Hawaii, but upon arriving at Japan,
he is transferred to a different airline. So
according to the last paragraph of 3(A), for a
flight which originates from the Philippines, but
transshipment of passenger takes place at any
part outside the Philippines on another airline,
in this case, Japan, only the aliquot portion
of the cost of the ticket corresponding to
the leg flown from the Philippines to the
point of transshipment shall form part of
Gross Philippine Billings.
The rate of tax is 2 ½% based on Gross Philippine
Billings.
Offshore banking units – it has something to do with
foreign currency transactions with local commercial
banks. Similarly, it is just transacting business with a
local commercial bank, except that it involves foreign
currency.
EXAMPLE: You have interest income derived
from foreign currency loans granted to
residents, the same shall be subjected to final
income tax at a rate of 10%. Take note that
this is already a final income tax.
The same is true for Branch Profit Remittances. A
foreign corporation has a branch here in the Philippines
and that branch remits profit to its national/head office
say, in China or Japan for example, the amount that has
been remitted will be subjected to 15% income tax which
shall be based on total profits applied or earmarked for
remittance without any deduction for the tax component
thereof except those activities which are registered with
the Philippine Economic Zone Authority. Take note of the
exception: those firms which are registered with the
PEZA. Firms which are registered with the PEZA are
given certain incentives and therefore are actually
exempt from income taxation.
For nonresident foreign corporation Sec. 28 (B), take
note of the following:
 As a general rule, the rate of tax is at 30% for
nonresident foreign corporations based on the
gross income received for the taxable year of
the income derived from all sources within the
Philippines.
 EXCEPTIONS: (TAKE NOTE: these are
already final taxes).
o A nonresident cinematographic
film owner, lessor or distributor –
LRVIOLET | 34
Taxation Review Notes 2018-2019
25% of its gross income from all
sources within the Philippines
o A nonresident owner or lessor of
Vessels chartered by Philippine
Nationals – 4 ½% of gross rentals,
lease or charter fees from leases or
charters to Filipino citizens or
corporations, approved by the
Maritime Industry Authority.
o A nonresident owner or lessor of
Aircraft, Machineries and Other
Equipment – 7 ½% of gross rentals
or fees.
B) Tax on Corporations Subject to Improperly
Accumulated Earnings Tax. -
(1) In General. - The improperly accumulated earnings tax
imposed in the preceding Section shall apply to every
corporation formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders
of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions. - The improperly accumulated earnings tax as
provided for under this Section shall not apply to:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial
intermediaries; and
(c) Insurance companies.
IMPROPERLY ACCUMULATED EARNINGS TAX
(IAET)
Corporate profit is supposed to be distributed by the
corporation to the stockholders by way of dividends. It is
the board of directors who will declare the distribution of
such dividends. However, there are times, depending on
the decision of the board; they will not declare dividends
for one reason or another.
EXAMPLE: Maybe the corporation would like to redeem
its maturing bonds. The earnings will not be distributed
because they need to accumulate such earnings/fund in
order for them to redeem their maturing bonds. Or the
corporation wants to construct a factory, and they need
funds for its construction/or other projects that will be
made by the corporation, so the dividends cannot be
declared for distribution. And that‟s fine – there can be
no improperly accumulated tax imposed in these
situations because there is a reason for the lack of
declaration of dividends. HOWEVER, if the corporation
earns profits and is not put to use, they have to declare
dividends to be distributed; otherwise, they will be
subjected to the imposition of an improperly accumulated
earnings tax.

Corporate profits are supposed to be distributed to its
stockholders by way of dividends; otherwise, the
stockholders themselves cannot be taxed for that year
on dividend income because there was no dividend
declaration. What happens is when the dividends are
declared by the corporation, the stockholders who
receive the dividend will report the same as part of their
gross income – it is similar to that of a partnership: when
partners receive share of their profits from the
partnership, the partner is expected to reflect such share
of the profits as part of his income. When a stockholder
receives the dividends from the corporation as dividend
income, it is to be included in the computation of its
gross income, and is therefore subjected to income tax.
Hence, if the corporation does not distribute dividends,
the stockholder does not receive any dividends on which
income tax may be imposed. That is why, instead, the
BIR will have to impose improperly accumulated
earnings tax on the corporation at the rate of 10%
based on those earnings which were improperly
accumulated.
EXCEPTION where IAET cannot be imposed:
(a) Publicly-held corporations;
(b) Banks and other nonbank financial
intermediaries; and
(c) Insurance companies.
When these firms accumulate profits, the IAET
cannot be imposed on any of them. WHY?
The reason is because of the nature and character of
these business/corporations/companies having to
INHERENTLY NEED FUNDS. It is inherent in them that
they need these funds because like insurance for
example, they will be able to pay any claims against
them any time when the need arises. This is why the
IAET cannot be imposed on them despite their
accumulated profits/earnings. It is inherent in these
corporations to require the existence of funds at their
disposal, that if IAET were to be imposed, they might not
be able to comply with the claims against them.
Exempt Corporations
Sec. 30. Exemptions from Tax on Corporations. - The
following organizations shall not be taxed under this Title in
respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and without
profit;
LRVIOLET | 35
Taxation Review Notes 2018-2019
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a
nonstock corporation organized by employees providing for the
payment of life, sickness, accident, or other benefits exclusively to
the members of such society, order, or association, or nonstock
corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the
benefit of its members;
(E) Nonstock corporation or association organized and operated
exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not
organized for profit and no part of the net income of which inures to
the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character, the income
of which consists solely of assessments, dues, and fees collected
from members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the products
of its members and turning back to them the proceeds of sales, less
the necessary selling expenses on the basis of the quantity of
produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.
In Sec. 30 (h), a non-stock and non-profit educational
institution is one of the corporations exempt from
the payment of income tax. How will you reconcile
Sec. 30 (h) on non-stock and non-profit educational
institution from Sec. 27(b) wherein a proprietary
educational institution is subjected to a 10%
preferential rate on their taxable income?
To be exempt, the educational institution must be both
NON-STOCK AND NON-PROFIT. If the educational
institution is non-stock but for profit, it is not exempt – the
10% preferential rate under Sec. 27(b) shall apply. If the
educational institution is non-profit but is a stock
corporation, it is not exempt. Likewise, the 10%
preferential rate as a private institution under Sec. 27(b)
shall be applicable.
Sec. 30 (e) provides that non-stock corporation or
association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the

benefit of any member, organizer, officer or any specific
person;
Take note of the adjective exclusively operated. If the
operation is only incidental, for example its being
operated as a religious institution is only incidental to its
primary business, then it is not exclusive and therefore
the exception will not apply.
EXAMPLE: Diocese of Palo is a religious
corporation. What they collect from the
churches, the amount which is received by the
Diocese, will not be subjected to income tax
because it is a religious corporation under Sec.
30(e), having operated exclusively as a
religious corporation.
TAKE NOTE: In the last paragraph of the section it
states there that notwithstanding the provisions in the
preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities
conducted for profit regardless of the disposition made of
such income, shall be subject to tax imposed under this
Code.
EXAMPLE: The Diocese of Palo is able to
collect money and that amount they received
shall not be subjected to income tax.
Supposing the money they collected in a year
amounts to 12M – this is not subjected to
income tax. But then this 12M will not be
utilized by the corporation so instead they
decide to deposit this in the bank. That amount
deposited in the bank earns interest. Is the
interest income earned subject to income
tax? The answer is YES.
The money collected by the Diocese was used
to buy real property and they constructed a
building. They had it rented out to private
persons. Will the rental income obtained
from the building be subjected to income
tax? The answer is YES.
In the case of St. Luke’s Hospital vs. CIR, St. Luke‟s
hospital claims to be a non-stock, nonprofit corporation
and it is charitable therefore they assert that they are
exempt under Sec. 30. But the SC debunks this and
says that to be charitable they have to be exclusively
charitable. The hospital countered that the amount they
collect from their paying patients is being utilized by them
in order that “charity cases” patients would be able to
avail of their services at St. Luke‟s for free. However,
LRVIOLET | 36
Taxation Review Notes 2018-2019
looking at their financial statements, their charity cases is
not even 10% of what is being collected from the paying
patients. The SC declared that they are not a charitable
institution: if a portion only of that amount collected by
paying patients is utilized to accommodate charity cases,
the same is not considered to be exclusively charitable.
Hence, St. Luke‟s will have to pay the 10% preferential
rate of its taxable income under Sec. 27(b).
The revenues received by St. Luke‟s which amounted to
billions comparing with the amounts stated by St. Luke‟s
spent for charity patients – a very big disparity exists.
Clearly, the revenue from the paying patients is income
derived from activities conducted for profit and therefore,
the hospital cannot be regarded as a charitable
institution insofar as those revenues received from
paying patients is concerned. The income that is
received by St. Luke‟s is then not exclusively for
charitable purposes and therefore, it cannot qualify for
the exemption from income taxation. The same doctrine
has been applied by the Supreme Court in a 2017 case
wherein again St. Luke‟s was not considered to be
operating exclusively for charitable purposes.
-oOo-
ITEMIZED DEDUCTIONS
There are two classifications of deductions: itemized
deduction and the optional standard deduction.
Recap on the previous discussion regarding the
optional standard deduction: the rate is the same at
40% but the basis is different. For individual taxpayer,
the basis is gross sales/receipts, while for corporation,
the basis is gross income.
LOSSES
Among your itemized deductions are your losses.
Sec. 34 - Deductions from Gross Income
(D) Losses.
(1) In General. - Losses actually sustained during the taxable
year and not compensated for by insurance or other forms of
indemnity shall be allowed as deductions:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms, shipwreck, or
other casualties, or from robbery, theft or embezzlement.
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and
manner by which the taxpayer shall submit a declaration of
loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year:

Provided, however, That the time limit to be so prescribed in
the rules and regulations shall not be less than thirty (30) days
nor more than ninety (90) days from the date of discovery of
the casualty or robbery, theft or embezzlement giving rise to
the loss.
(c) No loss shall be allowed as a deduction under this
Subsection if at the time of the filing of the return, such loss
has been claimed as a deduction for estate tax purposes in the
estate tax return.
Losses may be claimed by the taxpayer, provided that
the loss is in connection with work or business. In
other words, an individual taxpayer who is not engaged
in trade or business is not allowed to claim losses
because they can only be claimed as a deduction if the
taxpayer is engaged in trade or business or if they were
incurred through the practice of his work or profession.
Losses may arise from fire, casualty, shipwreck,
embezzlement, robbery or theft – this could be the cause
of the loss that may be claimed by the taxpayer as a
deduction. To claim loss as a deduction, it must not
be compensated for by insurance.
EXAMPLE: If the value of the loss is 1M, but
the coverage of the insurance is only up to
600,000, what is deductible as an expense is
only the difference of 400,000 that which is not
covered by the insurance. If the total amount of
loss is not covered by insurance, then the
entire amount may be allowed as a deduction.
As always, the taxpayer must be able to substantiate his
claim for loss. And one of the requirements in order that
the taxpayer will be able to substantiate his loss, is to
report the matter to the BIR. He has to make a report. In
case of a fire loss, he has to inform likewise the Bureau
of Fire and Protection, that there was a fire that caused
his loss; in fact, an investigation will soon follow by the
said bureau of fire to inspect and confirm that the fire
was not purposely done by the taxpayer as in the case of
arson, in order to obtain his insurance or in the absence
of which, in order to claim for a deduction for that loss.
Definitely if it is confirmed to be arson, the taxpayer will
not be allowed to claim the loss as a deduction.
The loss must not be claimed as a deduction for estate
taxation purposes.
You can only claim loss as a deduction once, and if it
is already claimed for purposes of estate taxation, you
can no longer avail of it again as a deduction from
income tax.
EXAMPLE: Thee individual taxpayer is
engaged in business and then this taxpayer
dies. During the period for filing of the estate
LRVIOLET | 37
Taxation Review Notes 2018-2019
tax return, a portion of the taxpayer‟s building
was burned. The estate can claim the loss
either as a deduction from the gross estate OR
as a deduction from the gross income of the
estate engaged in trade or business.
Net Operating Loss Carry Over (NOLCO) - net
operating loss of the business or enterprise for any
taxable year immediately preceding the current taxable
year, which had not been previously offset as deduction
from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive
taxable years immediately following the year of such
loss.
2018
Gross Sales 3,000,000
Cost of Sales 1,800,000
Gross Income 1,200,000
Less Allowable Deductions 1,400,000
NET LOSS (200,000)
The total allowable deductions amounted to 1,400,000.
The difference of 200,000 is what you call net operating
loss. There is a net loss from the operations. What is the
remedy of the taxpayer in case there is a net
operating loss? In the first place, the net operating loss
came to be because the allowable deduction was not
covered by the gross income during the taxable year.
Because he was not able to claim/deduct during that
taxable year, he is allowed to deduct such net loss as an
item of deduction in the next succeeding taxable year, if
the gross income covers for it.
So if the next succeeding year, he has a gross income of
1,500,000 and the allowable deductions amount to only
1,000,000, he gets to also include as an item of
deduction the net loss of 200,000 from the previous year
and therefore will have a taxable income of 300,000.
2019
Gross Income 1,500,000
Less Allowable Deductions 1,000,000
Less NET LOSS from prev. year (200,000)
Taxable Income 300,000
A net operating loss carry-over shall be allowed only if
there has been no substantial change in the
ownership of the business or enterprise in that -
(i) Not less than seventy-five percent (75%) in
nominal value of outstanding issued shares, if the
business is in the name of a corporation, is held by or on
behalf of the same persons; or

(ii) Not less than seventy-five percent (75%) of the
paid up capital of the corporation, if the business is in
the name of a corporation, is held by or on behalf of the
same persons.
Capital Losses
Capital losses include securities becoming worthless.
Sec. 22(t) defines what securities are, in that, they are
shares of stocks in a corporation and rights to subscribe
for or to receive such shares. The term includes bonds,
debentures, notes or certificates, or other evidence of
indebtedness issued by any corporation, including those
issued by a government or political subdivision thereof,
with interest coupons or in registered form.
They are actually investment in shares of stocks and
these investments may become worthless.
EXAMPLE: You invest 500 shares
Recall what a for par value of 1,000 that is
capital asset is.
Securities are
500,000. Then, the company where
considered to be a you invested shares of stock
capital asset if the declared bankruptcy. Naturally, your
taxpayer is not a investment on the shares of stock
dealer of such
shares of stocks. will become worthless. Under Sec.
But if you are a 34(D)(4)(b), if securities become
dealer in securities worthless during the taxable year
however, these
and are capital assets, the loss
shares of stocks
will be considered resulting therefrom shall be
only as an ordinary considered as a loss from the sale or
asset. exchange, on the last day of such
taxable year, of capital assets.
Losses on Wash Sales of Stocks or Securities
Sec. 38. Losses from Wash Sales of Stock or Securities. -
(A) In the case of any loss claimed to have been sustained
from any sale or other disposition of shares of stock or
securities where it appears that within a period beginning thirty
(30) days before the date of such sale or disposition and
ending thirty (30) days after such date, the taxpayer has
acquired (by purchase or by exchange upon which the entire
amount of gain or loss was recognized by law), or has entered
into a contact or option so to acquire, substantially identical
stock or securities, then no deduction for the loss shall be
allowed under Section 34 unless the claim is made by a dealer
in stock or securities and with respect to a transaction made in
the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered by
the contract or option to acquire) is less than the amount of
stock or securities sold or otherwise disposed of, then the
particular shares of stock or securities, the loss from the sale or
other disposition of which is not deductible, shall be determined
under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
LRVIOLET | 38
Taxation Review Notes 2018-2019
(C) If the amount of stock or securities acquired (or covered by
the contract or option to acquire which) is not less than the
amount of stock or securities sold or otherwise disposed of,
then the particular shares of stock or securities, the acquisition
of which (or the contract or option to acquire which) resulted in
the non-deductibility of the loss shall be determined under rules
and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
Actually it is a situation or circumstance wherein losses
are not allowed to be claimed in sales of stock or
securities if within a period of 30 days before the sale,
and 30 days after the sale, the taxpayer acquires or
enters into an option to purchase the same shares or
securities.
Dec 1, 2018 100 shares 1,000,000
EXAMPLE: Dec 15, 2018 100 shares 900,000
Jan 2, 2019, he sold
his Dec 1 shares for 900,000
Loss from that Dec 1 shares 100,000
Consider the example. The taxpayer purchases 100
shares for 1M on December 1, 2018. He then purchases
another additional 100 shares for 900,000 on Dec. 15,
2018. On January 2, 2019, he decides to sell the same
shares purchased on December 1, for only 900,000;
therefore there is a loss of 100,000 pesos. This is
considered as wash sales, because within the period of
30 days, he had purchased and sold the same identical
shares for a LOSS. Such a loss hence cannot be
claimed as a deduction because they are deemed to be
wash sales.
EXCEPTION: No deduction for the loss shall be allowed
under Sec. 34 unless the claim is made by a dealer in
stock or securities and with respect to a transaction
made in the ordinary course of business of such
dealer.
Wagering Losses
What are wagering losses? Remember that all gains and
profits earned by the taxpayer is considered to be
taxable unless the law so provides that is otherwise
exempt, including even those losses which are derived
illegally (e.g. gains or profits through the selling of shabu,
since theoretically it forms part of your income). Your
wagering gains also forms part of your income, for
example you like to make bets in a cockfight or gamble
for money thru tongits and other card games. These
wagering gains should be reported as part of your
income in order that your wagering losses may be
considered as a deduction. If you don‟t report your gains,
you cannot claim a deduction on your wagering losses.

The rule basically is losses from wagering transactions
shall be allowed as a deduction only to the extent of
the gains from such transactions. If you do not report
your illegal gains for example, that from shabu, and then
let‟s say you got caught in a raid by the police but you
paid them off, losing all of your income from the shabu
transaction, you cannot report such loss as a deduction if
in the first place you did not even report the gains as part
of your income.
Abandonment Losses – this has something to do with
petroleum operations wherein partially or wholly
abandoned all accumulated explorations and
development expenditures pertaining thereto shall be
allowed as deduction.
EXAMPLE: Miners or mining companies. After
the exploration or development of a property
and the corporation taxpayer abandons the
place, whatever may be the accumulated
exploration and development expenditures, the
same may be claimed as a deduction.
[Bad debts, depreciation, depletion – read on your
own]
Interests
For interest to be claimed as a deduction:
1. There must be indebtedness.
2. The indebtedness must be that of the
taxpayer and
3. There must be a legal liability to pay
interest.
When can we say that there is legal liability to pay
interest? When it is stipulated in a contract of loan that
there is to be payment of interest. When the loan is
interest-bearing as shown in the contract of loan or in the
promissory note, there is a legal liability to pay interest.
Nevertheless, take note of the taxpayers who are
considered to be related to each other. When payment of
interest is required by a taxpayer who is related to that
payee, the interest paid therein will not be allowed as a
deduction.
The same is true if there is a claim for losses of sale or
exchanges of property between related taxpayers.
Basically there are two prohibitions as to between
related taxpayers: (1) the payment of interest and (2)
the losses of sale or exchanges of property.
Who are related taxpayers? (Sec. 36(b) NIRC)
LRVIOLET | 39
Taxation Review Notes 2018-2019
1. Between members of the family
EXAMPLE: When the son claims that he
borrowed money from his father and that there
is to be payment of interest to his father. Will
this be considered as a deduction? No
because the loan is between members of the
family.
In the same manner, for example, the parents
sell real property to their child for 500,000
when it was actually acquired by 1,000,000.
The parents will claim a loss of 500,000. That
is not allowed as a deduction because the sale
or exchange of property is between members
of the family.
2. Except in the case of distributions in liquidation,
between an individual and corporation more than fifty
percent (50%) in value of the outstanding stock of which
is owned, directly or indirectly, by or for such individual;
in other words, a corporation and a stockholder of
that corporation.
EXAMPLE: When a stockholder allows the
corporation to borrow money from him wherein
he owns more than 50% of the shares of
stocks or when a corporation allows the
stockholder to borrow money from it – this is
not allowed.
3. Except in the case of distributions in liquidation,
between two corporations more than fifty percent (50%)
in value of the outstanding stock of which is owned,
directly or indirectly, by or for the same individual if either
one of such corporations, with respect to the taxable
year of the corporation preceding the date of the sale of
exchange was under the law applicable to such taxable
year, a personal holding company or a foreign personal
holding company; in other words, a parent corporation
and a subsidiary corporation
4. Between the grantor and a fiduciary of any trust;
5. Between the fiduciary of and the fiduciary of a
trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust;
6. Between a fiduciary of a trust and beneficiary of
such trust.
If there is a contract loan between these related
taxpayers and there is a payment to be made with
respect to the interest, or there is a sale or exchange of
property, such payment of interest or such losses on
 Taxation Review Notes 2018-2019

the sale or exchange as the case will not be allowed 50,000 x 50% = 25,000: this is the net gain which will be
as a deduction. reflected from the capital asset transaction.

Capital Asset Transactions Next, the taxpayer decided to sell his yacht. He bought
the same last July 2018, and sold it just this month in
We said that the sale of a real property which is a capital 2019. Since he is an individual taxpayer, there is a need
asset will be subjected to a capital gains tax which is a to consider the holding period.
final tax. We also know that a share of stock not traded
Sale of Yacht
in the stock exchange is also subjected to a capital gains
Gross Selling Price (Sold in 2019) 3,000,000
tax. If the capital asset other than a share of stock not Book Value (Acquired in 2018) (3,500,000)
traded in the stock exchange or a real property, how will Net Loss (500,000)
you deal with a capital asset transaction?
Because the holding period is less than 12 months, the
It will depend if he is an individual taxpayer or a net loss obtained from the capital asset transaction will
corporate taxpayer. be reported at 100% so the entire 500,000 will have be
taken into account. Hence:
If he is an individual taxpayer, you have to consider the This 475,000 capital
Net Gain 25,000 asset transaction
holding period. If it is a corporation, do not mind the
Net Loss (500,000) loss may be allowed
holding period. Net Capital Loss (475,000) as a deduction
from your gross
Under Sec. 39(b), the percentages to be taken account income.
Therefore:
for the gain or loss recognized from the sale or exchange
of a capital asset are whether it is short term or long
INDIVIDUAL TAXPAYER 2019
term. Gross Sales 5,000,000
Cost of Sales 3,200,000
It is short term when the holding period is for not more Gross Income 1,800,000
than 12 months – the gain or loss to be considered Less Allowable Deductions xxxx
Less Capital Net Loss (475,000)
will be 100%. Taxable Income 1,325,000

It is long term when the holding period is for more than

12 months – the gain or loss to be considered will be TAKE NOTE: That if the gross income is not sufficient to
at 50% cover the loss, the net loss may be carried over to the
succeeding taxable year under Sec. 39(d) which we call
To illustrate: as net capital loss carry-over. It states that the loss (in
INDIVIDUAL TAXPAYER 2019 an amount not in excess of the net income for such year)
Gross Sales 5,000,000 shall be treated in the succeeding taxable year as a loss
Cost of Sales 3,200,000
from the sale or exchange of a capital asset held for not
Gross Income 1,800,000
more than 12 months. Hence, the holding period is no
The taxpayer decides to sell his car for 300,000 in 2019. longer applicable here: it will be treated 100% as a loss
This car was bought by him back in 2015 for only deductible from that succeeding year‟s gross income.
250,000. Therefore, there was a gain on capital asset
What makes this different from a corporation? For
from this transaction:
corporations, the holding period is NOT RECOGNIZED.
Sale of a Car
Gross Selling Price (Sold in 2019) 300,000 CORPORATION TAXPAYER 2019
Book Value (Acquired 2015) (250,000) Gross Sales 5,000,000
Net Gain 50,000 Cost of Sales 3,200,000
Gross Income 1,800,000
Take note that the car was acquired in 2015, already 4
Thus, in the following cases: the sale of the car, the net
years back before he was able to sell it at 300,000.
gain of 50,000 will be considered as 50,000 in itself. And
Therefore, since he is an individual taxpayer, there is a
the loss from sale of the yacht of 500,000 will also be
need to consider the holding period. In this case, since
considered in its entirety as 500,000.
the holding period is 4 years and definitely more than 12
months, the consideration of the 50,000 will only be for Sale of a Car
Gross Selling Price (Sold in 2019) 300,000
50%. Thus: Book Value (Acquired 2015) (250,000)
Net Gain 50,000

LRVIOLET | 40

Sale of Yacht
Gross Selling Price (Sold in 2019) 3,000,000
Book Value (Acquired in 2018) (3,500,000)
Net Loss (500,000)
However, we have this principle that capital loss is
deductible up to the extent of the capital gain in the
case of a corporation. Therefore, for the capital asset
transactions, only a net capital loss of 50,000 shall be
considered because the net capital asset gain is only
50,000.
CORPORATION TAXPAYER 2019
Gross Sales 5,000,000
Cost of Sales 3,200,000
Gross Income 1,800,000
Less Allowable Deductions xxxx
Less Net Capital Loss (50,000)
Taxable Income 1,750,000
SOME CASES UNDER INCOME TAXATION:
We have cases for the MCIT (read in reference to the
topic under MCIT, not related to the topic of capital asset
transactions).
Manila Banking Corporation vs. CIR gives us an issue
regarding the reckoning period from which the 4-year-
period to apply the MCIT may be imposed. Generally,
the MCIT is imposed on the fourth year from the time of
birth or incorporation. In this case, Manila Banking
Corporation was organized in 1964, but then its
operations were suspended and ceased because of
insolvency and only until such time, that is in 1999, that
the BSP authorized MBC to operate once more but no
longer as a full blown bank. Instead, it operates merely
as thrift-bank. The SC ruled in this case, that the
reckoning period to which MCIT may be imposed is not
from the date in which it was first organized, but from
1999, the date in which it became a thrift-bank. It is
entitled then to the grace period of 4 years before the
MCIT may be imposed.
PAL vs. CIR involves also the MCIT. The MCIT is not
applicable to PAL because of its charter. In its charter,
there is a provision as to which taxes are to be paid by
the airlines and it provides that no other tax is to be paid
except for the franchise tax.
Sec 76. Final Adjustment Return. - Every corporation liable
to tax under Section 27 shall file a final adjustment return
covering the total taxable income for the preceding calendar
or fiscal year. If the sum of the quarterly tax payments made
during the said taxable year is not equal to the total tax due
on the entire taxable income of that year, the corporation
shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as
the case may be.
LRVIOLET | 41
Taxation Review Notes 2018-2019
In case the corporation is entitled to a tax credit or refund of
the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be
carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the
succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax
due for the taxable quarters of the succeeding taxable years
has been made, such option shall be considered irrevocable
for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor.
TAKE NOTE: This provision is for Income Taxation. It is
different from that earlier discussed under Value Added
Tax. There is the required quarterly filing by the
corporation of its income tax return. For every quarter,
depending on the accounting period of the corporation
whether it is following the calendar year or the fiscal
year, it has to file its income tax return accordingly. So, if
it‟s the calendar year, it must be filed within March for 1st,
June for the 2nd quarter, and so on. At the end of every
quarter, the taxpayer is supposed to file a quarterly
income tax return; then for the 4th quarter, it has to file a
final and adjusted return.
In Sec. 76, the taxpayer will have following options:
1. If there is still an amount due, then the taxpayer may
pay for that amount.
2. If there is no tax due, that is, his expenses are greater
than his receipts during the quarter, the excess could
be carried over for the next quarter.
3. Or he could be credited or refunded for the excess
amount paid, as the case may be.
This would hold true if and when, there is the final and
adjusted return. Usually if it is just a quarterly return, if
there is an excess, such excess will only be carried over
to the next succeeding quarter.
In the final and adjusted return, the taxpayer has to pick
which option he would opt for in the instance that there is
an excess payment of income tax, he may choose to
have it carried over or the same be credited or refunded.
If you still remember, for claims of refund, he has to
apply. Aside from applying/making a written application
for claim for refund, in the final and adjusted income tax
return, the taxpayer has to pick that option (like, check
the box upon filling up his return) to have the excess be
claimed as a refund; OTHERWISE, if he picks the other
option to carry over that excess instead, he is barred or
he cannot claim a refund within the period of 2 years
for payment since the OPTION he picked is considered
to be irrevocable. No tax refund shall be allowed

anymore if it is manifested in your return that you picked
the option to carry over.
CASES on irrevocability: See Belle Corporation vs.
CIR GR 181298, CIR vs. Mirant Operations GR
171742; GR 176165
The principle here in both cases is that once the option
to carry over has been exercised, then the taxpayer is no
longer allowed to claim for a tax refund or tax credit for
the excess payment for income tax.
BUSINESS TAXES:
VALUE ADDED TAX
Value-added Tax (VAT) is an indirect tax. It is the
amount of tax paid on the goods, properties, or services
bought, transferred or leased, and pursuant to Sec.
105(b) of the NIRC, the VAT may be an indirect, the
amount of which may be shifted or passed on to the
buyer, transferee, lessee of the goods, or properties or
services.
The VAT was first adopted in the Philippines in 1988,
when then Pres. Corazon Aquino, signed into law EO
203. That is the first law on VAT. Thereafter, the VAT law
was expanded, thus came RA 7716 or E-VAT (Expanded
VAT), which took effect on May 5, 1994. On July 1, 2005,
the VAT law has to be expanded again in order to
include other goods and services under AR-VAT (VAT
Reforma) or RA 9337.
Under RA 9337, the VAT tax rates are now 0% and 12%.
It is under the AR-VAT that the rate of VAT from 10%
was increased to 12%. The purpose or the reason why
the Philippines had adopted the VAT system is to
simplify tax administration. Before its adoption, other
countries have already been adopting the VAT system –
it was only in 1988 wherein the Philippines decided to
adopt it. Prior to the VAT law, we had several
percentages and rates for our goods and services,
classified into commodity, etc. If it‟s a basic necessity,
there is a 25%, or a 20%. It may also be an essential
good. And then there were also other classifications for
not so basic commodities, perfumes or items, were taxed
at the rate of 50% or a 100%. There percentage rates
were very varied and so, to simplify it, the government
had adopted the VAT system.
Now, there are only 0% and the 12% (which was
originally 10%).
Good taxed at the rate of 0% are what we call as export
sales, and the so called foreign currency denominated
sales.
LRVIOLET | 42
Taxation Review Notes 2018-2019
Aside from promoting efficient sale and simplifying the
tax administration, VAT promotes honesty in tax
payment. In what manner? Tax evasion has been
minimized. Why? Remember how to determine VAT
payable. The output VAT less the input VAT will give us
the VAT payable. In order that the taxpayer will be able
to avail of the input VAT, it has to ask for receipts. He
has to buy goods and services from a VAT-registered
taxpayer; otherwise, if his receipts and suppliers are not
VAT-registered, he will not be allowed to claim input
VAT.
Besides, in order to claim his input VAT, he has to
substantiate it with a receipt that he purchased from a
VAT-registered taxpayer that very amount he paid. He
has to ask for an actual receipt every time he makes a
purchase. Unlike before, receipts were not so important
– and most of the taxpayer only reported how much they
would like to report and not honestly reflecting the actual
money/exchange used in the transaction. With the VAT
system, this dishonesty can be easily prevented and
minimizes at the same time, tax evasion.
The provision of Sec. 105 stating that VAT is an indirect
tax has caused an uproar or clamor for the repeal of the
VAT law. Originally under EO 270, this provision was not
emitted, meaning it was only silent as to the nature of
VAT being an indirect tax, and that being an indirect tax,
it can be shifted to the ultimate consumers. This
provision was included when the law was amended.
Because of this inclusion, a lot of people complained;
according to the taxpayers who objected, it was
unnecessary and the provision gave conformity to all
sellers to indiscriminately share the VAT to the buyer by
merely adding the rate of 10% (12%) to the price of
goods sold.
In answer to that clamor or questioning of the validity of
the E-VAT (RA 7716), the SC stated that VAT is imposed
upon the seller, but if the seller shifts VAT to the buyer, it
is deemed to be an addition to its cost. If it is an addition
to cost, it is up to the buyer if he chooses to purchase the
same from the seller, who had imposed the VAT to cover
his cost. This additional cost covered by the price is no
longer tax, but simply what the buyer ought to pay if he
wants to purchase something from the seller.
With that principle, you will notice that when you see a
receipt, the presumption is whatever amount that is in
the receipt includes the VAT. That is why to
determine/to compute how much the VAT, you divide the
amount by its equivalent.

EXAMPLE: In the invoice it appears 1,100.
That 1,100 is presumed to include the VAT. To
determine how much is the VAT therein, you
divide 1,110 by its equivalent 1.12 or 112%.
100% Cost of the goods + 12% VAT = 112%
To determine the amount excluding VAT,
divide the amount the equivalent. [SEE
BETTER STEP BY STEP ILLUSTRATION IN
EARLIER DISCUSSION OF THESE NOTES]
In VAT, you have Sec. 106, 107, 108, and 109. Under
Sec. 109, you have exempt transactions. Familiarize
yourself with these exempt transactions because if the
item/transaction is not included in the enumeration, then
the same must be subjected to value-added tax. If it is
subjected to VAT, it is either 0% or 12%.
Among the transactions subjected to 0%, you can find
this under Sec. 106 for the sale of goods subject to a
rate of 0%. In Sec. 108(b), you also have the sale of
services which are subject to VAT at the rate of 0%. All
other transactions shall be subject to 12%.
FAMILIARIZE YOURSELF WITH THESE SECTIONS:
Sec. 106 - Value-Added Tax on Sale of Goods or Properties
(2) The following sales by VAT-registered persons shall be
subject to zero percent (0%) rate:
(a) Export Sales. - The term “export sales” means:
(1) The sale and actual shipment of goods from the Philippines
to a foreign country, irrespective of any shipping arrangement
that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in
acceptable foreign currency or its equivalent in goods or
services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale and delivery of goods to:
(i) Registered enterprises within a separate customs territory
as provided under special laws; and
(ii) Registered enterprises within tourism enterprise zones as
declared by the Tourism Infrastructure and Enterprise Zone
Authority (TIEZA) subject to the provisions under Republic Act
No. 9593 or The Tourism Act of 2009.
(3) Sale of raw materials or packaging materials to a
nonresident buyer for delivery to a resident local export-
oriented enterprise to be used in manufacturing, processing,
packing or repacking in the Philippines of the said buyer's
goods and paid for in acceptable foreign currency and
accounted for in accordance with the rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(4) Sale of raw materials or packaging materials to export-
oriented enterprise whose export sales exceed seventy percent
(70%) of total annual production;
(5) Those considered export sales under Executive Order No.
226, otherwise known as the “Omnibus Investment Code of
1987”, and other special laws; and
(6) The sale of goods, supplies, equipment and fuel to persons
engaged in international shipping or international air transport
operations: Provided, That the goods, supplies, equipment and
fuel shall be used for international shipping or air transport
operations.
LRVIOLET | 43
Taxation Review Notes 2018-2019
Provided, That subparagraphs (3), (4), and (5) hereof shall be
subject to the twelve percent (12%) value-added tax and no
longer be considered export sales subject to zero percent (0%)
VAT rate upon satisfaction of the following conditions:
(1) The successful establishment and implementation of an
enhanced VAT refund system that grants refunds of creditable
input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided, That, to
determine the effectivity of item no. 1, all applications filed from
January 1, 2018 shall be processed and must be decided
within ninety (90) days from the filing of the VAT refund
application; and
(2) All pending VAT refund claims as of December 21, 2017
shall be fully paid in cash by December 31, 2019.
Provided, That the Department of Finance shall establish a
VAT refund center in the Bureau of Internal Revenue (BIR) and
in the Bureau of Customs (BOC) that will handle the
processing and granting of cash refunds of creditable input tax.
An amount equivalent to five percent (5%) of the total VAT
collection of the BIR and the BOC from the immediately
preceding year shall be automatically appropriated annually
and shall be treated as a special account in the General Fund
or as trust receipts for the purpose of funding claims for VAT
refund: Provided, That any unused fund, at the end of the year
shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be required
to submit to the Congressional Oversight Committee on the
Comprehensive Tax Reform Program (COCCTRP) a quarterly
report of all pending claims for refund and any unused fund.
(b) Sales to persons or entities whose exemption under
special laws or international agreements to which the
Philippines is a signatory effectively subjects such sales
to zero rate.
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, 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 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 exclusively 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 fuels.
(8) Services rendered to:
(i) Registered enterprises within a separate customs territory
as provided under special law; and
(ii) Registered enterprises within tourism enterprise zones as
declared by TIEZA subject to the provisions under Republic Act
No. 9593 or the Tourism Act of 2009.
Provided, That subparagraphs (B)(1) and (B)(5) hereof shall be
subject to the twelve percent (12%) value-added tax and no
longer subject to zero percent (0%) VAT rate upon satisfaction
of the following conditions:
(1) The successful establishment and implementation of an
enhanced VAT refund system that grants refund of creditable
input tax within ninety (90) days from the filing of the VAT
refund application with the Bureau; Provided, That, to
determine the effectivity of item no. 1, all applications filed from
January 1, 2018 shall be processed and must be decided
within ninety (90) days from the filing of the VAT refund
application; and
(2) All pending VAT refund claims as of December 31, 2017
shall be fully paid in cash by December 31, 2019.
Provided, That the Department of Finance shall establish a
VAT refund center in the Bureau of Internal Revenue(BIR) and
in the Bureau of Customs(BOC) that will handle the processing
and granting of cash refunds of creditable input tax.
An amount equivalent to five percent (5%) of the total value-
added tax collection of the BIR and the BOC from the
immediately preceding year shall be automatically appropriated
annually and shall be treated as a special account in the
General Fund or as trust receipts for the purpose of funding
claims for VAT Refund: Provided, That any unused fund, at the
end of the year shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be required
to submit to the COCCTRP a quarterly report of all pending
claims for refund and any unused fund.
TRANSACTIONS DEEMED SALE:
In transactions deemed sale, there is no exchange of
money for the goods. There is no actual exchange of
money as against the goods that are considered to be
sold. Even though there is no actual exchange, for
acquisition purposes, it shall be deemed as a sale so
that the transaction may be subjected to VAT at the rate
of 12%. The following are transactions deemed sale:
[Sec. 106(b)]
1. Transfer, use or consumption not in the course of
business of goods or properties originally intended
for sale or for use in the course of business;
EXAMPLE: A taxpayer owns a grocery store.
He wanted to eat corned beef for lunch so he
took two cans which were intended to be sold
LRVIOLET | 44
Taxation Review Notes 2018-2019
from his store, for private use or personal
consumption – these two cans of corned beef
that were originally intended to be sold shall
form part of the gross receipts as transactions
deemed sale. The amount which should have
been earned by him if he had sold the two
cans will be the same amount that will be
subjected to the 12% VAT.
2. Distribution or transfer to:
(a) Shareholders or investors as share in
the profits of the VAT-registered persons;
or
This enumeration is true in the case of a
corporation. Corporations, generally distribute
its profits by way of dividends. There are
several kinds of dividends: there are instances
where a corporation would distribute stock
dividends, sometimes cash dividends,
sometimes property. If the property dividend
distributed by the corporation is in the form of
goods intended to be sold by them, it should
be considered as if the goods were sold, and
as if the proceeds from the sale were
distributed as dividends. That‟s why distribution
of goods or transfer of goods to shareholders
as share in the profits is considered to be sale
subject to VAT.
(b) Creditors in payment of debt;
Presumption is the goods were sold, the
proceeds from the sale of goods were used to
pay for the obligation.
3. Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods
were consigned;
If the consignee does not return the goods within 60
days, they shall be deemed as sold. And because they
are deemed sold, it will be subject to VAT.
4. Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation.
When the taxpayer decides to retire, but in his inventory
there are still unsold goods, all of these goods left upon
retirement shall be considered as good sold. Upon
reporting of his retirement, he will have to include these
goods as part of his gross receipts subject to VAT.

OTHER PERCENTAGE TAXES
Sec 116. Tax on Persons Exempt from Value-Added Tax
(VAT). - Any person whose sales or receipts are exempt
under Section 109(V) of this Code from the payment of
value-added tax and who is not a VAT-registered person
shall pay a tax equivalent to three percent (3%) of his gross
quarterly sales or receipts: Provided, that cooperatives shall
be exempt from the three percent (3%) gross receipts tax
herein imposed.
Among your exempt transactions under Sec. 109 of the
NIRC is when the VAT-registered taxpayer‟s gross
receipts will not exceed the ceiling for value-added tax.
The ceiling at present is 3Million. When it does not
exceed the ceiling, it is exempt from VAT; however, that
same amount of gross receipts will be subjected to
percentage tax.
The rate of percentage tax to be paid by a non-VAT
taxpayer and a VAT-taxpayer‟s whose gross receipts did
not exceed the ceiling is at 3%. Payment of percentage
tax shall also be made quarterly.
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.
Originally, included herein were domestic airlines as well
as water transportation. But in the present tax law, the air
and water transportation is subjected to VAT, so what
remains under Sec. 117 are domestic carriers by land.
Under this paragraph, take note of the exception:
bancas and animal-drawn two wheeled vehicles are
NOT subject to percentage tax on domestic carriers and
keepers of garages. All others are subjected to 3%
quarterly percentage tax.
Take note of the last paragraph, these PUJs and PUBs,
are covered by a franchise. That is why they have to
apply for a franchise: they have to apply for a franchise,
and submit their application for the franchise with the
LTFRB.
Under the LGC, provinces are allowed to impose a
franchise tax on businesses enjoying franchise.
Franchise is a privilege granted by the state. Under par.
2 of Sec. 117, it provides that the gross receipts of
LRVIOLET | 45
Taxation Review Notes 2018-2019
common carriers from their incoming and outgoing
freight shall not be subjected to local taxes imposed
under R.A. 7160 otherwise known as the Local
Government Code of 1991.
In other words, even if your domestic
transportation/land transportation is covered by a
franchise, it is not subjected to the franchise tax
imposed by the province or under the Local Government
Code. Thus,
General Rule: The LGU is allowed to impose a franchise
tax on businesses enjoying a franchise or has been
granted a franchise.
Exception: Public Utility transportation under Sec. 117
paragraph 2 who are covered by a franchise. They will
not be subjected to a franchise tax imposed under the
LGC.
Sec. 118. Percentage Tax on International Carriers
(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 quarterly gross receipts.
(B) International shipping 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
equivalent to three percent (3%) of their quarterly gross
receipts.
Consider along with this provision that of zero-rated
transactions under the VAT. Is it not that international air
carriers and shipping carriers are already subjected to
VAT at the rate 0%?
Yes, because Sec. 118 is no longer applicable (however,
see amendments in TRAIN). International gross receipts
derived by international air carriers doing business in the
Philippines, and gross receipts of international shipping
carriers are already subjected to Value-Added Tax at the
rate of zero (0%) percent.
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 broadcasting companies whose
annual gross receipts of the preceding year do not exceed
Ten million 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 tax due thereon: Provided, further, That once the option is
exercised, said option shall not be irrevocable.

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 contrary notwithstanding.
Franchise tax is a right or privilege that is being
allowed/granted by the state in favor of a taxpayer, in
favor of a business, individual or corporate, in order to
operate a public utility, such as a franchise on a public
conveyance, franchise to operate water facilities,
electricity, television networks, broadcasting networks,
gas companies, etc. These establishments are covered
by a franchise.
Under Sec. 119, it imposes a franchise on radio and/or
television broadcasting companies whose annual gross
receipts of the preceding year do not exceed 10Million,
a tax of 3%, and a tax of 2% on gas and water utilities
from the gross receipts derived from the business
covered by the law granting the franchise.
Take note of the option given to television and radio
broadcasting companies when its gross receipts do not
exceed the 10Million ceiling. The option is that these
broadcasting companies may register as VAT
taxpayers at his option and pay the tax due thereon,
even if the gross receipts do not exceed 10Million. Under
this section, the franchise tax is imposed upon a
radio/television broadcasting company if their gross
receipts do not exceed 10M. If it does exceed 10M, it
shall automatically be subjected to VAT.
So, just remember that when the broadcasting
company‟s gross receipts does not exceed 10M, he has
TWO OPTIONS: either the option to register as a (1)
VAT taxpayer and pay the tax due thereon or if he
doesn‟t choose to do so, he can (2) just opt to pay the
franchise tax. Once such an option is exercised, this can
no longer be revoked.
Electric companies were originally subject to a franchise
tax at the rate of 2%. Now, they are no longer subjected
to a franchise tax, but are instead made to pay VAT.
Electric companies are now subject to VAT, that is why
when you check the receipts paid to LEYECO, there is a
tax of 12%, which represents the VAT, the burden
thereof is being shifted to consumer.
As earlier mentioned, the province is likewise allowed to
impose a franchise tax.
Example: For the broadcasting company,
aside from the franchise tax under Sec. 119 of
NIRC, the province can also impose a
LRVIOLET | 46
Taxation Review Notes 2018-2019
franchise tax at a rate not exceeding 50% of
1% of gross annual receipts. So he actually
pays 2 types of taxes: percentage tax under
Sec. 119 and a franchise tax under the
Local Government Code.
Aside from holders of certificates of public convenience
for the operation of public utility vehicle which are
exempt under Sec. 117, businesses enjoying
franchise operating within a city shall also not be
subjected to the franchise tax imposed by the province.
The city here refers to any city, regardless of whether it
is already an HUC like Tacloban or like Ormoc which has
a different charter, or like other cities which are still
components or are part of the province itself, so long as
the business enjoying the franchise operates within such
a city, the franchise tax which is imposed by the province
is no longer paid by said businesses.
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 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 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.
(B) Exemptions. - The tax imposed by this Section shall not
apply to:
(1) Government. - Amounts paid for messages transmitted
by the Government of the Republic of the Philippines or
any of its political subdivisions or instrumentalities;
(2) Diplomatic Services. - Amounts paid for messages
transmitted by any embassy and consular offices of a
foreign government;
(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
(4) News Services. - Amounts paid for messages from any
newspaper, press association, radio 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 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.

Section 120 refers to the Overseas Communication
Tax which is at the rate of 10% based on the amount
paid for such services. For every overseas
communication that one will make, there is a tax of 10%.
EXCEPTIONS:
1. Government or any of its political
subdivisions or instrumentalities
2. Diplomatic Services which include the
embassy and other consular offices of foreign
governments
3. International organizations, e.g. United
Nations, World Health Organization, UsAid.
These are international organizations if and
when there are messages transmitted, the
transmission shall not be subjected to the
overseas communication tax.
4. News Services, like Abs-Cbn and GMA, when
they send messages to their correspondents
abroad, the same shall be exempt from
overseas communication tax.
In the case of CIR vs. PAL (2010) GR 179800, the latter
was subjected to overseas communication tax. PAL had
communicated with PLDT in which the latter had
imposed on the airlines an overseas communication tax.
It then sought for reimbursement claiming the same is
not covered by their franchise.
The Supreme Court ruled in favor of PAL. PD1590 is the
law which grants Philippine Airlines the franchise to
operate as a carrier. Under said law, it specified therein
as to which taxes are to be paid by the airlines. The
Overseas Communication Tax is not among those taxes
to be paid under its franchise. That is why in this case,
PAL is exempt from overseas communications tax.
Sec. 121. Tax on Banks and Non-Bank Financial
Intermediaries Performing Quasi- Banking Functions -
There shall be collected a tax on a gross receipt derived
from sources within the Philippines by all banks and non-
bank financial intermediaries in accordance with the
following schedule:
(a) On interest, commissions and discounts from lending
activities as well as income from financial leasing, on the
basis of remaining maturities of instruments from which
such receipts are derived:
Maturity period is five years or less 5%
Maturity period is more than five years 1%
(b) On dividends and equity shares and net income of
subsidiaries 0%
(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%
LRVIOLET | 47
Taxation Review Notes 2018-2019
(d) On net trading gains within the taxable year on foreign
currency, debt securities, derivatives, and other similar
financial instruments 7%
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.
Nothing in this Code shall preclude the Commissioner from
imposing the same tax herein provided on persons
performing similar banking activities.
Sec. 121 provides for tax on banks and non-bank
financial intermediaries performing quasi-banking
functions. This is where the gross receipts tax enters.
Among the sources of revenue for a bank and non-bank
financial intermediaries is the interest, commission and
discounts of lending activities (since this is after all the
primary operations of a bank). When it extends a loan,
be it a short-term or a long-term loan, it earns interest.
Aside from interest, it also earns dividends and equity
shares, royalties, profits from rental of property from
exchange and other items treated as gross income under
Sec. 32, etc.
In the cases of CIR vs. Solidbank and Chinabank vs.
CIR, the issue in both refers to the computation or
determination of whether or not the interest earned by a
bank should form part of its gross receipts, therefore
should be subjected to the gross receipts tax.
What is gross receipt for the purpose of the gross
receipts tax?
The Supreme Court in both of the cases ruled that even
though the interest is already subjected to a final
withholding tax of 20%, since gross receipts is a term
which refers to the entire receipts without any
deduction, interpreting it otherwise would compromise
the intent of its legislation. The exclusion of the final
withholding tax from gross receipts operates as a tax
exemption which the law must expressly grant. No law
provides for such an exemption.
In these cases, the Supreme Court tells us that for
purposes of computing gross receipts in order to
determine how much is the gross receipts tax, the

amount withheld/interest shall still form part of gross
receipts.
Take note that there might be some confusion from our
understanding of what a final tax is. What we understand
is that since the interest earned by banks, which is
passive income on the part of the bank, is subject to
withholding tax, in our understanding it is no longer
included as part of its gross income because the same is
already deducted as a final tax.
However, the tax referred to under this provision is a
percentage tax or a business tax which is the gross
receipts tax. We can say that the interest earned by
banks no longer forms part of its gross income/receipts
for purposes of determining its TAXABLE INCOME. So
for purposes of income taxation, if the interest income is
subjected to withholding tax, that withholding tax is
already considered as final – and therefore not included.
For purposes of determining the GRT, however, even if
the interest received by the bank is net of the withholding
tax, that amount of withheld should still form part of the
gross receipts. Because when we speak of gross
receipts, for purposes of the GRT, that is the amount
received by the bank without deduction. The deduction
here is the withheld, but that deduction only applies later
on when we will be determining its taxable income.
The SC also had the opportunity of discussing a
constructive receipt from that of the actual receipt. While
it is true there is no actual receipt by the taxpayer bank,
there was still a receipt by the bank constructively, and
since the law does not distinguish, the same will form
part of the gross receipts.
Tax on life insurance premiums, tax on agents of
foreign insurance companies – nothing interesting
here except that for tax on life insurance premiums, the
rate of tax has been reduced to 2% from 5%.
Amusement Tax
What is an amusement tax? It is a tax imposed on the
admission to places of amusement; therefore, it is (an
excise) tax on the right or privilege of people to enter
places of amusement e.g. movie cinemas, cockpits, etc.
wherein those who enter will pay the amusement tax. If
you will notice your receipt such as a ticket or admission
slip, you will notice one of the items therein is for the
amusement tax.
The amount or rate of amusement tax will depend on the
place of amusement (Check Sec. 125 for the
LRVIOLET | 48
Taxation Review Notes 2018-2019
enumeration of these places and the rate of amusement
tax imposed on them). The basis for amusement tax is
gross receipts.
Take note of the following provision under the Local
Government Code:
Sec. 140. Amusement Tax. (LGC) - (a) The province
may levy an amusement tax to be collected from the
proprietors, lessees, or operators of theaters, cinemas,
concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent
(30%) of the gross receipts from admission fees.
(b) In the case of theaters or cinemas, the tax shall first
be deducted and withheld by their proprietors, lessees, or
operators and paid to the provincial treasurer before the
gross receipts are divided between said proprietors,
lessees, or operators and the distributors of the
cinematographic films.
(c) The holding of operas, concerts, dramas, recitals,
painting and art exhibitions, flower shows, musical
programs, literary and oratorical presentations, except
pop, rock, or similar concerts shall be exempt from the
payment of the tax herein imposed.
(d) The sangguniang panlalawigan may prescribe the
time, manner, terms and conditions for the payment of
tax. In case of fraud or failure to pay the tax, the
sangguniang panlalawigan may impose such surcharges,
interests and penalties as it may deem appropriate.
(e) The proceeds from the amusement tax shall be
shared equally by the province and the municipality where
such amusement places are located.
Under the LGC, the province can also impose an
amusement tax to be collected according to the
abovementioned provision.
TAKE NOTE: the amusement tax under the NIRC is
different from the amusement tax that may be imposed
by the province.
Tax on sale shares of stock listed and traded
through the Local Stock Exchange or through Initial
Public Offering
Earlier on there was a discussion that among the passive
income is that capital gains tax on the sale, exchange or
barter of shares of stocks NOT TRADED in the stock
exchange. If and when the sales of shares of stock is not
traded in the stock exchange, it is subjected to a capital
gains tax. It is among passive income on the part of the
taxpayer. However, if the shares of stocks are sold and
traded through the stock exchange, instead of a capital
gains tax, the sale, barter or exchange will now be
subjected to a percentage tax under Sec. 127 of the
NIRC at the rate of 1/2 of 1% based on 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.
A few common stock exchanges that operate in the
Philippines include the Manila Stock Exchange, Makati
Stock Exchange, and Philippine Stock Exchange.
Sec. 128 - Returns and Payment of Percentage Taxes.
(A) Returns of Gross Sales, Receipts or Earnings and
Payment of Tax.
(1) Persons Liable to Pay Percentage Taxes. - Every
person subject to the percentage taxes imposed under
this Title shall file a quarterly return of the amount of his
gross sales, receipts or earnings and pay the tax due
thereon within twenty-five (25) days after the end of each
taxable quarter: Provided, That in the case of a person
whose VAT registration is cancelled and who becomes
liable to the tax imposed in Section 116 of this Code, the
tax shall accrue from the date of cancellation and shall be
paid in accordance with the provisions of this Section.
Under this provision, when it comes to returns of
percentage taxes paid, the same may be done by filing a
quarterly return of the amount of his gross sales within
25 days after the end of each taxable quarter. The
quarter shall be based on whether the taxpayer is
following the fiscal year or the calendar year. If based on
the calendar year, the first quarter ends on March 31, so
the filing of the quarterly return is until April 25. For the
second quarter, the same ends on June 30, so that filing
of the return is until July 25, and so on.
EXCISE TAXES
Excise taxes are taxes on the manufacture or production
of goods. Sec. 129 provides that excise taxes apply to
goods manufactured or produced in the Philippines for
domestic sales or consumption or for any other
disposition and to things imported as well as services
performed in the Philippines. The excise tax imposed
herein shall be in addition to the value-added tax
imposed under Title IV.
In business taxes, we have Value Added Tax,
Percentage Tax and the Excise Tax.
TAKE NOTE of the following:
 For VAT, we have value added tax on the sale
of goods, value added tax on the sale of
services, and value added tax on the
importation.
 The taxpayer may be required to pay VAT OR
percentage tax on the sale of goods AND
excise tax.
 On the sale of goods, it is either VAT or
percentage tax. If you are not a VAT-
LRVIOLET | 49
Taxation Review Notes 2018-2019
registered taxpayer, you will be required to pay
percentage tax, instead of the VAT.
 On the production/manufacture of goods,
taxpayer is required to pay excise tax. Hence,
he pays BOTH VAT and the EXCISE TAX.
 A taxpayer may also be required to pay both
percentage tax and excise tax (when for
example, said taxpayer is not a VAT-registered
person).
 On imported goods, the taxpayer will also be
required to pay VAT plus the excise tax on
the imported articles.
 There is no such thing as an excise tax on the
sale of services because the excise tax applies
to only the manufacture of goods and imported
goods. On the sale of services, we only
have VAT or Percentage Tax.
There are two (2) kinds of excise tax:
1. Specific – refers to those excise taxes imposed and
based on weight or volume capacity, or any other
physical unit of measurement
2. Ad Valorem – as the title suggests, it is based upon
the value of the goods which are subjected to excise tax.
When it is an excise tax, it is imposed upon a standard
weight of measurement, i.e. excise tax per kilo, excise
tax per box, excise tax per liter in the case of distilled
spirits, excise tax per pack of cigarettes, etc.
Who are liable to pay the excise tax?
It is imposed upon the manufacturer or the producer of
the goods. That is why under Sec. 130, it requires that
before the release of the goods from the place of
production, excise tax must first be paid. Every person
liable to pay excise tax imposed under this Title shall file
a separate return for each place of production setting
forth, among others the description and quantity or
volume of products to be removed, the applicable tax
base and the amount of tax due. Before goods
manufactured are released or removed from the place of
production, the excise tax must be paid.
In the case of excise tax on imported goods, before the
imported goods are released from the customs house,
the importer has to first pay for the excise tax and the
value added tax.
Should domestic products be removed from the place of
production without the payment of the tax, the owner or
person having possession thereof shall be liable for

the tax due thereon. Take note that as a general rule,
the tax thereon is paid supposedly by the
manufacturer or the producer but in case of such
goods being removed from the place of production
without payment of the corresponding taxes, then
whoever would be found to be in possession shall be the
ones liable to pay for the taxes due thereon.
Sec. 131. Payment of Excise Taxes on Imported
Articles -
(A) Persons Liable. - Excise taxes on imported articles
shall be paid by the owner or importer to the Custom
Officers, conformably with the regulations of the
Department of Finance and before the release of such
articles from the customs house, or by the person who is
found in possession of articles which are exempt from
excise taxes other than those legally entitled to
exemption.
In the case of tax-free articles brought or imported into the
Philippines by persons, entities, or agencies exempt from
tax which are subsequently sold, transferred or
exchanged in the Philippines to non-exempt persons or
entitles, the purchasers or recipients shall be considered
the importers thereof, and shall be liable for the duty and
internal revenue tax due on such importation.
The article basically considers the scenario wherein
there is an importation of goods subject to excise tax.
The owner/importer shall be held liable for the excise tax.
However, if that person is exempt from the payment of
excise tax, or that he transferred or sold goods
supposedly exempt to a non-exempt entity or taxpayer,
the latter shall be held liable for the excise tax on the
imported articles.
This is the similar rule for value-added tax on imported
items. When an imported item is brought into the
Philippines by an exempt entity, and then sold to a non-
exempt entity, the latter will then be subjected to the
value added tax.
The provision of any special or general law to the contrary
notwithstanding, the importation of cigars and cigarettes,
distilled spirits, fermented liquors and wines into the
Philippines, even if destined for tax and duty free shops,
shall be subject to all applicable taxes, duties, charges,
including excise taxes due thereon. This shall apply to
cigars and cigarettes, distilled spirits, fermented liquors
and wines brought directly into the duly chartered or
legislated freeports of the Subic Special Economic and
Freeport Zone, created under Republic Act No. 7227; the
Cagayan Special Economic Zone and Freeport, created
under Republic Act No. 7922; and the Zamboanga City
Special Economic Zone, created under Republic Act No.
7903,and such other freeports as may hereafter be
established or created by law: Provided, further, That
nothwithstanding the provisions of Republic Act Nos.
9400 and 9593, importations of cigars and cigarettes,
distilled spirits, fermented liquors and wines made directly
by a government-owned and operated duty-free shop, like
the Duty-Free Philippines (DFP), shall be exempted from
all applicable duties only.
LRVIOLET | 50
Taxation Review Notes 2018-2019
Provided, finally, That the removal and transfer of tax and
duty-free goods, products, machinery, equipment and other
similar articles other than cigars and cigarettes, distilled
spirits, fermented liquors and wines, from one freeport to
another freeport, shall not be deemed an introduction into
the Philippine customs territory.
Cigars and cigarettes, distilled spirits and wines within the
premises of all duty-free shops which are not labeled as
herein above required, as well as tax and duty-free articles
obtained from a duty free shop and subsequently found in a
non-duty-free shop to be offered for resale shall be
confiscated, and the perpetrator of such non-labeling or re-
selling shall be punishable under the applicable provisions
of this Code.
Articles confiscated shall de destroyed using the most
environmentally friendly method available in accordance
with the rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the
Commissioners of Customs and Internal Revenue.
The tax due on any such goods, products, machinery,
equipment or other similar articles shall constitute a lien on
the article itself, and such lien shall be superior to all other
charges or liens, irrespective of the possessor thereof.
(B) Rate and Basis of the Excise Tax on Imported
Articles. - Unless otherwise specified imported articles
shall be subject to the same rates and basis of excise taxes
applicable to locally manufactured articles.
What is importation?
When we speak of importation, it is the bringing in of
goods into the country from abroad. Importation is
deemed complete when the duties and taxes upon the
merchandise have been paid or secured to be paid at the
port of entry, and the legal permit to withdraw the goods
from the custom house has been granted. Otherwise if
no payment has been paid, these goods will be
considered to be smuggled. There is smuggling, and
articles confiscated shall be disposed of in accordance
with the rules and regulations promulgated by the Sec. of
Finance upon recommendation by the Commissioners of
Customs and Internal Revenue.
All imported articles, the excise tax of which shall be the
same rate and basis as the excise taxes applicable to
locally manufactured articles. Depending on the goods,
the rates are similar locally or imported.
What are some of the excise taxes?
1. Excise Tax on Distilled Spirits (Sec. 141) - the basis
is per proof liter. Spirits or distilled spirits is the
substance known as ethyl alcohol, ethanol or spirits of
wine, including all dilutions, purifications and mixtures
thereof, from whatever source, by whatever process
produced, and shall include whisky, brandy, rum, gin and
vodka, and other similar products or mixtures.

Proof spirits is liquor containing one-half (1/2) of its
volume of alcohol of a specific gravity of seven thousand
nine hundred and thirty-nine thousandths (0.7939) at
fifteen degrees centigrade (15˚C). A 'proof liter' means
a liter of proof spirits.
Distilled spirits include those which are produced from
the sap of nipa, coconut, cassava, camote, or buri palm
or from the juice, syrup or sugar of the cane, provided
such materials are produced commercially in the country.
2. Excise Tax on Wines (Sec. 142) – For wines, you
have sparkling wines, still wines, fortified wines.
3. Fermented Liquor (Sec. 143)
And all other excise taxes listed under said chapter.
Do not worry much about the rates because they will not
be asked. It will be more on giving a scenario with this
taxpayer engaged in a certain business, and what are
the taxes he is ought to pay. Example: If he is a
manufacturer of cigars, what taxes are he supposed to
pay?
Take note also of the changes under the TRAIN LAW,
there had been some for excise taxes. Some have been
increased, some have been exempt – that they need not
pay excise taxes anymore, and some have been
decreased.
4. Excise Tax on automobiles (Sec. 149)
Sec. 149 – Automobiles: There shall be levied, assessed
and collected an ad valorem tax on automobiles based on the
manufacturer's or importer's selling price, net of excise and
value-added tax, in accordance with the following schedule:
Net manufacturer's price/
importer's selling price RATE
Up to P 600,000 2%
Over P 600,000 to P 1.1 Million P 12,000 + 20%
of value in
excess of
P600,000
Over P1.1 Million to P 2.1 Million P 112,000 + 40%
of value in
excess of P 1.1
Million
Over P 2.1 Million P 512,000 + 60%
of value
excess of P 2.1
Million
Provided, That the brackets reflecting the manufacturer's
price or importer's selling price, net of excise and value
added-taxes, will be indexed by the Secretary of Finance
once every two years if the change in the exchange rate of
the Philippine peso against the United States (U.S) dollar is
more ten percent (10%) from the date of effectivity of this Act,
in the case of initial adjustments and from the last revision
date in the case of subsequent adjustments.
LRVIOLET | 51
Taxation Review Notes 2018-2019
Excise tax on automobiles is an ad valorem tax
because it is based on the price of the automobile.
Among the excise taxes mentioned, the excise tax on the
automobile is an ad valorem. All the others are specific
because they are based on rates and measures of unit.
5. Excise tax on non-essential goods (Sec. 150):
What are considered to be non-essential goods?
1. All goods commonly or commercially known as
jewelry, whether real or imitation, pearls, precious and
semi-precious stones and imitations thereof; goods
made of, or ornamented, mounted or fitted with, precious
metals or imitations thereof or ivory (not including
surgical and dental instruments, silver-plated wares,
frames or mountings for spectacles or eyeglasses, and
dental gold or gold alloys and other precious metals used
in filling, mounting or fitting the teeth); opera glasses and
lorgnettes. The term 'precious metals' shall include
platinum, gold, silver and other metals of similar or
greater value. The term 'imitations thereof' shall include
platings and alloys of such metals;
2. Perfumes and toilet waters;
3. Yachts and other vessels intended for pleasure or
sports.
This is also ad valorem because it is based on the price
or value of importation.
DOCUMENTARY STAMP TAXES
Documentary Stamp Tax (DST) is a tax on documents,
instruments and papers evidencing acceptance,
assignments, sale and transfer of an obligation, right or
property. There is a need to affix the documentary stamp
on documents which will evidence transfer of property,
i.e. a deed of sale or a mortgage, because it will
evidence a transfer of the obligation, right or property.
A DST is also an excise tax, and the purpose of which
is to raise revenue. The documentary stamp is affixed to
the taxable document at the time the document was
issued or executed. The liability for an instrument to
stamp tax in the amount of tax is determined by the form
and face thereof and cannot be affected by proof of facts
in
outside of the instrument itself.
What is the effect if you do not pay the documentary
stamp tax of a document supposedly subjected to
DST?
Sec. 201 states that an instrument, document or paper
which is required by law to be stamped and which has

been signed, issued, accepted or transferred without
being duly stamped, shall not be recorded, nor shall it or
any copy thereof or any record of transfer of the same be
admitted or used in evidence in any court until the
requisite stamp or stamps are affixed thereto and
cancelled.
Under the provision, the failure to pay the DST will NOT
affect the VALIDITY OF THE INSTRUMENT, but then if
that document is presented in court, the same will not be
admitted or it could be admitted, subject to the
payment of the DST. Or, it is a deed of sale for
example; the Register of Deeds will not register the sale
if and when the DST is not paid.
No notary public or other office authorized to administer
oaths shall add this jurat or acknowledgment to any
document subject to documentary stamp tax unless the
proper documentary stamps are affixed thereto and
cancelled.
DST may either be affixed with the documentary
stamp itself, equivalent to the amount of the DST paid.
If you need 1,000 documentary stamp tax, you have to
buy documentary stamps worth 1,000 pesos. Affix that
1,000 pesos worth documentary stamp on the document.
OR, we have a documentary stamp metering
machine. A stamp metering machine is available at the
post office, when you mail something; you can buy a
postage stamp and paste it on the letter, or you can just
enter it through a metering machine.
The same is true with a DST. It is either affixing the
documentary stamp itself or the BIR may just enter the
instrument into a metering machine, especially if it is a
very big amount, for it to manifest the amount paid as a
DST.
The case of Philippine Bank of Communications vs.
CIR pertains to the DST metering machine. The SC held
that when one purchases documentary stamp tax and
this taxpayer maintains a metering machine, whatever is
purchased is an advance payment to be used in a later
date when instrument is to be issued or executed. The
problem here is PBC issued repurchased agreements
which are tax-exempt. They made a mistake and
imposed a DST. They later found out that these
agreements were tax-exempt from DST. They now
sought refund or tax credit of the amount which has been
wrongly paid.
The issue is when to reckon the 2-year period (for the
refund). According to the CTA, from the time the
LRVIOLET | 52
Taxation Review Notes 2018-2019
payment of the DST for reloading to the metering
machine should the reckoning period. Supreme Court
disagreed and said that the liability to pay DST is of the
time when there is execution issuance or signing of the
document. The reckoning date, therefore, to be
considered as payment, is when the repurchase
agreement has been executed. In this case, the Court
allowed the refund to PB of Communications.
Otherwise, if the basis of counting the two year period
had been at the time when the documentary stamp tax
has been purchased and declared, that period would
have lapsed and therefore they will no longer be entitled
to the refund.
CIR vs. PNB is on call loans and whether or not they are
subject to DST. The SC ruled in this case that they are
not. An Interbank Call Loan (ICL) refers to the cost of
borrowings from other resident banks and non-bank
financial institutions with quasi-banking authority that is
payable on call or demand. It is transacted primarily to
correct a bank's reserve requirements. It does not fall
under the definition of a loan agreement. Even if it does,
the DST liability under Section 180 will only attach if the
loan agreement was signed abroad but the object of the
contract is located or used in the Philippines, which was
not the case in regard to PNB' s ICLs.
LOCAL GOVERNMENT TAXATION
Local taxation is one of the delegated powers of
Congress. There are two (2) instances wherein
Congress may delegate the exercise of the power of
taxation.
1. Delegation to the president – wherein the president
may adjust tariff rates and customs duties whenever
necessary under the Customs and Tariff Code.
2. Delegation to the LGU
Unlike the exercise of the power of taxation by Congress
which is inherent in the State, exercise of taxation by the
LGU is a delegated power. Under the 1987 Constitution,
Art. 10, Sec. 5 provides that each local government unit
shall have the power to create their own sources of
revenue and to levy taxes, fees, and charges subject to
such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.

In the Local Government Code (LGC) there is a similar
provision allowing LGUs the power to create sources of
revenue and to levy taxes.
Sec. 129 of the LGC states that each local government
unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to
the provisions herein, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall
accrue exclusively to the local government units.
What is the relationship between the provision of the
1987 Constitution allowing LGUs the power to create
their own sources of revenue and the provision
under the LGC Sec. 129 which provides that LGU in
the exercise of taxation shall create its own sources
of revenue?
The provision of the Constitution allowing LGUs to
exercise the power of taxation is not self-executing. It still
requires a law in order for local government units to
exercise the power of taxation. That is what the LGC is
for, which will serve as the guidelines or standards in the
exercise by the LGUs of the power of taxation.
If you recall in your Constitution law, in order to have a
valid delegation of power, it requires that Congress must
set forth standards/guidelines. That is why it has to come
up with the LGC which includes the power of taxation.
Kinds of LGUs:
1. Province
2. Cities – have the greatest taxing power
3. Municipalities
4. Barangays – have the least taxing power
Cities have the greatest taxing power because they
could exercise or impose taxes which are imposed by
provinces and municipalities. There are also taxes which
are imposed by cities and municipalities which cannot be
imposed by the provinces.
The exercise of taxation begins with the enactment of a
local tax ordinance. Similarly, in Congress you have bills
for purposes of taxation: the Senate will adopt the bill,
amend the bill or modify the bill on taxation. For LGU, the
exercise of the power is thru the enactment of a tax
ordinance.
How is a tax ordinance enacted?
It starts with sponsorship. Somebody should sponsor the
birth of the tax ordinance. From there, it will be referred
to a committee who will discuss and deliberate on the
LRVIOLET | 53
Taxation Review Notes 2018-2019
proposal to come up with a tax ordinance. In the
deliberation of the tax ordinance while it is with the
committee, it is important that there should be a
consultation with the public otherwise without the
required consultation there can be no valid tax
ordinance. From there, it will be presented to the plenary,
to be deliberated upon and then when it is approved,
voting shall take place.
Within ten (10) days after their approval, certified true
copies of all provincial, city, and municipal tax
ordinances or revenue shall be published in full for three
consecutive days in a newspaper of general/local
circulation.
Copies of all provincial, city, and municipal and barangay
tax ordinances and revenue measures shall be furnished
the respective local treasurers for public dissemination.
Public hearings are important in the enactment of
local tax ordinance; without them, the tax ordinance
implemented is not valid. Sec. 187 of the LGC
provides that there must be the conduct of a mandatory
public hearing.
If one questions the validity or constitutionality of a
tax ordinance, where will the taxpayer go?
To question the validity or constitutionality of a new tax
ordinance, the taxpayer has to file his protest or appeal
with the Department of Justice. If the DOJ would
decide that the local tax ordinance is unconstitutional,
then it is for the Local Sanggunian, to appeal the same to
the regular courts.
In the exercise of local taxation, discussion must be
made on the principle of pre-emption, double taxation
and the exclusionary rule.
What is double taxation? What is the relation of
double taxation to the exclusionary rule/the principle
of pre-emption in local taxation?
In the Constitution, there is no express prohibition
against double taxation. Although the Constitution
provides for some limitations in the exercise of taxation,
this does not include double taxation.
Jurisprudence would tell us however, that there are
instances where double taxation is discouraged. Under
what instance is double taxation frowned upon or is
not allowed?
What is frowned upon is DIRECT DOUBLE TAXATION
– wherein it exists where the same property is taxed

twice when it should be taxed once, or the same person
is taxed twice by the same jurisdiction for the same
reason, by the same taxing authority.
If there is taxing twice of a similar object/property, but the
taxing authorities are different, this is INDIRECT
DOUBLE TAXATION, which is allowed.
That is why you will notice that the LGC taxes taxpayers
on certain taxes that are also made to be taxable under
the NIRC.
EXAMPLE: On percentage taxes, we have the
franchise tax that is being imposed under the
NIRC and we also have a franchise tax under
LGC to be imposed by the province.
We also have the amusement tax under the
LGC imposed by the LGUs and an amusement
tax under the NIRC.
Is there double taxation in these examples?
YES, but it is merely indirect double taxation
which is not prohibited.
The principle of exclusionary rule/right of pre-
emption therefore applies wherein the National
Government elects to impose a particular tax on a
particular subject to the exclusion of local government
units. That would lead us to the common limitations
under the Local Government Code.
Because of the exclusionary rule, LGUs (Provinces,
Cities, Municipalities and Barangays) may tax on some
taxpayers/subjects but there are certain kinds of taxes
which are exclusive only to the national government.
These excluded impositions from LGUs are the
following:
1. Income Tax – LGUs do not impose Income
Tax
2. Documentary Stamp Tax
3. Estate/Donor‟s Taxes – Gift taxes included
4. Customs Duties, Fees and Charges
5. Value Added Tax
6. Percentage Tax
7. Excise Tax
8. Taxes, fees and charges of motor vehicles
9. Taxes, fees and charges on agricultural and
aquatic products that are sold by marginal
famers and fishermen.
And many more.
They are taxes considered to be imposed by the national
government and collected by the national government to
the exclusion of local government units. They are
LRVIOLET | 54
Taxation Review Notes 2018-2019
referred to as COMMON LIMITATIONS. They are
COMMON in a sense that no local government unit can
impose any of the above mentioned kinds of taxes.
Basically they are just:
a. Taxes which are levied under the NIRC
b. Taxes which are levied and imposed by
Customs and Tariff Code
c. Taxes, fees and charges where the
imposition of which contravenes existing
governmental policies
d. Taxes, fees and charges imposed under
special laws (e.g. Land Transportation Office,
which imposes the Motor Vehicle Registration
Rules)
FUNDAMENTAL PRINCIPLES IN LOCAL TAXATION
(Sec. 131, LGC):
(1) Taxation shall be uniform in each local government
unit;
(2) Taxes, fees, charges and other impositions shall:
(a) be equitable and based as far as
practicable on the taxpayer's ability to pay;
(b) be levied and collected only for public
purposes;
(c) not be adjust, excessive, oppressive, or
confiscatory;
(d) not be contrary to law, public policy,
national economic policy, or in restraint of
trade;
(3) The collection of local taxes, fees, charges and other
impositions shall in no case be let to any private person;
- if it is for a public purpose, it should be
imposed by the LGU; private person must not
be allowed to collect the tax.
(4) The revenue collected pursuant to the provisions of
this Code shall inure solely to the benefit of, and be
subject to disposition by, the local government unit
levying the tax, fee, charge or other imposition unless
otherwise specifically provided herein;
- You will notice that there are taxes imposed
by the province which the cities do not impose.
There are also taxes which are imposed by the
province that municipalities do not impose.
- As a general rule, according to the principle,
the amount/revenue collected must inure to the
benefit of the LGU which imposed and
collected such tax as amount/revenue.

- EXCEPTION: unless otherwise provided in
the Local Government Code
EXAMPLE: Tax on Sand and Gravel is
imposed by the Province. Who will approve the
concession for sand and gravel tax? It is the
Sanggunian of the Province. Who will collect
and impose? It is the Province.
But, the amount collected by the Province, is
not exclusive for the province. WHY?
If you notice where the quarrying occurs, or
where the digging occurs, the local
government who is proximately and closely
affected thereby is the barangay. Thus, the tax
collected by the Province from such
concession will be shared among the province,
municipalities, cities, and the barangays, the
barangay receiving the most from this sharing.
ANOTHER EXAMPLE: Residence/Community
Tax. Before, the Community Tax was a
national tax but it was transferred to the local
government units. The city and municipality
collect the community tax. However, this
proceeds/collection is shared with the national
government. WHY? Because, the printing of
the community tax certificate is being made by
the national government through the Bureau of
Revenue (not sure if „revenue‟, voice was very
very small, sorry).
These are the exceptions to the rule that whenever a
LGU collects tax as revenue it solely inures only to the
benefit of the LGU who collected the same.
(5) Each local government unit shall, as far as
practicable, evolve a progressive system of taxation.
What is progressive system of taxation?
The Constitution provides for a progressive system of
taxation. Do not confuse this with a progressive tax. A
progressive tax is different from a progressive system of
taxation. The principle “when the tax base increases, the
tax rate also increases” is what you refer to as a
progressive tax (e.g. income tax).
Progressive system of taxation is that system wherein
there are more direct taxes than indirect taxes.
Indirect taxes are easily shifted by the person upon
whom it is imposed, to the ultimate consumer or to
another taxpayer. This is what is meant by a
progressive system of taxation. And since we are not
LRVIOLET | 55
Taxation Review Notes 2018-2019
like the United States, wherein they can afford a
regressive system of taxation, even though they impose
more indirect than direct taxes, they are able to afford
the same. In our country, it is different.
Whoever the tax is imposed upon, he is obligated to
pay for it. Do not confuse yourself with the progressive
tax from a progressive system of taxation.
Those taxes which are imposed by the Province are
the following: (Sec. 135-141, LGC)
1. Tax on transfer of real property ownership
- This is different from donor‟s tax or the
estate tax, but refers to a tax on the sale,
exchange, barter or any mode of
transferring ownership that deals with real
property. If the property transferred is
personal property, there is no tax under
this kind.
Unlike in succession, unlike in donation, you
can subject to donor‟s tax if what you are
donating is money or jewelry or estate tax, as
the case may be. But under the local
government code, if it is real property, the tax
therein is the transfer of real property.
„Transfer‟ involves sale or donation and other
mode of transferring ownership or title – this
will actually also include your mortgage and
your sale with right to repurchase.
- Rate of tax is 50% of 1% of the
consideration.
- Transfer tax is payable within 60 days
from date of execution of the date, or in
case of inheritance, from the decedent‟s
death.
- If it is real property, and there is no
payment of the transfer tax under the
LGC, the register of deeds will not record
nor register nor transfer the property in
your name.
- This is similar to the estate tax. If the
estate tax is not paid within the period
required by law, the register of deeds
cannot transfer the inheritance. The BIR
will not allow the transfer of the property.
2. Tax on business of printing and publication
(Printer’s or publisher’s tax)
- Printing press or publishers are the ones
liable to this kind of tax.
 Taxation Review Notes 2018-2019

- It is a tax on the business of persons

engaged in the printing and/or publication
of books, cards, posters, leaflets,
handbills, certificates, receipts,
pamphlets, and other of similar nature, at
a rate not exceeding fifty percent (50%)
of one percent (1%) of the gross annual
receipts for the preceding calendar year.

What happens here? You may have noticed

that this tax is imposed by the Province. So for
example, if the taxpayer is situated within the
city, may the printer‟s or publisher‟s tax be
imposed by the city? YES. But the Province
can no longer impose.

Take Note: The City is allowed to impose taxes

which are imposable by the either the Province
or the Municipality. Whatever may be
imposable by the either the province or the
municipality, the city can impose the same.

For printing press/publishing establishments

located outside the city or it is within a
municipality, like Palo, for example, who will
impose the tax? It will be the province,
because the municipality cannot impose a
printer‟s or publisher‟s tax. Notice the varying
difference between the encompassing
authority of the city to impose as opposed to
that of a municipality.

3. Franchise Tax
4. Tax on Sand and Gravel and other Quarry
resources
5. Professional Tax
6. Amusement Tax
7. Annual Fixed Tax for every delivery truck or
van of manufacturers or producers,
wholesalers of, dealers, or retailers in, certain
products.

LRVIOLET | 56