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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN

INTRODUCTORY LECTURE o Police Power –

o Eminent Domain –
« VAT
o VAT is not inflationary. b. Amount of exaction, if any
o Unlike sales tax that has a cascading o Taxation – amount or rate must be clear
effect (tax upon tax à tax component of in the law. This determination is within
selling price is subjected to tax), VAT has the exclusive competence of Congress or
no tax cascade. the Legislature.
§ Cf. Sec. 106, NIRC: Gross o Police Power – only regulatory fees,
selling price – “excluding which must be minimal (or just enough
VAT”- base of VAT at 12% to cover expenses of regulation)
rate o Eminent Domain – no exaction but just
§ Unlike in sales tax, only the compensation
value that is added is subject to
VAT. c. Benefits received by the citizenry
o VAT does not distinguish between types o T – cost of living in a civilized society
of commodities. It imposes the same rate (e.g., for infrastructure)
for all goods. o PP – orderly society
§ Equal opportunities for o ED – for a public purpose (plus just
businessmen. compensation)
§ Therefore, the price of goods
and services will be influenced d. As to relationship with the non-impairment
only by the law of supply and clause
demand. o T – inferior to the NIC, unlike PP and
o VAT forces all business people to be ED, but only when one of the
honest, as such people have to issue VAT contracting parties is the Government.
invoice and reflect them on their ITRs. § E.g., public borrowings of the
Government
I. GENERAL PRINCIPLES OF TAXATION § When the Government enters
into contracts with private
A. Definition and concept of taxation individuals, it stoops down to
the level of that individual,
Characteristics or Scope of Taxation therefore, it cannot renege on
its obligations.
a. Unlimited – can cover any subject or object which o All contracts are subject to the (silent)
Congress deems wise to tax condition that they will not prevail over
b. Comprehensive – covers rights, privileges, any changes in the law, even if it would
persons, corporations, businesses, professions, etc. impose more burdensome obligations on
o Note: Only cities and provinces, and one party.
municipalities within Metro Manila
(Pateros), can impose RPT e. As to scope
c. Plenary power – complete process from levy to o Taxation – supreme (everything that
assessment to collection to payment Congress deems wise to tax, therefore,
d. Supreme over the other inherent powers of the the power to destroy notion)
Government – only insofar as selection of subject o Police Power – subjects only legal
is concerned. businesses or activities
o Eminent Domain –
B. Power of taxation compared with other inherent powers
C. Source of the power to tax
Similarities between three inherent powers a. National government – an inherent
a. Inherent in the government power of the sovereign government
b. Legislative i. Constitutional provisions
relating to the power of taxation
Distinctions do not operate as grants of the
a. Purpose power to the Government, but
o Taxation – to provide government with instead, merely constitute
operational fund, or to raise revenues limitations upon a power which
 SPECIAL PROBLEMS IN TAXATION | PROF. E.R. ABELLA
would otherwise be without
limit.
b. LGUs – have taxing powers only by
virtue of a direct constitutional grant
(1987 Constitution, Art. X)
D. Basis of the power to tax
« Necessity theory
« Benefits-protection theory (Symbiotic relationship)
E. Purpose or objective of taxation
Primary Purpose of Taxation
« Raise revenues for the Government
Secondary Purposes of Taxation
a. Promotion of the general welfare (e.g., Araneta
case – sugar industry is a national concern)
b. Regulation (e.g., sin tax – to regulate consumption)
c. Reduction of social inequality (mandate of
Congress to evolve as progressive system of
taxation à progressive rates)
d. Encourage economic growth (e.g., income tax
holiday)
e. Protectionism – protect local industries from
foreign competition
i. Protective tariff
a. For agricultural products, by the DA
Secretary, upon recommendation of
the Commissioner of Customs.
b. For non-agri, by the DTI Secretary,
upon recommendation of the
Commissioner of Customs.
ii. Even VAT
a. Exports are 0%.
b. Imports 12% (even if for personal
use)
c. Destination principle (cross-border)
F. Stages, steps, processes of phases of taxation
a. Levy – act of the Legislature of enacting
law
b. Assessment – determination of tax
liability. It is an act of the Executive
Department through the BIR.
« Note: Income tax is
through self-assessment.
Pay-as-you-file system.
However, it is still subject
to audit (deficiency taxes).
c. Collection – not the voluntary act of
paying tax liability, therefore, not equal to
payment. Collection is simply an act of
enforcement, if taxpayer can’t or won’t
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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
pay. It can be done through distraint (for
PP), garnishment (for bank accounts),
and levy (for RP).
« Note: If there is no bidder
in an auction after levy of
RP, the property shall be
forfeited to the
Government.
d. Payment – the voluntary act of
extinguishing tax liability. This culminates
the process. It is not an admission of the
validity of the assessment, as the taxpayer
can later file a claim for refund, or
exercise other remedies available to him
against the tax assessment.
G. Basic principles of a sound tax system
a. Fiscal adequacy
b. Administrative feasibility
i. Violated when a tax law requires
that the payment of taxes be in
kind.
c. Theoretical justice
i. Founded on the ability-to-pay
principle
« A deficit in tax collection is not in accord with
a sound tax system because the Government
will have no sufficient funds to deliver the
basic services to the people.
« What is the relationship between regressive
taxes and the principle of theoretical justice?
o Regressive taxes tend to impose more
burden on those who do not have the
ability to pay, hence, it violates the ability-
to-pay principle which is the foundation
of theoretical justice.
« The Constitution does not prohibit the
imposition of regressive taxes. What it provides
is simply to evolve a progressive system of
taxation. [PAL v. Secretary of Finance, et al., G.R.
No. 115852, October 30, 1995)
H. Definition and characteristics of taxes
Taxes – enforced proportional contributions from
persons and property levied by the law-making
body of the State by virtue of its sovereignty for
the support of the government and for public
needs
Characteristics:
a. Forced charge
b. Generally payable in money
c. Levied by the legislative body

d. Assessed in accordance with some
reasonable rule of apportionment
(observance of ability-to-pay principle)
e. It must be imposed within jurisdiction of
the State
f. It is levied for public purpose.
I. Tax vis-à-vis other forms of exactions
a. Tariff – taxes on exports and imports
b. Toll –
c. License fee –
d. Special assessment –
e. Debt
o A tax is not a debt because it is an
obligation solely imposed by law; while a
debt is an obligation created by contract,
express or implied.
J. Classification of taxes
Direct v. indirect taxes
« Direct tax is demanded from the very person who,
as intended, should pay the tax which he cannot
shift to another. Examples: income tax, donor’s
tax, estate tax [Maceda v. Macaraig, 223 SCRA 217]
« Indirect tax is demanded in the first instance from
one person with the expectation that can shift the
burden to someone else, not as a tax but as part of
the purchase price. Examples: VAT, DST, excise
tax on certain products, percentage tax [Maceda v.
Macaraig, 223 SCRA 217]
Ad-valorem v. specific taxes
K. Limitations on the power to tax
Inherent Limitations
a. Public purpose – The test of public purpose
are:
i. Whether the object to be furthered
by the appropriation of public
revenue is something which is the
duty of the Government to provide;
and
ii. Whether the proceeds of the tax will
directly promote the welfare of the
community in equal measure
b. Non-delegability of the power to tax
i. Principle of potestas delegata non
potest delegare
ii. Exceptions
c. Territoriality or situs of taxation
i. Multiplicity of tax situs
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d. Exemption of the Government from taxes
e. International comity
Constitutional Limitations
a. Due process clause, whether it be substantial
or procedural
i. Sec. 1, Art. III
b. Equal protection of the laws
i. Sec. 1, Art. III
« The tax law should be applied with equal force and
effect to persons, articles and properties belonging
to the same class.
« Singling out one class for taxation purposes does
not contravene the EP clause because singling out
one taxpayer belonging to a class will run counter
to the requirements of the fundamental law.
« Classification is permitted if:
i. The standards used therefor are not
arbitrary but are reasonable and
substantial;
ii. The classification is germane to
achieve the purpose of the
legislation;
iii. That classification applies to both
present and future conditions, other
circumstances being equal; and
iv. The classification applies equally to
all those belonging to the same class.
[Pepsi Cola v. City of Butuan, 24 SCRA
3]
« A tax on an “installation manager” is not
discriminatory just because at the time said tax was
imposed, there was no other person in the locality
who exercised such occupation. [Shell Co. of P.I.,
Ltd. v. Vano, etc., 94 Phil. 987]
« A tax ordinance levied on export tax on centrifugal
sugar milled by Ormoc Sugar Central, mentioning
only this company name. Although Ormoc Sigar
Central was the only sugar central existing at that
time, the ordinance is defective because even if a
similar company is later set up, it cannot be subject
to the tax levied by the ordinance. [Ormoc Sugar
Central v. Treasurer of Ormoc City, L-23794, February
17, 1968]
c. Freedom of speech and of the press
i. Sec. 4, Art. III
d. Non-infringement of religious freedom and
worship
i. Sec. 5, Art. III
e. Non-impairment of contracts
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i. Sec. 10, Art. III e. Contractual

f. Partial
f. Non-imprisonment for debt or non-payment g. Total
of poll tax
i. Sec. 20, Art. III M. Double taxation
ii. If a taxpayer fails or refuses to pay
income tax and a criminal action is Double taxation (direct duplicate taxation) – means taxing
filed against him, can he not raise as for the same tax period the same thing or activity twice,
a defense this constitutional when it should be taxed but once, for the same purpose and
provision? No. with the same kind or character of tax.

g. Rule requiring that appropriations, revenue Direct duplicate taxation – a prohibitive type of double
and tariff bills shall originate exclusively from taxation, also called obnoxious double taxation, for being
the House of Representatives violative of the rule on uniformity in taxation.
i. Sec. 24, Art. VI
Indirect duplicate taxation – It is allowed, and it will not
h. Uniformity, equitability and progressivity of invalidate a tax measure on the ground that there is double
taxation taxation. It is also called permissive double taxation.
i. Sec. 28(1), Art. VI [Villanueva v. City of Iloilo, L-26251, December 28, 1968]

i. Limitations on the congressional power to N. Forms of escape from taxation; Tax avoidance and tax
delegate to the President the authority to fix evasion
tariff rates, import and export quotas, etc.
i. Sec. 28(2), Art. VI Elements of tax evasion
a. Payment of an amount of tax that is less than
j. Tax exemption of properties actually, directly what is known by the taxpayer to be legally
and exclusively used for religious, charitable due;
and educational purposes b. An accompanying state of mind which is evil,
i. Sec. 28(3), Art. VI in bad faith, deliberate and not merely
accidental; and
k. Voting requirement in connection with the c. A cause of action or failure of action which is
legislative grant of tax exemption unlawful. [CIR v. Benigno Toda, Jr., 438 SCRA
i. Sec. 28(4), Art. VI 290]

l. Non-impairment of the jurisdiction of the O. Powers and duties of the Commissioner of Internal Revenue
Supreme Court in tax cases
i. Sec. 2, Art. VIII a. Interpret provisions of the NIRC and other
ii. Sec. 5, Art. VIII tax laws subject to review of the Secretary of
Finance (Sec. 4)
m. Exemption from taxes of the revenues and b. Decide tax cases (Sec. 4)
assets of educational institutions, including i. Disputed assessments
grants, endowments, donations and ii. Refunds of internal revenue taxes,
contributions fees and charges
i. Sec. 4(3) and (4), Art. XIV iii. Penalties imposed in relation thereto
iv. Other matters arising from the
L. Tax exemption NIRC or other laws or portions
thereof administered by the BIR
« It is a grant of immunity, express or implied, subject to the exclusive appellate
to particular persons or corporations from the jurisdiction of the CTA
obligation to pay taxes.
c. Obtain information, and to summon/
Kinds of tax exemption: examine, and take testimony of persons (Sec.
a. Constitutional 5)
a. Statutory d. Make assessments and prescribe additional
b. Express requirements for tax administration and
c. Implied enforcement – supplements the self-
d. Unilateral assessment system (Sec. 6)

e. Conduct inventory-taking, surveillance and to
prescribe presumptive gross sales and receipts
f. Prescribe real property values
g. Inquire into bank deposit accounts
« International Double Taxation (Income Tax)
o Resident Citizens
o Domestic Corporations
à Both are taxed on income sourced
within and without the Philippines
« Remedies
1. __
2. Reciprocal Exception (under tax treaties)
3. Reduced tax rates (principle of
reciprocity)
§ E.g., dividends received by a
non-resident corporation (Sec.
28, NIRC)
II. NATIONAL INTERNAL REVENUE CODE
OF 1997, AS AMENDED (NIRC)
A. INCOME TAXATION
- Tax on income, whether gross or net
- Not everything received by a taxpayer during a
taxable year is income. What he may have received
is only capital.
WHAT IS AN INCOME?
« Income may be defined as the gain defined from
capital, from labor, or from both combined,
provided it is understood to include profit gained
through a sale or conversion of capital assets.
[Doyle v. Mitchell, 247 US 179]
o Capital Asset (Sec. 29) – property of a
taxpayer, whether or not… When you are
selling capital asset, you are not
employing capital. Because capital asset is
an investment.
o Versus ordinary assets: When selling
ordinary assets, you are employing capital
to gain income therefrom.
« Income is any wealth that flows into the taxpayer
other than a mere return of capital. [Fisher v.
Trinidad, 43 Phil. 973]
« Income is wealth that is accumulated over a period
of time.
o Element of “periodicity” is always there.
Calendar year or fiscal year accounting
periods.
o Calendar year – any 12-month period
ending Dec. 31
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o Fiscal year – any 12-month period ending
on any month other than Dec.
WHEN IS AN INCOME TAXABLE?
« 3 requirements:
o There has to be a closed and completed
transaction à REALIZATION
o Gain or profit is derived therefrom à
REALIZATION
o There is no law which excludes it from
taxation à RECOGNITION
« An income to be taxable must be BOTH realized
AND recognized.
« An increase in the value of an investment is not a
realized gain, hence, not subject to income tax.
[FDC v. CIR, 2011]
« An interest cannot be imputed in a loan where the
parties did not provide for interest. There must be
real income before the CIR is allowed to allocate
the same.
« Enhancement of control in a controlled
corporation is still tax-free.
« Distinction between realization and
recognition
o Realization is broader. Not all realized
income is recognized, but all recognized
income is realized.
o Realization always comes first.
« Who makes the recognition? Congress. You find
it in the law.
o The basic rule is: If an income is realized,
and there is no law excluding it from
taxation, then it is taxable.
o Recognition is always presumed.
TESTS OF TAXABILITY OF INCOME
« Flow of Wealth Test – gain derived from capital
« Realization Test – closed and completed
transaction
« Economic-Benefit Principle
« Recognition Principle
WHEN IS AN INCOME REALIZED? (DOCTRINES
OF REALIZATION)
1. Severance Test: An income is not realized until
the fruit is plucked from the tree. The gain must be
severed from the capital.
REVENUE REGULATIONS NO. 02-40
SECTION 49. Improvements by lessees. — When buildings
are erected or improvements made by a lessee in pursuance of
an agreement with the lessor, and such buildings or

improvements are not subject to removal by the lessee, the
lessor may at his option report the income therefrom upon
either of the following bases;
(a) The lessor may report as income at the time when such
buildings or improvements are completed the fair market value
of such buildings or improvements subject to the lease.
(b) The lessor may spread over the life of the lease the
estimated depreciated value of such buildings or improvements
at the termination of the lease and report as income for each
year of the lease an aliquot part thereof.
If for any other reason than a bona fide purchase from the
lessee by the lessor the lease is terminated, so that the lessor
comes into possession or control of the property prior to the
time originally fixed for the termination of the lease, the lessor
receives additional income for the year in which the lease is so
terminated to the extent that the value of such buildings or
improvements when he became entitled to such possession
exceeds the amount already reported as income on account of
the erection of such buildings or improvements. No
appreciation in value due to causes other than the premature
termination of the lease shall be included. Conversely, if the
building or improvements are destroyed prior to the expiration
of the lease, the lessor is entitled to deduct as a loss for the year
when such destruction takes place the amount previously
reported as income because of the erection of such buildings or
improvements, less any salvage value subject to the lease to the
extent that such loss was not compensated for by insurance. If
the buildings or improvements destroyed were acquired prior
to March 1, 1913, the deduction shall be based on the cost or
the value subject to the lease to the extent that such loss was
not compensated for by insurance.
• Is there an instance when stock dividends
become a realized gain subject to income
tax? Fisher v. Trinidad
o Yes. When there is a change in
the ownership interests of the
shareholder. But this merely an
EXCEPTION.
o For example, when there is an
option to avail of cash dividends
or property, instead of stock
dividends, and some
shareholders availed of that
option. ALL of them will be
subject to income tax, not only
those who received cash
dividends or property, because
there is a change in ownership
interests (equivalent to cash).
The withholding agent is legally
liable to pay for the tax
(withhold 10%).
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2. Claim of right doctrine: If a taxpayer during a
taxable year received something of value and legal
or equitable title thereon, and you appropriated it
as your own. (Therefore, windfalls are taxable, e.g.,
if you found something on the street.) You are
required to declare that in your ITR.
• Commissioner v. Javier
• See Sec. 32B à Exclusions from Gross
Income à #3. Gifts, Bequests, and
Devises
3. Doctrine of Involuntary Conversion of
Property
• Forfeiture, confiscation, etc., and the
proceeds is used to acquire a like-kind
property, then it is not taxable à there is
continuity of ownership as if there was
no gain realized. Also not taxable if
exchange from one residential lot to
another residential lot.
• Sale or conversion à there is no law
excluding it (insurance proceeds from
warehouse that burned down)
4. Equivalent of cash doctrine
• If services are paid in kind (e.g., jewelry).
Or stock dividends acquired during a
transaction that resulted in a change of
ownership interests of shareholders.
• For as long as what is received is
measurable in money or money’s worth.
Not love and affection!
• See Sec. 32
MEASUREMENT OF GAIN OR LOSS IN A SALE
OR EXCHANGE
NATIONAL INTERNAL REVENUE CODE
Section 40. Determination of Amount and Recognition of
Gain or Loss. -
(A) Computation of Gain or Loss. - The gain from the sale or other
disposition of property shall be the excess of the amount
realized therefrom over the basis or adjusted basis for
determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized.
The amount realized from the sale or other disposition of
property shall be the sum of money received plus the fair
market value of the property (other than money) received;
(B) Basis for Determining Gain or Loss from Sale or Disposition of
Property. - The basis of property shall be -
(1) The cost thereof in the case of property acquired on or after
March 1, 1913, if such property was acquired by purchase; or
(2) The fair market price or value as of the date of acquisition,
if the same was acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the

same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except
that if such basis is greater than the fair market value of the
property at the time of the gift then, for the purpose of
determining loss, the basis shall be such fair market value; or
(4) If the property was acquired for less than an adequate
consideration in money or money's worth, the basis of such
property is the amount paid by the transferee for the property;
or
(5) The basis as defined in paragraph (C)(5) of this Section, if
the property was acquired in a transaction where gain or loss is
not recognized under paragraph (C)(2) of this Section.
(C) Exchange of Property. -
(1) General Rule. - Except as herein provided, upon the sale or
exchange or property, the entire amount of the gain or loss, as
the case may be, shall be recognized.
(2) Exception. - No gain or loss shall be recognized if in
pursuance of a plan of merger or consolidation -
a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in
a corporation, which is a party to the merger or
consolidation; or
b) A shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to
the merger or consolidation; or
c) A security holder of a corporation, which is a party to
the merger or consolidation, exchanges his securities
in such corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for stock
or unit of participation in such a corporation of which as a
result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for services shall not
be considered as issued in return for property.
(3) Exchange Not Solely in Kind. -
a) If, in connection with an exchange described in the
above exceptions, an individual, a shareholder, a
security holder or a corporation receives not only
stock or securities permitted to be received without
the recognition of gain or loss, but also money
and/or property, the gain, if any, but not the loss,
shall be recognized but in an amount not in excess of
the sum of the money and fair market value of such
other property received: Provided, That as to the
shareholder, if the money and/or other property
received has the effect of a distribution of a taxable
dividend, there shall be taxed as dividend to the
shareholder an amount of the gain recognized not in
excess of his proportionate share of the undistributed
earnings and profits of the corporation; the
remainder, if any, of the gain recognized shall be
treated as a capital gain.
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b) If, in connection with the exchange described in the
above exceptions, the transferor corporation receives
not only stock permitted to be received without the
recognition of gain or loss but also money and/or
other property, then (i) if the corporation receiving
such money and/or other property distributes it in
pursuance of the plan of merger or consolidation, no
gain to the corporation shall be recognized from the
exchange, but (ii) if the corporation receiving such
other property and/or money does not distribute it in
pursuance of the plan of merger or consolidation, the
gain, if any, but not the loss to the corporation shall
be recognized but in an amount not in excess of the
sum of such money and the fair market value of such
other property so received, which is not distributed.
(4) Assumption of Liability. -
a) If the taxpayer, in connection with the exchanges
described in the foregoing exceptions, receives stock
or securities which would be permitted to be received
without the recognition of the gain if it were the sole
consideration, and as part of the consideration,
another party to the exchange assumes a liability of
the taxpayer, or acquires from the taxpayer property,
subject to a liability, then such assumption or
acquisition shall not be treated as money and/or
other property, and shall not prevent the exchange
from being within the exceptions.
b) If the amount of the liabilities assumed plus the
amount of the liabilities to which the property is
subject exceed the total of the adjusted basis of the
property transferred pursuant to such exchange, then
such excess shall be considered as a gain from the
sale or exchange of a capital asset or of property
which is not a capital asset, as the case may be.
(5) Basis -
a) The basis of the stock or securities received by the
transferor upon the exchange specified in the above
exception shall be the same as the basis of the
property, stock or securities exchanged, decreased by
(1) the money received, and (2) the fair market value
of the other property received, and increased by (a)
the amount treated as dividend of the shareholder
and (b) the amount of any gain that was recognized
on the exchange: Provided, That the property
received as 'boot' shall have as basis its fair market
value: Provided, further, That if as part of the
consideration to the transferor, the transferee of
property assumes a liability of the transferor or
acquires form the latter property subject to a liability,
such assumption or acquisition (in the amount of the
liability) shall, for purposes of this paragraph, be
treated as money received by the transferor on the
exchange: Provided, finally, That if the transferor
receives several kinds of stock or securities, the
Commissioner is hereby authorized to allocate the
basis among the several classes of stocks or securities.
b) The basis of the property transferred in the hands of
the transferee shall be the same as it would be in the

hands of the transferor increased by the amount of
the gain recognized to the transferor on the transfer.
(6) Definitions. -
a) The term 'securities' means bonds and debentures but
not 'notes" of whatever class or duration.
b) The term 'merger' or 'consolidation', when used in
this Section, shall be understood to mean: (i) the
ordinary merger or consolidation, or (ii) the
acquisition by one corporation of all or substantially
all the properties of another corporation solely for
stock: Provided, That for a transaction to be regarded
as a merger or consolidation within the purview of
this Section, it must be undertaken for a bona fide
business purpose and not solely for the purpose of
escaping the burden of taxation: Provided, further,
That in determining whether a bona fide business
purpose exists, each and every step of the transaction
shall be considered and the whole transaction or
series of transaction shall be treated as a single unit:
Provided, finally , That in determining whether the
property transferred constitutes a substantial portion
of the property of the transferor, the term 'property'
shall be taken to include the cash assets of the
transferor.
c) The term 'control', when used in this Section, shall
mean ownership of stocks in a corporation
possessing at least fifty-one percent (51%) of the total
voting power of all classes of stocks entitled to vote.
d) The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to issue rules
and regulations for the purpose 'substantially all' and
for the proper implementation of this Section.
- The determination of the difference between the
amount realized and the basis of the property
- What is the amount realized? Sec. 40 à the
amount of money received or the fair market value
of the property received, and you deduct
therefrom the basis. If the amount realized exceeds
the basis, there is a gain. If it is less than, there is a
loss.
« Different Types of Bases
1. Acquisition cost – if a property is acquired by
purchase
• Purchase price plus expenses of
acquisition
2. Adjusted bases
3. Carry-over Basis – if a property is acquired by
donation
• The basis is the same as it would be in
the hands of the donor or at the last
preceding owner by whom it was not
acquired by gift, or the fair market value
at the time the gift was made, whichever
is lower.
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• A (100K) donated to B (300K FMV) à
B (300K) sold to C (400K) = gain is
300K
• Therefore, any increase in value in the
hands of the donor will be carried over to
the donee.
4. Stepped-Up Basis – if a property is acquired by
inheritance
• The basis is the fair market price or value
as of the time of the death of the
decedent (time of inheritance).
• A (100K) then FMV increased to 300K
à died à B inherited (300K) à B sold
to C (400K) = gain is 100K
• Why does the law impose a heavier
income tax on the donee rather than on
the heir? “Para maibsan ang kalungkutan ng
namatayan.” – Sir Abella
5. Substituted basis – for tax-free exchanges
EXCHANGES THAT DO NOT RESULT IN
RECOGNITION OF GAIN
1. Principle of substance over form
2. Mergers or consolidation
3. Transfer to a controlled corporation
CLASSIFICATION OF INCOME TAXPAYERS
NATIONAL INTERNAL REVENUE CODE
Section 23. General Principles of Income Taxation in the
Philippines. - Except when otherwise provided in this Code:
A. A citizen of the Philippines residing therein is taxable
on all income derived from sources within and
without the Philippines;
B. A nonresident citizen is taxable only on income
derived from sources within the Philippines;
C. An individual citizen of the Philippines who is
working and deriving income from abroad as an
overseas contract worker is taxable only on income
derived from sources within the Philippines:
Provided, That a seaman who is a citizen of the
Philippines and who receives compensation for
services rendered abroad as a member of the
complement of a vessel engaged exclusively in
international trade shall be treated as an overseas
contract worker;
D. An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
E. A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
F. A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.
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Section 22. Definitions - When used in this Title:
(B) The term 'corporation' shall include partnerships, no matter
how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional
partnerships and a joint venture or consortium formed for the
purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service
contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole
purpose of exercising their common profession, no part of the
income of which is derived from engaging in any trade or
business.
(C) The term 'domestic,' when applied to a corporation, means
created or organized in the Philippines or under its laws.
foreign corporation not engaged in trade or business within the
Philippines.
Section 26. Tax Liability of Members of General
Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be 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.

(D) The term 'foreign,' when applied to a corporation, means a 1. Individuals

corporation which is not domestic. a. Citizens
i. Resident citizens - those who
(E) The term 'nonresident citizen' means: stay in the Philippines on more
1) A citizen of the Philippines who establishes to the or less permanent basis. Taxable
satisfaction of the Commissioner the fact of his
on income from within and
physical presence abroad with a definite intention to
without the Philippines.
reside therein.
2) A citizen of the Philippines who leaves the
Philippines during the taxable year to reside abroad, ii. Non-resident citizens (Sec. 22E)
either as an immigrant or for employment on a - those who have established
permanent basis. their physical presence abroad
3) A citizen of the Philippines who works and derives on more or less permanent basis
income from abroad and whose employment thereat (e.g., OCWs, Filipino seamen
requires him to be physically present abroad most of employed as complement in a
the time during the taxable year. vessel engaged exclusively on
4) A citizen who has been previously considered as international trade) à Citizen
nonresident citizen and who arrives in the Philippines of the Philippines who works
at any time during the taxable year to reside and derives income from abroad
permanently in the Philippines shall likewise be and whose employment thereat
treated as a nonresident citizen for the taxable year in requires him to be physically
which he arrives in the Philippines with respect to his
present abroad most of the time
income derived from sources abroad until the date of
during the taxable year (183
his arrival in the Philippines.
5) The taxpayer shall submit proof to the Commissioner DAYS)
to show his intention of leaving the Philippines to « taxable only on income
reside permanently abroad or to return to and reside from within
in the Philippines as the case may be for purpose of
this Section. b. Aliens
i. Resident aliens - If the aggregate
(F) The term 'resident alien' means an individual whose period of his stay in the
residence is within the Philippines and who is not a citizen Philippines is more than 180
thereof. days during any calendar year.
ii. Non-resident aliens
(G) The term 'nonresident alien' means an individual whose 1. Engaged in trade or
residence is not within the Philippines and who is not a citizen business
thereof. 2. Not engaged in trade
or business
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines. c. Special classes of individual taxpayers
(Sec. 60-66)
(I) The term 'nonresident foreign corporation' applies to a

i. Taxable estate
ii. Taxable trust
2. Corporations (Sec. 22B)
− Very broad definition of a corporation.
a. Domestic corporations – those organized
under the laws of the Philippines. All others
are foreign.
b. Foreign corporation
i. Resident foreign corporation – engaged
in trade or business in the Philippines
(there is a branch or establishment where
it can transact its own business in the
country)
ii. Non-resident foreign corporation – not
engaged in trade or business in the
Philippines. Can only earn passive
investment income from the Philippines.
3. Partnerships, Joint Ventures and Consortiums
• Not taxable
• Rationale: The law encourages the
pooling of resources for the realization of
huge projects.
4. General Professional Partnerships (Sec. 26, NIRC)
• Sec. 22B, NIRC: A GPP is a partnership
formed by persons for the sole purpose
of exercising their COMMON
PROFESSION, no part of the income of
which is derived from engaged in trade or
business.
• Not taxable. If not common profession,
taxable.
Question: Who are not required to file income tax returns (ITR)?
1. Non-resident foreign corporation à No branch
here so no one can file. Even if they earn income
from Philippine sources.
2. Non-resident aliens who are NOT engaged in
trade or business in the Philippines
§ Common denominator: Lack of physical presence
here in the Philippines. Cannot send summons
abroad.
§ So how can we collect tax from them? Thru
withholding tax. The person legally liable to pay
the tax is the withholding agent, but this is without
prejudice to the right of the withholding agent to
recover from the NRFC or NRANETB.
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Sec. 34 à the taxpayer has an option whether to claim as a
tax credit or as a tax deduction à to eliminate international
double taxation
- Filipino working in Saudi Arabia (income tax paid
there) but also receives rentals from the
Philippines, can he avail of this option?
- No. Only available to resident citizens and
domestic corporations à because they are the
only ones taxable for income from within or
without à they are the only ones exposed to
danger of international double taxation. (Note:
Even if under Sec. 34.C.3.a, the language used is
“citizen of the Philippines and of domestic
corporations”
TAX CREDIT v. TAX DEDUCTION
- Tax credit – reduces the tax liability; after
computing the liability; greater impact or more
beneficial
- Tax deduction – reduces the tax base; before
computing the liability;
SOURCES OF INCOME TAXABLE IN THE
PHILIPPINES FOR THE DIFFERENT CLASSES
OF TAXPAYERS (Sec. 23, NIRC)
Kind of Taxpayer Source of Income
Resident citizen Within and without
Non-resident citizen Within only
Alien individual (resident and Within only
non-resident)
Domestic corporation Within and without
Foreign corporation (resident Within only
and non-resident)
RULES IN DETERMINING THE SOURCE OF
THE INCOME
NATIONAL INTERNAL REVENUE CODE
Section 42. Income from Sources Within the Philippines.-
(A) Gross Income From Sources Within the Philippines. - The
following items of gross income shall be treated as gross
income from sources within the Philippines:
1) Interests. - Interests derived from sources within the
Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents, corporate or
otherwise;
2) Dividends. - The amount received as dividends:
a) from a domestic corporation; and
b) from a foreign corporation, unless less than
fifty percent (50%) of the gross income of such
foreign corporation for the three-year period
ending with the close of its taxable year
preceding the declaration of such dividends or
for such part of such period as the corporation

has been in existence) was derived from sources
within the Philippines as determined under the
provisions of this Section; but only in an
amount which bears the same ration to such
dividends as the gross income of the
corporation for such period derived from
sources within the Philippines bears to its gross
income from all sources.
3) Services. - Compensation for labor or personal services
performed in the Philippines;
4) Rentals and royalties. - Rentals and royalties from
property located in the Philippines or from any
interest in such property, including rentals or royalties
for -
a) The use of or the right or privilege to use in the
Philippines any copyright, patent, design or
model, plan, secret formula or process,
goodwill, trademark, trade brand or other like
property or right;
b) The use of, or the right to use in the Philippines
any industrial, commercial or scientific
equipment;
c) The supply of scientific, technical, industrial or
commercial knowledge or information;
d) The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of
enabling the application or enjoyment of, any
such property or right as is mentioned in
paragraph (a), any such equipment as is
mentioned in paragraph (b) or any such
knowledge or information as is mentioned in
paragraph (c);
e) The supply of services by a nonresident person
or his employee in connection with the use of
property or rights belonging to, or the
installation or operation of any brand,
machinery or other apparatus purchased from
such nonresident person;
f) Technical advice, assistance or services
rendered in connection with technical
management or administration of any scientific,
industrial or commercial undertaking, venture,
project or scheme; and
g) The use of or the right to use:
i. Motion picture films;
ii. Films or video tapes for use in connection
with television; and
iii. Tapes for use in connection with radio
broadcasting.
5) Sale of Real Property. - gains, profits and income from
the sale of real property located in the Philippines;
and
6) Sale of Personal Property. - gains; profits and income
from the sale of personal property, as determined in
Subsection (E) of this Section.
(B) Taxable Income From Sources Within the Philippines. -
1) General Rule. - From the items of gross income
specified in Subsection (A) of this Section, there shall
be deducted the expenses, losses and other
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deductions properly allocated thereto and a ratable
part of expenses, interests, losses and other
deductions effectively connected with the business or
trade conducted exclusively within the Philippines
which cannot definitely be allocated to some items or
class of gross income: Provided, That such items of
deductions shall be allowed only if fully substantiated
by all the information necessary for its calculation.
The remainder, if any, shall be treated in full as
taxable income from sources within the Philippines.
2) Exception. - No deductions for interest paid or
incurred abroad shall be allowed from the item of
gross income specified in subsection (A) unless
indebtedness was actually incurred to provide funds
for use in connection with the conduct or operation
of trade or business in the Philippines.
(C) Gross Income From Sources Without the Philippines. - The
following items of gross income shall be treated as income
from sources without the Philippines:
1) Interests other than those derived from sources
within the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;
2) Dividends other than those derived from sources
within the Philippines as provided in paragraph (2) of
Subsection (A) of this Section;
3) Compensation for labor or personal services
performed without the Philippines;
4) Rentals or royalties from property located without the
Philippines or from any interest in such property
including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like
properties; and
5) Gains, profits and income from the sale of real
property located without the Philippines.
(D) Taxable Income From Sources Without the Philippines. - From the
items of gross income specified in Subsection (C) of this
Section there shall be deducted the expenses, losses, and other
deductions properly apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction which
cannot definitely be allocated to some items or classes of gross
income. The remainder, if any, shall be treated in full as taxable
income from sources without the Philippines.
(E) Income From Sources Partly Within and Partly Without the
Philippines.- Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A) and
(C) of this Section, shall be allocated or apportioned to sources
within or without the Philippines, under the rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. Where items of gross
income are separately allocated to sources within the
Philippines, there shall be deducted (for the purpose of
computing the taxable income therefrom) the expenses, losses
and other deductions properly apportioned or allocated thereto
and a ratable part of other expenses, losses or other deductions
which cannot definitely be allocated to some items or classes of
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gross income. The remainder, if any, shall be included in full as foreign corporation for the three
taxable income from sources within the Philippines. In the case preceding years was derived from
of gross income derived from sources partly within and partly sources within the Philippines
without the Philippines, the taxable income may first be à then apply the percentage
computed by deducting the expenses, losses or other (The grandfather of the
deductions apportioned or allocated thereto and a ratable part dividend is the gross income of
of any expense, loss or other deduction which cannot definitely the corporation declaring it)
be allocated to some items or classes of gross income; and the
portion of such taxable income attributable to sources within If 1M à 50% = 500K. If 75%
the Philippines may be determined by processes or formulas of = 750K.
general apportionment prescribed by the Secretary of Finance.
Gains, profits and income from the sale of personal property
c. Compensation for services
produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by • Performed within PH
the taxpayer without and sold within the Philippines, shall be
treated as derived partly from sources within and partly from d. Rentals and royalties
sources without the Philippines. • Location rule

Gains, profits and income derived from the purchase of e. Sale of real property
personal property within and its sale without the Philippines, or • Location of property
from the purchase of personal property without and its sale
within the Philippines shall be treated as derived entirely form f. Sale of personal property
sources within the country in which sold: Provided, however,
That gain from the sale of shares of stock in a domestic • Place of market rule
corporation shall be treated as derived entirely form sources • Exceptions:
within the Philippines regardless of where the said shares are i. Partly or wholly
sold. The transfer by a nonresident alien or a foreign produced within but
corporation to anyone of any share of stock issued by a sold without OR partly
domestic corporation shall not be effected or made in its book or wholly produced
unless: (1) the transferor has filed with the Commissioner a without but sold
bond conditioned upon the future payment by him of any within à gain is partly
income tax that may be due on the gains derived from such within and partly
transfer, or (2) the Commissioner has certified that the taxes, if without
any, imposed in this Title and due on the gain realized from ii. Sale of shares of stocks
such sale or transfer have been paid. It shall be the duty of the of a domestic
transferor and the corporation the shares of which are sold or corporation à gain is
transferred, to advise the transferee of this requirement.
an income from within
(F) Definitions. - As used in this Section the words 'sale' or 'sold'
irrespective of place of
include 'exchange' or 'exchanged'; and the word 'produced' sale
includes 'created', 'fabricated,' 'manufactured', 'extracted,'
'processed', 'cured' or 'aged.' o The sale of shares of stock of a domestic
corporation between two aliens residing
**Sir: Secs. 23 and 42 are very important. outside of the Philippines is taxable. How
Note: If imposed by different taxing authorities, although on is the tax collected? (See Sec. 39.B à this
the same taxpayer and on the same subject matter, it is not applies only to a capital asset held by
prohibited as double taxation. individual taxpayers other than shares of
stock in a domestic corporation, and real
1. Gross income from sources within the Philippines property classified as a capital asset
(Sec. 42A) located in the Philippines)
a. Interests (cf. NDC case) § Classification of capital
assets:
b. Dividends • Shares of stock in a
i. From a domestic corporation domestic
ii. From a foreign corporation, corporation
applying the grandfather rule • Real property
classified as a
Grandfather Rule – if at least capital asset located
50% of the gross income of the in the Philippines
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(owned by all types rates established in the following schedule:

of individuals,
special taxpayers, Not over P10,000 5%
and domestic Over P10,000 but not over P500+10% of the excess
corporations à cf. P30,000 over P10,000
Sec. 24D and 27D Over P30,000 but not over P2,500+15% of the
– gain presumed to P70,000 excess over P30,000
have been realized) Over P70,000 but not over P8,500+20% of the
• Other capital assets P140,000 excess over P70,000
à Therefore, the Over P140,000 but not over P22,500+25% of the
rule of period P250,000 excess over P140,000
recognition or Over P250,000 but not over P50,000+30% of the
P500,000 excess over P250,000
holding period
under Sec. 39.B Over P500,000 P125,000+34% of the
excess over P500,000 in
applies only to this
1998
type of capital asset
(cf. Sec. 39.A.1 For married individuals, the husband and wife, subject to the
definition) provision of Section 51 (D) hereof, shall compute separately
their individual income tax based on their respective total
taxable income: Provided, that if any income cannot be definitely
2. Gross income from sources without the attributed to or identified as income exclusively earned or
Philippines (Sec. 42C) realized by either of the spouses, the same shall be divided
equally between the spouses for the purpose of determining
3. Income partly within or partly without the their respective taxable income.
Philippines (Sec. 42E)
Provided, That minimum wage earners as defined in Section 22
DIFFERENT CLASSES OF INCOME FOR (HH) of this Code shall be exempt from the payment of
INCOME TAX PURPOSES (Sections 24, 25, 27 & 28) income tax on their taxable income: Provided, further, That the
holiday pay, overtime pay, night shift differential pay and
NATIONAL INTERNAL REVENUE CODE hazard pay received by such minimum wage earners shall
Section 24. Income Tax Rates. likewise be exempt from income tax.

(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.
(1) An income tax is hereby imposed:
a) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within and
without the Philippines be every individual citizen of
the Philippines residing therein;
b) On the taxable income defined in Section 31 of this
Code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within the
Philippines by an individual citizen of the Philippines
who is residing outside of the Philippines including
overseas contract workers referred to in
Subsection(C) of Section 23 hereof; and
c) On the taxable income defined in Section 31 of this
code, other than income subject to tax under
Subsections (B), (C) and (D) of this Section, derived
for each taxable year from all sources within the
Philippines by an individual alien who is a resident of
the Philippines.
(2) The tax shall be computed in accordance with and at the
(B) 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%
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 P100,000 5%
On any amount in excess of P100,000 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
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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.
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.
Section 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.
2) Cash and/or Property Dividends from a Domestic
Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarter or
Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional
Partnership), Joint Account, Joint Venture Taxable as a

Corporation or Association., Interests, Royalties, Prizes, and
Other Winnings. - Cash and/or property dividends
from a domestic corporation, or from a joint stock
company, or from an insurance or mutual fund
company or from a regional operating headquarter of
multinational company, or the share of a nonresident
alien individual in the distributable net income after
tax of a partnership (except a general professional
partnership) of which he is a partner, or the share of
a nonresident alien individual in the net income after
tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a
member or a co-venturer; interests; royalties (in any
form); and prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (B)(1) of Section 24)
and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to
an income tax of twenty percent (20%) on the total
amount thereof: Provided, however, that royalties on
books as well as other literary works, and royalties on
musical compositions shall be subject to a final tax of
ten percent (10%) on the total amount thereof:
Provided, further, That cinematographic films and
similar works shall be subject to the tax provided
under Section 28 of this Code: Provided,
furthermore, 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%
Less than three (3) years 20%
3) Capital Gains. - Capital gains realized from sale, barter
or exchange of shares of stock in domestic
corporations not traded through the local stock
exchange, and real properties shall be subject to the
tax prescribed under Subsections (C) and (D) of
Section 24.
(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
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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.
(C) Alien Individual Employed by Regional or Area
Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and
paid for each taxable year upon the gross income received by
every alien individual employed by regional or area
headquarters and regional operating headquarters established in
the Philippines by multinational companies as salaries, wages,
annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, from such regional or area
headquarters and regional operating headquarters, a tax equal
to fifteen percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to Filipinos
employed and occupying the same position as those of aliens
employed by these multinational companies. For purposes of
this Chapter, the term 'multinational company' means a foreign
firm or entity engaged in international trade with affiliates or
subsidiaries or branch offices in the Asia-Pacific Region and
other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. -
There shall be levied, collected and paid for each taxable year
upon the gross income received by every alien individual
employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and
allowances, from such off-shore banking units, a tax equal to
fifteen percent (15%) of such gross income: Provided,
however, That the same tax treatment shall apply to Filipinos
employed and occupying the same positions as those of aliens
employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service
Contractor and Subcontractor. - An Alien individual who is a
permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor
or by a foreign service subcontractor engaged in petroleum
operations in the Philippines shall be liable to a tax of fifteen
percent (15%) of the salaries, wages, annuities, compensation,
remuneration and other emoluments, such as honoraria and
allowances, received from such contractor or subcontractor:
Provided, however, That the same tax treatment shall apply to
a Filipino employed and occupying the same position as an
alien employed by petroleum service contractor and
subcontractor.
Any income earned from all other sources within the
Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the
pertinent income tax, as the case may be, imposed under this
Code.
Section 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, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
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 reduced corporate income tax rates shall be applied on the
amount computed by multiplying the number of months
covered by the new rates within the fiscal year by the taxable
income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after
the following conditions have been satisfied:
1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
3) A VAT tax effort of four percent (4%) of GNP; and
4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to gross sales
or receipts from all sources does not exceed fifty-five percent
(55%).
The election of the gross income tax option by the corporation
shall be irrevocable for three (3) consecutive taxable years
during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived
from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost
of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods' sold
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are
in transit.
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For a manufacturing concern, 'cost of goods manufactured and
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances and
discounts.
(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.
(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 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 s similar
business, industry, or activity.
(D) Rates of Tax on Certain Passive Incomes. -
1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and
Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest
on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from
trust funds and similar arrangements received by
domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however,
That interest income derived by a domestic
corporation 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.
2) Capital Gains from the Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital
gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed
of through the stock exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency
deposit system from foreign currency transactions
with local commercial banks, including branches of
foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
foreign currency depository system units and other
depository banks under the expanded foreign
currency deposit system, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be subject
to a final income tax at the rate of ten percent (10%)
of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic
corporation shall not be subject to tax.
5) Capital Gains Realized from the Sale, Exchange or
Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are
not actually used in the business of a corporation and
are treated as capital assets, based on the gross selling
price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever
is higher, of such lands and/or buildings.
(E) Minimum Corporate Income Tax on Domestic
Corporations. -
1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than the tax
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computed under Subsection (A) of this Section for
the taxable year.
2) Carry Froward of Excess Minimum Tax. - Any excess
of the minimum corporate income tax over the
normal income tax as computed under Subsection
(A) of this Section shall be carried forward and
credited against the normal income tax for the three
(3) immediately succeeding taxable years.
3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of
legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he
may suspend the imposition of the minimum
corporate income tax in a meritorious case.
4) Gross Income Defined. - For purposes of applying
the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods
sold' shall include all business expenses directly
incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, 'cost of goods sold'
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are
in transit.
For a manufacturing concern, cost of 'goods manufactured and
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances,
discounts and cost of services. 'Cost of services' shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of facilities
directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided,
however, That in the case of banks, 'cost of services' shall
include interest expense.
Section 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, 1998,
the rate of income tax shall be thirty-four percent
(34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%), and effective January 1,
2000 and thereafter, the rate shall be thirty-two
percent (32%).
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 reduced corporate income tax rates shall be
applied on the amount computed by multiplying the
number of months covered by the new rates 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).
2) Minimum Corporate Income Tax on Resident
Foreign Corporations. - A minimum corporate
income tax of two percent (2%) of gross income, as
prescribed under Section 27 (E) of this Code, shall be
imposed, under the same conditions, on a resident
foreign corporation taxable under paragraph (1) of
this Subsection.
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 port outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the
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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.
4) Offshore Banking Units. - The provisions of any law
to the contrary notwithstanding, income derived by
offshore banking units authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
offshore banking units, including any interest income
derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the
rate of ten percent (10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore
banking units shall be exempt from income tax.
5) Tax on Branch Profits Remittances. - Any profit
remitted by a branch to its head office shall be
subject to a tax of fifteen (15%) which shall be based
on the 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). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of
this Code: provided, that interests, dividends, rents,
royalties, including remuneration for technical
services, salaries, wages premiums, annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital
gains received by a foreign corporation during each
taxable year from all sources within the Philippines
shall not be treated as branch profits unless the same
are effectively connected with the conduct of its trade
or business in the Philippines.
6) Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies.
-
(a) Regional or area headquarters as defined in Section 22(DD)
shall not be subject to income tax.
(b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their taxable
income.
7) Tax on Certain Incomes Received by a Resident
Foreign Corporation. –
(a) Interest from Deposits and Yield or any other Monetary
Benefit from Deposit Substitutes, Trust Funds and Similar
Arrangements and Royalties. - Interest from any currency bank
deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be
subject to a final income tax at the rate of twenty percent (20%)

of such interest: Provided, however, That interest income
derived by a resident foreign corporation 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.
(b) Income Derived under the Expanded Foreign Currency
Deposit System. - Income derived by a depository bank under
the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks including
branches of foreign banks that may be authorized by the
Bangko Sentral ng Pilipinas (BSP) to transact business with
foreign currency deposit system units, including interest
income from foreign currency loans granted by such depository
banks under said expanded foreign currency deposit system to
residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository banks under
the expanded system shall be exempt from income tax.
(c) Capital Gains from Sale of Shares of Stock Not Traded in
the Stock Exchange. - 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 P100,000 5%
On any amount in excess of P100,000 10%
(d) Intercorporate Dividends. - Dividends received by a
resident foreign corporation from a domestic corporation liable
to tax under this Code shall not be subject to tax under this
Title.
(B) Tax on Nonresident Foreign Corporation. -
1) In General. - Except as otherwise provided in this
Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to
thirty-five percent (35%) of the gross income
received during each taxable year from all sources
within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except
reinsurance premiums), annuities, emoluments or
other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraphs (C)
and (d): Provided, That effective 1, 1998, the rate of
income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three
percent (33%); and, effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
2) Nonresident Cinematographic Film Owner, Lessor or
Distributor. - A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent
(25%) of its gross income from all sources within the
Philippines.
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3) Nonresident Owner or Lessor of Vessels Chartered by
Philippine Nationals. - A nonresident owner or lessor
of vessels shall be subject to a tax of four and one-
half percent (4 1/2%) of gross rentals, lease or
charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime
Industry Authority.
4) Nonresident Owner or Lessor of Aircraft, Machineries and
Other Equipment. - Rentals, charters and other fees
derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a
tax of seven and one-half percent (7 1/2%) of gross
rentals or fees.
5) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation. -
(a) Interest on Foreign Loans. - A final withholding tax at the rate
of twenty percent (20%) is hereby imposed on the amount of
interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends. - A final withholding tax at the rate of
fifteen percent (15%) is hereby imposed on the amount of cash
and/or property dividends received from a domestic
corporation, which shall be collected and paid as provided in
Section 57 (A) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%) for
1997, nineteen percent (19%) for 1998, eighteen percent (18%)
for 1999, and seventeen percent (17%) thereafter, which
represents the difference between the regular income tax of
thirty-five percent (35%) in 1997, thirty-four percent (34%) in
1998, and thirty-three percent (33%) in 1999, and thirty-two
percent (32%) thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in this
subparagraph;
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange. - 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 P100,000 5%
On any amount in excess of P100,000 10%
SUMMARY:
Categories of Income of Individuals and How They Are Taxed
Category How Taxed
Global System Schedular
System
1. Compensation ✓
income* (except
for estate and
trust)
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2. Income from ✓ Section 31. Taxable Income Defined. - The term taxable
trade, business income means the pertinent items of gross income specified in
or practice of this Code, less the deductions and/or personal and additional
profession* exemptions, if any, authorized for such types of income by this
3. Fringe benefits ✓ ✓ Code or other special laws.
(Only if received by (This is the
rank-and-file general rule; Taxable Income – means the pertinent items of gross
employees; will applies to income (Sir: returnable income) less deductions and/or
form part of the managerial & personal and additional exemptions, if any
compensation supervisory • Refers to the tax base in the ITRs to be filed by
income) employees) the taxpayer to cover all income earned by him
during the taxable year
4. Passive ✓ ✓ WHAT COMPRISES GROSS INCOME (cf. Sec. 32.A)
investment Only those not (This is the
income (e.g. subject to final general rule)
NATIONAL INTERNAL REVENUE CODE
interests on withholding tax
Section 32. Gross Income. -
bank deposits, (FWT) (c.f. Sec.
(A) General Definition. - Except when otherwise provided in
prizes, 24B)
this Title, gross income means all income derived from
winnings) à e.g. Interest whatever source, including (but not limited to) the following
income on a items:
loan to a friend (1) Compensation for services in whatever form paid,
(because friend including, but not limited to fees, salaries, wages,
is not a commissions, and similar items;
withholding (2) Gross income derived from the conduct of trade or
agent); royalties business or the exercise of a profession;
derived from (3) Gains derived from dealings in property;
abroad (4) Interests;
5. Capital gains ✓ ✓ (5) Rents;
à For capital à For capital (6) Royalties;
gains from sale of gains from sales of
(7) Dividends;
other capital assets. shares of stock of a
(8) Annuities;
Must be reported domestic
(9) Prizes and winnings;
in the ITR as non- corporation
(10) Pensions; and
compensation à For capital (11) Partner's distributive share from the net income of the
income. gains from sale of general professional partnership.
real properties
located in the
1. Compensation for services – in whatever form
Philippines
paid, in cash or in kind; but to be taxable, it should
be measurable in money
6. Exempt income
*Returnable income
o Compensation income - all remuneration for
services performed by an employee under
Global Tax System – all the different classes of income
an employer-employee relationship. The
will be taxed at the same rate (individuals, 5-32%;
name by which the remuneration is
corporations, 30%) (the graduated tax rates under Sec. 24)
designated is immaterial.
o The term includes salaries, wages,
Schedular Tax System – each type of income is taxed at a
emoluments, honoraria, allowances,
rate different from those of the other types.
commissions (e.g. transportation,
representation, entertainment and the
Q: Which of the abovementioned types of income will you
like); fees including director’s fees, if the
include in the ITR?
director is, at the same time, an employee
A: Only those under the global system.
of the corporation; taxable bonuses and
fringe benefits except those subject to
DEFINITION OF TAXABLE INCOME
FBT; taxable pensions and retirement
pay; and other income of similar nature.
NATIONAL INTERNAL REVENUE CODE

o Note: Retirement benefits will be
considered part of compensation income,
even if received after the termination of
employer-employee relationship.
2. Gross income from business – business (legal or
illegal), trade, profession
a. Sir: Even if illegal business, you are still
entitled to legitimate business deductions
(e.g., abortion clinic à does not include
expenses for protection money to the
police = Bribes, cf. Sec. 34.A.1.c. Legit
business expenses à rents, laundry for
bed sheets)
3. Gains derived from property dealings
4. Interests, rents and royalties
5. Dividends – legal connotation of the term
“dividend” for tax purposes
6. Annuities – How must the annuitant report the
income- tax now or tax later tax policy options?
a. Earned from an annuity contract
b. Annuity = excess of the amount received
over the amount of investment made
c. Until you have recovered your total
investment, there should be nothing that
is taxable. But the BIR may come out
with a regulation for a tax now policy. No
such regulation now.
7. Prizes and winnings
a. Not exceeding 10K – still taxable as
returnable income
b. Exceeding 10K - 5% schedular
8. Pensions (if not exempt) – whether paid out of
either contributory or non-contributory pensions
plans
9. Partner’s distributive share in net income of GPP
a. Because the GPP is not a taxable entity
(cf. Sec. 26)
b. How about partner’s share in a taxable
partnership (e.g. a general co-
partnership)? Yes. Still gross income. But
they fall under dividends. Partnership
should withhold, otherwise, it will
become directly liable for the tax.
10. Income from whatever source derived – claim of
right doctrine
a. Whether the income is legal or illegal (e.g.
ransom money of the Abu Sayaff – but
who would send the assessment notice to
them? LOL)
EXCLUSIONS FROM GROSS INCOME AND THE
REASONS FOR THEIR EXCLUSION
Sir: Lots of bar questions on this topic.
NATIONAL INTERNAL REVENUE CODE
Section 32. Gross Income. -
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(B) Exclusions from Gross Income. - The following items shall not
be included in gross income and shall be exempt from taxation
under this title:
(1) Life Insurance. - The proceeds of life insurance policies
paid to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, but if such amounts are
held by the insurer under an agreement to pay interest thereon,
the interest payments shall be included in gross income.
(2) Amount Received by Insured as Return of Premium. - The
amount received by the insured, as a return of premiums paid
by him under life insurance, endowment, or annuity contracts,
either during the term or at the maturity of the term mentioned
in the contract or upon surrender of the contract.
(3) Gifts, Bequests, and Devises. _ The value of property
acquired by gift, bequest, devise, or descent: Provided,
however, That income from such property, as well as gift,
bequest, devise or descent of income from any property, in
cases of transfers of divided interest, shall be included in gross
income.
(4) Compensation for Injuries or Sickness. - amounts received,
through Accident or Health Insurance or under Workmen's
Compensation Acts, as compensation for personal injuries or
sickness, plus the amounts of any damages received, whether
by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the
Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
a) Retirement benefits received under Republic Act No.
7641 and those received by officials and employees of
private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the
retiring official or employee has been in the service of
the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits
granted under this subparagraph shall be availed of by
an official or employee only once. For purposes of
this Subsection, the term 'reasonable private benefit
plan' means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the
benefit of some or all of his officials or employees,
wherein contributions are made by such employer for
the officials or employees, or both, for the purpose of
distributing to such officials and employees the
earnings and principal of the fund thus accumulated,
and wherein its is provided in said plan that at no
time shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said
officials and employees.
b) Any amount received by an official or employee or by
his heirs from the employer as a consequence of

separation of such official or employee from the
service of the employer because of death sickness or
other physical disability or for any cause beyond the
control of the said official or employee.
c) The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the
Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies
and other institutions, private or public.
d) Payments of benefits due or to become due to any
person residing in the Philippines under the laws of
the United States administered by the United States
Veterans Administration.
e) Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282.
f) Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by
government officials and employees.
(7) Miscellaneous Items. -
a) Income Derived by Foreign Government. - Income
derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by (i)
foreign governments, (ii) financing institutions
owned, controlled, or enjoying refinancing from
foreign governments, and (iii) international or
regional financial institutions established by foreign
governments.
b) Income Derived by the Government or its Political
Subdivisions. - Income derived from any public utility
or from the exercise of any essential governmental
function accruing to the Government of the
Philippines or to any political subdivision thereof.
c) Prizes and Awards. - Prizes and awards made
primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic
achievement but only if:
i. The recipient was selected without any action
on his part to enter the contest or proceeding;
and
ii. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
d) Prizes and Awards in sports Competition. - All prizes
and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations.
e) 13th Month Pay and Other Benefits. - Gross benefits
received by officials and employees of public and
private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed
P82,000* which shall cover:
i. Benefits received by officials and employees of
the national and local government pursuant to
Republic Act No. 6686;
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ii. Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13,
1986;
iii. Benefits received by officials and employees not
covered by Presidential decree No. 851, as
amended by Memorandum Order No. 28, dated
August 13, 1986; and
iv. Other benefits such as productivity incentives
and Christmas bonus: Provided, further, That
the ceiling of Thirty thousand pesos (P30,000)
may be increased through rules and regulations
issued by the Secretary of Finance, upon
recommendation of the Commissioner, after
considering among others, the effect on the
same of the inflation rate at the end of the
taxable year.
f) GSIS, SSS, Medicare and Other Contributions. -
GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.
g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the
same or exchange or retirement of bonds, debentures
or other certificate of indebtedness with a maturity of
more than five (5) years.
h) Gains from Redemption of Shares in Mutual Fund. -
Gains realized by the investor upon redemption of
shares of stock in a mutual fund company as defined
in Section 22 (BB) of this Code.
*Increased from P30,000 pursuant to R.A. No. 10653 (Feb.
12, 2015)
1. Proceeds of life insurance policy
a. The proceeds of life insurance policies
paid to the heirs or beneficiaries upon
the death of the insured
b. Excluded because it is not an income,
but a return of capital à human capital
(compensation for the loss of life)
c. Note: Under Sec. 36.A, personal, living or
family expenses are not deductible.
d. But if the insurance company retains part
of the proceeds, subject to the payment
of interests, the interests shall be taxed
(debtor-creditor relationship). Declare it
in the ITR, because not subject to FWT.
2. Return of premium to the insured
a. Excluded because it’s a return of capital.
b. Endowment – when you outlive the term
of the insurance contract, the insurance
company will give you back the
endowment = therefore, return of
premium to the insured (endowment
contract – special type of life insurance
contract; term is 20 years); but if you die
before the term expires, the insurance

company will pay to the beneficiary (see
#1)
c. Not entire 1M is excluded = only the
400K premiums paid is. The 600K is
taxable. Only the premiums are excluded
from tax.
3. Value of property acquired by gift, bequest or
devise
a. Excluded because not considered as
income – Remember, income is from
capital or labor or both combined (e.g.
rentals from the property) à Straight
donation
b. What if donation by divided interest?
Donor transfers property to a trustee à
Income/rentals (Usufruct) to wife for
life. Remainder of the property (naked
title) to the son. Can the wife argue that
the rentals are donation, therefore, not
taxable income? No. Not different from a
straight donation. (Cf. relevant provision
in the NIRC; US case of Erwin v. Gibbin)
4. Amount received through accident or health
insurance
a. As compensation for personal injuries or
sickness, plus the amounts of any
damages received, whether by suit or
agreement, on account of such injuries or
sickness
b. Personal injuries – broader than
physical injuries
c. Punitive damages excluded because not
intended to compensate the injury that
was sustained, but to punish the offender,
therefore, an income to the recipient =
taxable.
d. Excluded because injury to human
capital. Relate to #1.
5. Income exempt under tax treaty
a. Application of the principle of
international comity.
b. Tax treaties intended to avoid double
taxation and fiscal evasion. (Now, mostly
on income taxes only)
6. Retirement benefits, pensions, gratuities, etc.
TWO TYPES:
a. RA 7641 amending Art. 287, Labor Code;
b. RA 4917 – scope of exemption of an
employee’s trust – Sec. 60, NIRC
RA 7641, AMENDING ART. 287, LABOR CODE (1992)
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Section 1. Article 287 of Presidential Decree No. 442, as
amended, otherwise known as the Labor Code of the
Philippines, is hereby amended to read as follows:
Art. 287. Retirement. – Any employee may be retired upon
reaching the retirement age established in the collective
bargaining agreement or other applicable employment contract.
In case of retirement, the employee shall be entitled to receive
such retirement benefits as he may have earned under existing
laws and any collective bargaining agreement and other
agreements: Provided, however, That an employee's retirement
benefits under any collective bargaining and other agreements
shall not be less than those provided herein.
In the absence of a retirement plan or agreement providing for
retirement benefits of employees in the establishment, an
employee upon reaching the age of sixty (60) years or more, but
not beyond sixty-five (65) years which is hereby declared the
compulsory retirement age, who has served at least five (5)
years in the said establishment, may retire and shall be entitled
to retirement pay equivalent to at least one-half (1/2) month
salary for every year of service, a fraction of at least six (6)
months being considered as one whole year.
Unless the parties provide for broader inclusions, the term one-
half (1/2) month salary shall mean fifteen (15) days plus one-
twelfth (1/12) of the 13th month pay and the cash equivalent
of not more than five (5) days of service incentive leaves.
Retail, service and agricultural establishments or operations
employing not more than (10) employees or workers are
exempted from the coverage of this provision.
Violation of this provision is hereby declared unlawful and
subject to the penal provisions provided under Article 288 of
this Code.
RA 4917, AN ACT PROVIDING THAT RETIREMENT
BENEFITS OF EMPLOYEES OF PRIVATE FIRMS
SHALL NOT BE SUBJECT TO ATTACHMENT,
LEVY, EXECUTION, OR ANY TAX WHATSOEVER
(1967)
Section 1. Any provision of law to the contrary
notwithstanding, the retirement benefits received by officials
and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and
shall not be liable to attachment, garnishment, levy or seizure
by or under any legal or equitable process whatsoever except to
pay a debt of the official or employee concerned to the privates
benefit plan or that arising from liability imposed in a criminal
action: Provided, That the retiring official or employee has been
in the service of the same employer for at least ten (10) years
and is not less than fifty years of age at the time of his
retirement: Provided, further, That the benefits granted under this
Act shall be availed of by an official or employee only
once: Provided, finally, That in case of separation of an official or
employee from the service of the employer due to death,
sickness or other physical disability or for any cause beyond the
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control of the said official or employee, any amount received
by him or by his heirs from the employer as a consequence of
such separation shall likewise be exempt as hereinabove
provided.
As used in this Act, the term "reasonable private benefit plan"
means a pension, gratuity, stock bonus or profit sharing plan
maintained by an employer for the benefit of some or all of his
officials and employees, wherein contributions are made by
such employer or officials and employees, or both, for the
purpose of distributing to such officials and employees the
earnings and principal of the fund thus accumulated, and
wherein it is provided in said plan that at no time shall any part
of the corpus or income of the fund be used for, or be diverted
to, any purpose other than for the exclusive benefit of the said
officials and employees.
NATIONAL INTERNAL REVENUE CODE
CHAPTER X. ESTATES AND TRUSTS
Section 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind
of property held in trust, including:
1. Income accumulated in trust for the benefit of
unborn or unascertained person or persons with
contingent interests, and income accumulated or held
for future distribution under the terms of the will or
trust;
2. Income which is to be distributed currently by the
fiduciary to the beneficiaries, and income collected by
a guardian of an infant which is to be held or
distributed as the court may direct;
3. Income received by estates of deceased persons
during the period of administration or settlement of
the estate; and
4. Income which, in the discretion of the fiduciary, may
be either distributed to the beneficiaries or
accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or
all of his employees (1) if contributions are made to the trust by
such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan,
and (2) if under the trust instrument it is impossible, at any
time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or
income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to
any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
a. Herrera Law (RA 7641 amending Art.
287, Labor Code)
24
A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
• Refers to retirement benefits given by employers
to their employees.
• 2 requirements:
i. Age – Not less 60, not more than 65
ii. Service – at least 5 years à even broken
service is counted
• Sir: No frequency requirement because of the
retirement age. Who would hire you pa? Lels.
• The two requirements must concur; otherwise, the
entire benefit will be taxable as compensation.
• Minimum of ½ basic monthly salary for every year
of service or for every fraction thereof. But the
employer can give a higher amount by providing
for it under a collective bargaining agreement
(CBA).
b. Employer’s Trust Act (RA 4917)
• Refers to retirement benefits from a reasonable
private benefit plan; pre-approved by the BIR.
• The following 3 requirements must concur.
i. Service requirement – EE served ER for at
least 10 years. Broken service covered. What
matters is the aggregate years of service.
ii. Age – Retiring EE must at least be 50 years
of age (365 days = 1 year)
iii. Frequency – The benefit must be availed of
only once.
• What if not all the requisites concur? Example: A
served X Corporation (which has a reasonable
private benefit plan) for 12 years, retired at the age
of 49, got a lump sum retirement benefit of 3M
pesos. What would be the tax implication?
o Obviously, the retirement benefit is not
excluded under law, but which portion of
the 3M is taxable and which portion is
not?
o First, determine which portion is
contributory and which is non-
contributory.
§ Contributory retirement plan –
both the employer and the
employee contribute (e.g. SSS)
à If this is the case, know how
much the employee contributed
(through salary deductions) =
e.g. Employee contributed 1M,
while employer contributed 2M.
à ONLY THE AMOUNT
CONTRIBUTED BY THE
EMPLOYER IS TAXABLE.
That contributed by the
employee is not taxable because

return of capital (cf. Sec. 60 in
relation to Sec. 32.B)
§ Non-contributory – no salary
deductions to the employee.
The entire amount accepted as
retirement benefit, therefore, is
taxable.
§ Sir: If the problem is silent as to
whether contributory or not, the
entire amount is taxable.
7. Benefits or separation pay received due to
involuntary separation from employment
a. Death, sickness or physical disability or
any cause beyond the control of the EE
(e.g., retrenchment due to redundancy)
(illegal dismissal cases)
b. Never tender a courtesy resignation,
otherwise, not involuntary separation
anymore even if there is ongoing
retrenchment. Best evidence rule!
8. 13th month pay and other benefits – treatment of
excess over de minimis benefits
a. P82,000 threshold applies only to
employees, not to self-employed
individuals (trade, business, practice of
profession)
9. Prizes and awards in recognition of specified
achievements and those received in sports
competition
TWO TYPES:
a. Prizes and awards in recognition of specified
achievements (religious, charitable, scientific,
educational, artistic, literary or civic).
Two requirements:
i. Recipient must not have done any act to
receive such award
ii. Recipient must not be required to render
substantial future services as a condition
to receiving the prize or award.
§ Sir’s Example: Tatay X was
watching Eat Bulaga at home;
they called his name as recipient
of Gintong Ama Award à
scientific achievement for
having sired 50 children. LOL
ugh
b. Prizes and awards in sports competition.
i. Local and international sports
competitions
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ii. Sanctioned by the national sports
associations (Philippine Olympic
Committee à Sir: designed to
promote amateurism. What.)
Note: The term “awards” as defined in the law includes
everything received by the athlete during his training, after
his winning, etc. à excluded because all intended to uplift
his well-being (e.g. Onyok Velasco). Not subject to both
donor’s tax and income tax.
10. Exclusions intended to enhance the capital market
a. Gains from long-term certificates of
indebtedness, etc. But it is only the gain
that is excluded, not the interests.
i. Interests – passive income;
Gain – active income.
b. Gains from redemption of shares in
mutual fund companies. Excluded to
encourage investors to share their
investments.
Question: What are the two captions or categories for income
tax under the ITR?
1. Compensation Income
2. Income from trade, business, or practice of
profession à DEFAULT RULE à All income
required to be declared which are not covered
under compensation income will fall under this
category.
a. Interest income
b. Windfalls
c. Prizes not exceeding P10K
d. Dividends from abroad
e. All capital gains that has no specific tax
treatment under the law
f. Income from whatever source derived
Therefore, there are only two types of income that are
required to be declared in an ITR. Why not just lump them
all together? Why the COMPARTMENTALIZED
APPROACH?
• Cf. Sec. 34 à No deductions shall be allowed
from compensation income save for the special
deduction under Sec. 34.M (Premium Payments on
Health and/or Hospitalization Insurance of an
Individual Taxpayer à 200 per month or a
maximum of 2400 per annum; a family deduction)
• Each and every taxpayer who earns mixed income
• MIXED INCOME EARNER – there are more
than one type of returnable income
o E.g., an employee maintains an account
with the bank, and such earns interest à
Not a mixed income earner
o Personal & additional exemptions will be
deducted only from compensation

income if there is mixed income. But
offsetting allowed if there is a negative
compensation income.
§ 50K personal exemption
§ 25K additional exemption for a
dependent (maximum of 4) =
100K
TAXABLE COMPENSATION INCOME
• = Gross compensation income minus Sec. 34M
minus personal & additional exemptions
NET INCOME FROM TRADE, BUSINESS OR
PRACTICE OF PROFESSION
• = Gross income from TBP MINUS itemized
deductions/optional standard deductions
= ADD the two = AGGREGATE TAXABLE
INCOME, then apply the graduated tax rates under Sec. 24
• If the taxable compensation income is a
NEGATIVE FIGURE, can you combine it with
the POSITIVE taxable income from TBP? Or can
you offset them? (Excess or unclaimed personal
exemptions?)
• Yes, you can offset them, because you are entitled
to a maximum of P150K. That is a matter of right
given by law. You can claim it against business
income if there are excess personal exemptions.
• BUT loss from business cannot be offset against
compensation income but can be carried over as
NOLCO (net operating loss carry-over). No
deduction shall be allowed against compensation
income à Sec 34 à COMPARTMENTALIZED
APPROACH
FOR INDIVIDUALS
• Gross income – deductions & personal
exemptions = Taxable income (Sec. 31)
FOR CORPORATIONS
• No personal exemptions
• Gross income – deductions = Taxable income
TWO TYPES OF DEDUCTIONS FROM GROSS
INCOME
1. Itemized deductions (Sec. 34 A-J) à
2. Optional Standard Deduction (Sec. 34L)
• Not all taxpayers taxable on net income can
choose what deduction to claim. Non-resident
alien engaged in trade or business in the
Philippines can only claim itemized deductions.
(NRA-NETB is taxable on gross income;
withholding agent is directly liable for the payment
of the income tax)
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• Non-resident foreign corporations are taxed on
gross income; withholding agent is directly liable
for the payment of the income tax.
• NRA-NETB and NRFC can only earn passive
investment income from the Philippines. It does
not require their physical presence here.
ITEMIZED DEDUCTIONS FROM GROSS
INCOME
NATIONAL INTERNAL REVENUE CODE
Section 34. Deductions from Gross Income. - Except for
taxpayers earning compensation income arising from personal
services rendered under an employer-employee relationship
where no deductions shall be allowed under this Section other
than under subsection (M) hereof, in computing taxable
income subject to income tax under Sections 24 (A); 25 (A); 26;
27 (A), (B) and (C); and 28 (A) (1), there shall be allowed the
following deductions from gross income;
(A) Expenses. -
1. Ordinary and Necessary Trade, Business or
Professional Expenses.-
a) In General. - There shall be allowed as
deduction from gross income all the ordinary
and necessary expenses paid or incurred during
the taxable year in carrying on or which are
directly attributable to, the development,
management, operation and/or conduct of the
trade, business or exercise of a profession,
including:
i. A reasonable allowance for salaries,
wages, and other forms of compensation
for personal services actually rendered,
including the grossed-up monetary value
of fringe benefit furnished or granted by
the employer to the employee: Provided,
That the final tax imposed under Section
33 hereof has been paid;
ii. A reasonable allowance for travel
expenses, here and abroad, while away
from home in the pursuit of trade,
business or profession;
iii. A reasonable allowance for rentals and/or
other payments which are required as a
condition for the continued use or
possession, for purposes of the trade,
business or profession, of property to
which the taxpayer has not taken or is not
taking title or in which he has no equity
other than that of a lessee, user or
possessor;
iv. A reasonable allowance for entertainment,
amusement and recreation expenses
during the taxable year, that are directly
connected to the development,
management and operation of the trade,
business or profession of the taxpayer, or

that are directly related to or in
furtherance of the conduct of his or its
trade, business or exercise of a profession
not to exceed such ceilings as the
Secretary of Finance may, by rules and
regulations prescribe, upon
recommendation of the Commissioner,
taking into account the needs as well as
the special circumstances, nature and
character of the industry, trade, business,
or profession of the taxpayer: Provided,
That any expense incurred for
entertainment, amusement or recreation
that is contrary to law, morals public
policy or public order shall in no case be
allowed as a deduction.
b) Substantiation Requirements. - No deduction
from gross income shall be allowed under
Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as
official receipts or other adequate records: (i)
the amount of the expense being deducted, and
(ii) the direct connection or relation of the
expense being deducted to the development,
management, operation and/or conduct of the
trade, business or profession of the taxpayer.
c) Bribes, Kickbacks and Other Similar Payments.
- No deduction from gross income shall be
allowed under Subsection (A) hereof for any
payment made, directly or indirectly, to an
official or employee of the national
government, or to an official or employee of
any local government unit, or to an official or
employee of a government-owned or -
controlled corporation, or to an official or
employee or representative of a foreign
government, or to a private corporation, general
professional partnership, or a similar entity, if
the payment constitutes a bribe or kickback.
2. Expenses Allowable to Private Educational
Institutions. - In addition to the expenses allowable as
deductions under this Chapter, a private educational
institution, referred to under Section 27 (B) of this
Code, may at its option elect either: (a) to deduct
expenditures otherwise considered as capital outlays
of depreciable assets incurred during the taxable year
for the expansion of school facilities or (b) to deduct
allowance for depreciation thereof under Subsection
(F) hereof.
(B) Interest.-
1. In General. - The amount of interest paid or incurred
within a taxable year on indebtedness in connection
with the taxpayer's profession, trade or business shall
be allowed as deduction from gross income:
Provided, however, That the taxpayer's otherwise
allowable deduction for interest expense shall be
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reduced by an amount equal to the following
percentages of the interest income subjected to final
tax:
Forty-one percent (41%) beginning January 1, 1998;
Thirty-nine percent (39%) beginning January 1, 1999;
and
Thirty-eight percent (38%) beginning January 1, 2000;
2. Exceptions. - No deduction shall be allowed in respect
of interest under the succeeding subparagraphs:
a) If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise:
Provided, That such interest shall be allowed a a
deduction in the year the indebtedness is paid:
Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount
of interest which corresponds to the amount of
the principal amortized or paid during the year
shall be allowed as deduction in such taxable
year;
b) If both the taxpayer and the person to whom
the payment has been made or is to be made are
persons specified under Section 36 (B); or
c) If the indebtedness is incurred to finance
petroleum exploration.
3. Optional Treatment of Interest Expense. - At the option of
the taxpayer, interest incurred to acquire property
used in trade business or exercise of a profession may
be allowed as a deduction or treated as a capital
expenditure.
(C) Taxes.-
1. In General. - Taxes paid or incurred within the taxable
year in connection with the taxpayer's profession,
trade or business, shall be allowed as deduction,
except
a) The income tax provided for under this Title;
b) Income taxes imposed by authority of any
foreign country; but this deduction shall be
allowed in the case of a taxpayer who does not
signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
subsection (relating to credits for taxes of
foreign countries);
c) Estate and donor's taxes; and
d) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed.
Provided, That taxes allowed under this
Subsection, when refunded or credited, shall be
included as part of gross income in the year of
receipt to the extent of the income tax benefit
of said deduction.

2. Limitations on Deductions. - In the case of a nonresident
alien individual engaged in trade or business in the
Philippines and a resident foreign corporation, the
deductions for taxes provided in paragraph (1) of this
Subsection (C) shall be allowed only if and to the
extent that they are connected with income from
sources within the Philippines.
3. Credit Against Tax for Taxes of Foreign Countries. - If the
taxpayer signifies in his return his desire to have the
benefits of this paragraph, the tax imposed by this
Title shall be credited with:
a) Citizen and Domestic Corporation. - In the case
of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid
or incurred during the taxable year to any
foreign country; and
b) Partnerships and Estates. - In the case of any
such individual who is a member of a general
professional partnership or a beneficiary of an
estate or trust, his proportionate share of such
taxes of the general professional partnership or
the estate or trust paid or incurred during the
taxable year to a foreign country, if his
distributive share of the income of such
partnership or trust is reported for taxation
under this Title.
An alien individual and a foreign corporation
shall not be allowed the credits against the tax
for the taxes of foreign countries allowed under
this paragraph.
4. Limitations on Credit. - The amount of the credit taken
under this Section shall be subject to each of the
following limitations:
a) The amount of the credit in respect to the tax
paid or incurred to any country shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer's taxable
income from sources within such country under
this Title bears to his entire taxable income for
the same taxable year; and
b) The total amount of the credit shall not exceed
the same proportion of the tax against which
such credit is taken, which the taxpayer's taxable
income from sources without the Philippines
taxable under this Title bears to his entire
taxable income for the same taxable year.
5. Adjustments on Payment of Incurred Taxes. - If accrued
taxes when paid differ from the amounts claimed as
credits by the taxpayer, or if any tax paid is refunded
in whole or in part, the taxpayer shall notify the
Commissioner; who shall redetermine the amount of
the tax for the year or years affected, and the amount
of tax due upon such redetermination, if any, shall be
paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the
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case of such a tax incurred but not paid, the
Commissioner as a condition precedent to the
allowance of this credit may require the taxpayer to
give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he
may require, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed
shall contain such further conditions as the
Commissioner may require.
6. Year in Which Credit Taken. - The credits provided for
in Subsection (C)(3) of this Section may, at the option
of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken
in the year which the taxes of the foreign country
were incurred, subject, however, to the conditions
prescribed in Subsection (C)(5) of this Section. If the
taxpayer elects to take such credits in the year in
which the taxes of the foreign country accrued, the
credits for all subsequent years shall be taken upon
the same basis and no portion of any such taxes shall
be allowed as a deduction in the same or any
succeeding year.
7. Proof of Credits. - The credits provided in Subsection
(C)(3) hereof shall be allowed only if the taxpayer
establishes to the satisfaction of the Commissioner
the following:
a) The total amount of income derived from
sources without the Philippines;
b) The amount of income derived from each
country, the tax paid or incurred to which is
claimed as a credit under said paragraph, such
amount to be determined under rules and
regulations prescribed by the Secretary of
Finance; and
c) All other information necessary for the
verification and computation of such credits.
(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.
2. Proof of Loss. - In the case of a nonresident alien
individual or foreign corporation, the losses
deductible shall be those actually sustained during the
year incurred in business, trade or exercise of a
profession conducted within the Philippines, when
such losses are not compensated for by insurance or
other forms of indemnity. 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, That the time 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; and
3. Net Operating Loss Carry-Over. - The 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: Provided, however, That any net loss incurred in
a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction
under this Subsection: Provided, further, That 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.
For purposes of this subsection, the term 'not
operating loss' shall mean the excess of allowable
deduction over gross income of the business in a
taxable year.
Provided, That for mines other than oil and gas wells,
a net operating loss without the benefit of incentives
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provided for under Executive Order No. 226, as
amended, otherwise known as the Omnibus
Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over
as a deduction from taxable income for the next five
(5) years immediately following the year of such loss.
The entire amount of the loss shall be carried over to
the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds, the
taxable income of such first year shall be deducted in
like manner form the taxable income of the next
remaining four (4) years.
4. Capital Losses. -
a) Limitation. - Loss from sales or Exchanges of
capital assets shall be allowed only to the extent
provided in Section 39.
b) Securities Becoming worthless. - If securities as
defined in Section 22 (T) become worthless
during the taxable year and are capital assets,
the loss resulting therefrom shall, for purposes
of this Title, be considered as a loss from the
sale or exchange, on the last day of such taxable
year, of capital assets.
5. Losses From Wash Sales of Stock or Securities. -
Losses from 'wash sales' of stock or securities as
provided in Section 38.
6. Wagering Losses. - Losses from wagering
transactions shall b allowed only to the extent of the
gains from such transactions.
7. Abandonment Losses. -
a) In the event a contract area where petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto
shall be allowed as a deduction: Provided, That
accumulated expenditures incurred in that area
prior to January 1, 1979 shall be allowed as a
deduction only from any income derived from
the same contract area. In all cases, notices of
abandonment shall be filed with the
Commissioner.
b) In case a producing well is subsequently
abandoned, the unamortized costs thereof, as
well as the undepreciated costs of equipment
directly used therein , shall be allowed as a
deduction in the year such well, equipment or
facility is abandoned by the contractor:
Provided, That if such abandoned well is
reentered and production is resumed, or if such
equipment or facility is restored into service, the
said costs shall be included as part of gross
income in the year of resumption or restoration
and shall be amortized or depreciated, as the
case may be.
(E) Bad Debts. -
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1. In General. - Debts due to the taxpayer actually
ascertained to be worthless and charged off within
the taxable year except those not connected with
profession, trade or business and those sustained in a
transaction entered into between parties mentioned
under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as
deduction in the preceding years shall be included as
part of the gross income in the year of recovery to
the extent of the income tax benefit of said
deduction.
2. Securities Becoming Worthless. - If securities, as defined in
Section 22 (T), are ascertained to be worthless and
charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case
of a taxpayer other than a bank or trust company
incorporated under the laws of the Philippines a
substantial part of whose business is the receipt of
deposits, for the purpose of this Title, be considered
as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets.
(F) Depreciation. -
1. General Rule. - There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion,
wear and tear (including reasonable allowance for
obsolescence) of property used in the trade or
business. In the case of property held by one person
for life with remainder to another person, the
deduction shall be computed as if the life tenant were
the absolute owner of the property and shall be
allowed to the life tenant. In the case of property held
in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in
accordance with the pertinent provisions of the
instrument creating the trust, or in the absence of
such provisions, on the basis of the trust income
allowable to each.
2. Use of Certain Methods and Rates. - The term 'reasonable
allowance' as used in the preceding paragraph shall
include, but not limited to, an allowance computed in
accordance with rules and regulations prescribed by
the Secretary of Finance, upon recommendation of
the Commissioner, under any of the following
methods:
a) The straight-line method;
b) Declining-balance method, using a rate not
exceeding twice the rate which would have been
used had the annual allowance been computed
under the method described in Subsection (F)
(1);
c) The sum-of-the-years-digit method; and
d) any other method which may be prescribed by
the Secretary of Finance upon recommendation
of the Commissioner.
3. Agreement as to Useful Life on Which Depreciation Rate is
Based. - Where under rules and regulations prescribed
30
A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
by the Secretary of Finance upon recommendation of
the Commissioner, the taxpayer and the
Commissioner have entered into an agreement in
writing specifically dealing with the useful life and
rate of depreciation of any property, the rate so
agreed upon shall be binding on both the taxpayer
and the national Government in the absence of facts
and circumstances not taken into consideration
during the adoption of such agreement. The
responsibility of establishing the existence of such
facts and circumstances shall rest with the party
initiating the modification. Any change in the agreed
rate and useful life of the depreciable property as
specified in the agreement shall not be effective for
taxable years prior to the taxable year in which notice
in writing by certified mail or registered mail is served
by the party initiating such change to the other party
to the agreement.
Provided, however, that where the taxpayer has
adopted such useful life and depreciation rate for any
depreciable and claimed the depreciation expenses as
deduction from his gross income, without any written
objection on the part of the Commissioner or his
duly authorized representatives, the aforesaid useful
life and depreciation rate so adopted by the taxpayer
for the aforesaid depreciable asset shall be considered
binding for purposes of this Subsection.
4. Depreciation of Properties Used in Petroleum Operations. -
An allowance for depreciation in respect of all
properties directly related to production of petroleum
initially placed in service in a taxable year shall be
allowed under the straight-line or declining-balance
method of depreciation at the option of the service
contractor.
However, if the service contractor initially elects the
declining-balance method, it may at any subsequent
date, shift to the straight-line method.
The useful life of properties used in or related to
production of petroleum shall be ten (10) years of
such shorter life as may be permitted by the
Commissioner.
Properties not used directly in the production of
petroleum shall be depreciated under the straight-line
method on the basis of an estimated useful life of five
(5) years.
5. Depreciation of Properties Used in Mining Operations. - an
allowance for depreciation in respect of all properties
used in mining operations other than petroleum
operations, shall be computed as follows:
a) At the normal rate of depreciation if the
expected life is ten (10) years or less; or
b) Depreciated over any number of years between
five (5) years and the expected life if the latter is
more than ten (10) years, and the depreciation

thereon allowed as deduction from taxable
income: Provided, That the contractor notifies
the Commissioner at the beginning of the
depreciation period which depreciation rate
allowed by this Section will be used.
6. Depreciation Deductible by Nonresident Aliens Engaged in
Trade or Business or Resident Foreign Corporations. - In the
case of a nonresident alien individual engaged in trade
or business or resident foreign corporation, a
reasonable allowance for the deterioration of
Property arising out of its use or employment or its
non-use in the business trade or profession shall be
permitted only when such property is located in the
Philippines.
(G) Depletion of Oil and Gas Wells and Mines. -
1. In General. - In the case of oil and gas wells or mines,
a reasonable allowance for depletion or amortization
computed in accordance with the cost-depletion
method shall be granted under rules and regulations
to be prescribed by the Secretary of finance, upon
recommendation of the Commissioner. Provided,
That when the allowance for depletion shall equal the
capital invested no further allowance shall be granted:
Provided, further, That after production in
commercial quantities has commenced, certain
intangible exploration and development drilling costs:
(a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the
year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such
expenditures incurred are for producing wells and/or
mines in the same contract area.
Intangible costs in petroleum operations' refers to
any cost incurred in petroleum operations which in
itself has no salvage value and which is incidental to
and necessary for the drilling of wells and preparation
of wells for the production of petroleum: Provided,
That said costs shall not pertain to the acquisition or
improvement of property of a character subject to
the allowance for depreciation except that the
allowances for depreciation on such property shall be
deductible under this Subsection.
Any intangible exploration, drilling and development
expenses allowed as a deduction in computing taxable
income during the year shall not be taken into
consideration in computing the adjusted cost basis
for the purpose of computing allowable cost
depletion.
2. Election to Deduct Exploration and Development
Expenditures. - In computing taxable income from
mining operations, the taxpayer may at his option,
deduct exploration and development expenditures
accumulated as cost or adjusted basis for cost
depletion as of date of prospecting, as well as
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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
exploration and development expenditures paid or
incurred during the taxable year: Provided, That the
amount deductible for exploration and development
expenditures shall not exceed twenty-five percent
(25%) of the net income from mining operations
computed without the benefit of any tax incentives
under existing laws. The actual exploration and
development expenditures minus twenty-five percent
(25%) of the net income from mining shall be carried
forward to the succeeding years until fully deducted.
The election by the taxpayer to deduct the
exploration and development expenditures is
irrevocable and shall be binding in succeeding taxable
years.
'Net income from mining operations', as used in this
Subsection, shall mean gross income from operations
less 'allowable deductions' which are necessary or
related to mining operations. 'Allowable deductions'
shall include mining, milling and marketing expenses,
and depreciation of properties directly used in the
mining operations. This paragraph shall not apply to
expenditures for the acquisition or improvement of
property of a character which is subject to the
allowance for depreciation.
In no case shall this paragraph apply with respect to
amounts paid or incurred for the exploration and
development of oil and gas.
The term 'exploration expenditures' means
expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent or quality
of any deposit of ore or other mineral, and paid or
incurred before the beginning of the development
stage of the mine or deposit.
The term 'development expenditures' means
expenditures paid or incurred during the
development stage of the mine or other natural
deposits. The development stage of a mine or other
natural deposit shall begin at the time when deposits
of ore or other minerals are shown to exist in
sufficient commercial quantity and quality and shall
end upon commencement of actual commercial
extraction.
3. Depletion of Oil and Gas Wells and Mines Deductible by a
Nonresident Alien individual or Foreign Corporation. - In
the case of a nonresident alien individual engaged in
trade or business in the Philippines or a resident
foreign corporation, allowance for depletion of oil
and gas wells or mines under paragraph (1) of this
Subsection shall be authorized only in respect to oil
and gas wells or mines located within the Philippines.
(H) Charitable and Other Contributions. -
1. In General. - Contributions or gifts actually paid or
made within the taxable year to, or for the use of the
Government of the Philippines or any of its agencies
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or any political subdivision thereof exclusively for
public purposes, or to accredited domestic
corporation or associations organized and operated
exclusively for religious, charitable, scientific, youth
and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to
social welfare institutions, or to non-government
organizations, in accordance with rules and
regulations promulgated by the Secretary of finance,
upon recommendation of the Commissioner, no part
of the net income of which inures to the benefit of
any private stockholder or individual in an amount
not in excess of ten percent (10%) in the case of an
individual, and five percent (5%) in the case of a
corporation, of the taxpayer's taxable income derived
from trade, business or profession as computed
without the benefit of this and the following
subparagraphs.
2. Contributions Deductible in Full. - Notwithstanding the
provisions of the preceding subparagraph, donations
to the following institutions or entities shall be
deductible in full;
a) Donations to the Government. - Donations to
the Government of the Philippines or to any of
its agencies or political subdivisions, including
fully-owned government corporations,
exclusively to finance, to provide for, or to be
used in undertaking priority activities in
education, health, youth and sports
development, human settlements, science and
culture, and in economic development
according to a National Priority Plan
determined by the National Economic and
Development Authority (NEDA), In
consultation with appropriate government
agencies, including its regional development
councils and private philantrophic persons and
institutions: Provided, That any donation which
is made to the Government or to any of its
agencies or political subdivisions not in
accordance with the said annual priority plan
shall be subject to the limitations prescribed in
paragraph (1) of this Subsection;
b) Donations to Certain Foreign Institutions or
International Organizations. - donations to
foreign institutions or international
organizations which are fully deductible in
pursuance of or in compliance with agreements,
treaties, or commitments entered into by the
Government of the Philippines and the foreign
institutions or international organizations or in
pursuance of special laws;
c) Donations to Accredited Nongovernment
Organizations. - the term 'nongovernment
organization' means a non profit domestic
corporation:
1) Organized and operated exclusively for
scientific, research, educational, character-
building and youth and sports development,
32
A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
health, social welfare, cultural or charitable
purposes, or a combination thereof, no part
of the net income of which inures to the
benefit of any private individual;
2) Which, not later than the 15th day of the
third month after the close of the accredited
nongovernment organizations taxable year
in which contributions are received, makes
utilization directly for the active conduct of
the activities constituting the purpose or
function for which it is organized and
operated, unless an extended period is
granted by the Secretary of Finance in
accordance with the rules and regulations to
be promulgated, upon recommendation of
the Commissioner;
3) The level of administrative expense of
which shall, on an annual basis, conform
with the rules and regulations to be
prescribed by the Secretary of Finance,
upon recommendation of the
Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses;
and
4) The assets of which, in the even of
dissolution, would be distributed to another
nonprofit domestic corporation organized
for similar purpose or purposes, or to the
state for public purpose, or would be
distributed by a court to another
organization to be used in such manner as
in the judgment of said court shall best
accomplish the general purpose for which
the dissolved organization was organized.
Subject to such terms and conditions as may
be prescribed by the Secretary of Finance,
the term 'utilization' means:
i. Any amount in cash or in kind
(including administrative expenses) paid
or utilized to accomplish one or more
purposes for which the accredited
nongovernment organization was
created or organized.
ii. Any amount paid to acquire an asset
used (or held for use) directly in carrying
out one or more purposes for which the
accredited nongovernment organization
was created or organized.
An amount set aside for a specific
project which comes within one or
more purposes of the accredited
nongovernment organization may be
treated as a utilization, but only if at the
time such amount is set aside, the
accredited nongovernment organization
has established to the satisfaction of the
Commissioner that the amount will be

paid for the specific project within a
period to be prescribed in rules and
regulations to be promulgated by the
Secretary of Finance, upon
recommendation of the Commissioner,
but not to exceed five (5) years, and the
project is one which can be better
accomplished by setting aside such
amount than by immediate payment of
funds.
3. Valuation. - The amount of any charitable
contribution of property other than money shall be
based on the acquisition cost of said property.
4. Proof of Deductions. - Contributions or gifts shall be
allowable as deductions only if verified under the
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner.
(I) Research and Development.-
1. In General. - a taxpayer may treat research or
development expenditures which are paid or incurred
by him during the taxable year in connection with his
trade, business or profession as ordinary and
necessary expenses which are not chargeable to
capital account. The expenditures so treated shall be
allowed as deduction during the taxable year when
paid or incurred.
2. Amortization of Certain Research and Development
Expenditures. - At the election of the taxpayer and in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the following
research and development expenditures may be
treated as deferred expenses:
a) Paid or incurred by the taxpayer in connection
with his trade, business or profession;
b) Not treated as expenses under paragraph 91)
hereof; and
c) Chargeable to capital account but not
chargeable to property of a character which is
subject to depreciation or depletion.
In computing taxable income, such deferred expenses shall be
allowed as deduction ratably distributed over a period of not
less than sixty (60) months as may be elected by the taxpayer
(beginning with the month in which the taxpayer first realizes
benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for
any taxable year beginning after the effectivity of this Code, but
only if made not later than the time prescribed by law for filing
the return for such taxable year. The method so elected, and
the period selected by the taxpayer, shall be adhered to in
computing taxable income for the taxable year for which the
election is made and for all subsequent taxable years unless
with the approval of the Commissioner, a change to a different
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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure
paid or incurred during any taxable year for which the taxpayer
makes the election.
3. Limitations on deduction. - This Subsection shall not
apply to:
a) Any expenditure for the acquisition or
improvement of land, or for the improvement
of property to be used in connection with
research and development of a character which
is subject to depreciation and depletion; and
b) Any expenditure paid or incurred for the
purpose of ascertaining the existence, location,
extent, or quality of any deposit of ore or other
mineral, including oil or gas.
(J) Pension Trusts. - An employer establishing or maintaining a
pension trust to provide for the payment of reasonable
pensions to his employees shall be allowed as a deduction (in
addition to the contributions to such trust during the taxable
year to cover the pension liability accruing during the year,
allowed as a deduction under Subsection (A) (1) of this Section
) a reasonable amount transferred or paid into such trust during
the taxable year in excess of such contributions, but only if
such amount (1)has not theretofore been allowed as a
deduction, and (2) is apportioned in equal parts over a period
of ten (10) consecutive years beginning with the year in which
the transfer or payment is made.
(K) Additional Requirements for Deductibility of Certain Payments. -
Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income or for
which depreciation or amortization may be allowed under this
Section, shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom has
been paid to the Bureau of Internal Revenue in accordance
with this Section 58 and 81 of this Code.
(L) Optional Standard Deduction.* - In lieu of the deductions
allowed under the preceding Subsections, an individual subject
to tax under Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case
may be. In the case of a corporation subject to tax under
section 27(A) and 28(A)(1), it may elect a standard deduction in
an amount not exceeding forty percent (40%) of it gross
income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intention to elect the optional
standard deduction, he shall be considered as having availed
himself of the deductions allowed in the preceding Subsections.
Such election when made in the return shall be irrevocable for
the taxable year for which the return is made: Provided, That an
individual who is entitled to and claimed for the optional
standard 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
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his gross

income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
[As amended by RA 9504 (2008)]
(M) Premium Payments on Health and/or Hospitalization Insurance of
an Individual Taxpayer. - the amount of premiums not to exceed
Two thousand four hundred pesos (P2,400) per family or Two
hundred pesos (P200) a month paid during the taxable year for
health and/or hospitalization insurance taken by the taxpayer
for himself, including his family, shall be allowed as a deduction
from his gross income: Provided, That said family has a gross
income of not more than Two hundred fifty thousand pesos
(P250,000) for the taxable year: Provided, finally, That in the
case of married taxpayers, only the spouse claiming the
additional exemption for dependents shall be entitled to this
deduction.
Notwithstanding the provision of the preceding Subsections,
The Secretary of Finance, upon recommendation of the
Commissioner, after a public hearing shall have been held for
this purpose, may prescribe by rules and regulations, limitations
or ceilings for any of the itemized deductions under
Subsections (A) to (J) of this Section: Provided, That for
purposes of determining such ceilings or limitations, the
Secretary of Finance shall consider the following factors: (1)
adequacy of the prescribed limits on the actual expenditure
requirements of each particular industry; and (2)effects of
inflation on expenditure levels: Provided, further, That no
ceilings shall further be imposed on items of expense already
subject to ceilings under present law.
1. Ordinary AND necessary expenses
• When is an expense considered ordinary?
Normal and usual in relation to the taxpayer's
business and surrounding circumstances; need
not be recurring à THE BENEFIT THAT
THE TAXPAYER WILL DERIVE FROM
THE EXPENSE SHOULD NOT EXCEED
ONE TAXABLE YEAR, otherwise, it will
become an extraordinary expense (capital
expenditure; cf. Sec. 36 items not deductible).
• Matching Principle – All deductions or
expenses must be matched against income. If
the income is only for one year, the expense
must also be for one year. Otherwise,
capitalized à depreciated or amortized
(cannot claim as an outright deduction during
one taxable year only)
o There has to be a proper matching
of costs against revenues.
• General Foods Corporation v. CIR: The media
advertising expenses which were found to be
inordinately large and thus, not ordinary, and
which were incurred in order to protect the
taxpayer’s brand franchise which is analogous
to the maintenance of goodwill or title to
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one’s property, are not ordinary and necessary
expenses but are capital expenditures, which
should be spread out over a reasonable period
of time.
o Here, the benefit that can be derived
is not only for one year. A brand
franchise or good will is for life.
• Is an intangible asset subject to depreciation?
Can you amortize it?
o Yes and no. Yes, if the intangible
asset has a definite life. No, if
otherwise. See Basilan Estates Inc. v.
CIR
• When is an expense necessary?
o Necessary for the business
o Unnecessary – personal, living or family
expense?
o Can an expense incurred by a corporation
be disallowed by reason of personal,
living or family expense? No. This applies
only to an individual. But why is it not
allowed to an individual? Because it is not
necessary, and only necessary expenses
are deductible.
2. Interest
• Only business-connected interests are
deductible. So if the loan is personal or not
used in trade or business, then the interest is
also not deductible.
• Interest on deficiency of income tax? (Note:
Income tax is not a deductible tax) Yes,
deductible because considered business-
connected interest (income tax is business-
connected)
• Palanca v. CIR: Interest on deficiency taxes is
deductible from gross income.
• Interest, to be deductible, is not limited only
to indebtedness.
TAX ARBITRAGE RULE
• Allowable interest expense equals interest expense
minus 33% of interest income subjected to final
withholding tax à If the taxpayer incurs interest
expense in a taxable year and at the same time
earns interest income, he shall not be allowed to
get the full deduction
• Intended to address the tax differential (effect of
the combination of global and schedular income
tax systems)
• This limitation is apparently intended to counter
the tax arbitrage scheme where a taxpayer obtains
an interest-bearing loan and places the proceeds of
such loan in investments that yield interest income

subject to preferential tax rate of 20% final
withholding tax. [Valencia and Roxas]
• Corporations: Global = 30%; Schedular (e.g.,
interest income) = 20%
• See example in handouts (p. 11)
NON-DEDUCTIBLE INTEREST EXPENSE
a. Interest paid in advance by the taxpayer who
reports income on cash basis shall only be allowed
as deduction in the year the indebtedness is paid.
b. If the indebtedness is payable in periodic
amortizations, only the amount of interest which
corresponds to the amount of the principal
amortized or paid during the year shall be allowed
as deduction in such taxable year.
c. Interest payments made between related taxpayers.
d. Interest on indebtedness incurred to finance
petroleum exploration
• Indirect prohibition for foreign-owned
corporations not to use local money to
finance their project. They should bring in
their own capital.
• Palanca v. CIR
CASH BASIS INDIVIDUAL TAXPAYER
• Cash basis = an income is earned when money is
received, and an expense is incurred when money
is given out. Expense is deductible when paid.
There has to be actual or constructive receipt of
the income, or expense made.
• Accrual basis = an income should be recognized
when earned; it does not matter when it is not yet
received (e.g., services already rendered). An
expense is deductible when incurred; it does not
matter when payable on a future date.
• ON INTEREST: No deduction shall be allowed if
within the taxable year an individual taxpayer
reporting income on cash basis incurs an
indebtedness on which an interest is paid in
advance through discount or otherwise. But the
deduction shall be allowed in the year the
indebtedness (principal) is paid, or if payable
through installment, aliquot portion
• Why does this follow the accrual method? This is
an exception to the cash basis method
o Prevent evils of an individual taxpayer
getting a loan on the last day of the year
just to get a deduction (but pay the loan
after two days during the next year)
Optional Treatment of Interest Expense
• At the option of the taxpayer, interest expense on
a capital expenditure may be allowed as: (a) A
deduction in full in the year when incurred
(OUTRIGHT DEDUCTION); (b) A capital
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expenditure for which the taxpayer may claim only
as a deduction the periodic amortization of such
expenditure (CAPITALIZATION)
o This gives the taxpayer an avenue to plan
his tax exposure.
• PICOP v. CIR: Availment of one option excludes
the other. Touch move beh.
Tax Treatment of a Loan Between Related Parties (cf.
Sec. 36B)
• E.g., loan extended by a parent corporation to a
subsidiary; loan by a father to a son engaged in
business to be used as additional capital
• Interest income of the father is taxable, but the
interest expense of the son is not deductible.
• Is interest on related-party loan double-taxed?
(taxed at source and at the point of destination)
o Yes. But this is to discourage related-
party loans.
• They are better off if they will not stipulate any
interest. The CIR cannot impute any interest
income on the creditor.
o Under the Civil Code, there shall be no
interest unless it is expressly stipulated.
o To be taxable, it must be actually earned
and legally due.
o Exception: Sec. 33 à Fringe Benefits
Tax à If an ER extends an interest-free
loan to a manager, then the foregone
interest is a fringe benefit. Same rule if
the ER extends a loan with interest below
the market rate (12%).
§ If 6% interest rate only, then the
foregone 6% will be fringe
benefit.
Three Types of Deductions Limited By Related-Party
Transaction
a. Interest
b. Losses on Sales or Exchanges of Property
Between Related Parties
c. Bad Debts
Related Taxpayers
a. Between members of the family, i.e. brothers and
sisters (whether by the whole or half-blood),
spouse, ancestor, and lineal descendants; or
b. Except in case of distributions in liquidation,
between an individual and a corporation, where
the individual owns directly or indirectly more than
50% of the outstanding stock of the corporation
c. Except in the case of distributions in liquidation,
between two corporations where:
• Either one is a personal holding company of a
foreign personal holding company with
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respect to the taxable year preceding the date § = Not yet deductible
of the sale of exchange; and because you still did not
• More than 50% of the outstanding stock of surrender the possibility
each is owned, directly or indirectly, by or for of collection. See third
the same individual; or requirement for
d. Between parties to a trust – Grantor and Fiduciary; deductibility.
or § Year 3 – Allowance for
e. Fiduciary of a trust and fiduciary of another trust if Doubtful Accounts =
the same person is a grantor with respect to each 100K
trust; or § Write off from Accounts
f. Fiduciary and Beneficiary Receivable = 100K = This
becomes deductible.
3. Taxes
• Not deductible: Progressive Taxes (Income, o Direct Expense or Direct Write-Off
Donor, Estate, Special Levies under the Method
LGC). Otherwise, their nature as progressive § There must be an earnest
taxes will be destroyed. Those will huge effort to collect (collection
income will offset tax paid through letters, bro). Once it is
deductions. ascertained to be worthless,
• As for donor and estate taxes, they are not cancel the amount from the
deductible because they are personal taxes. Accounts Receivable list.
They are not business-connected. § Year 1 – Bad Debt
• Foreign income taxes paid are not allowed as Expense = 100K
a deduction, but only when the taxpayer § Write off from Accounts
chooses to claim it as a deduction. (cf. Sec. Receivable = 100K=
34.3.C) Deductible immediately.
o Only resident citizens and domestic
corporations who are earning § Requirements for Deductibility (PRC v.
income from abroad. CIR)
o Valid and subsisting debt not
4. Losses between related parties
• Doctrine of Involuntary Conversion of o Ascertained to be worthless
o Charged off or written off
Property à not taxable (continuity of during the taxable year (in full
ownership as if no disposition has been made or not at all; partial not allowed)
albeit involuntary § Should be cancelled as
o If insurance proceeds used in part of the asset
acquiring like-kind property
• To be deductible, the casualty loss must be a § Financial Accounting – a recognized
property used in trade or business expense
• But loss on sales or exchanges of property
between related parties is not deductible, but 6. Depreciation
the gain therein is taxable. • Represents an allowance for the gradual
• But not if individual (Net Operating Loss – diminution in the value of an asset due to its
excess of allowable à not deductible; but use in trade or business resulting in ordinary
NOLCO is deductible) wear and tear or normal obsolescence.
o If diminution is abrupt, may not
5. Bad debts qualify as depreciation, but as
• Two Methods of Accounting for Bad Debts casualty loss instead. à E.g. a
o Allowance Method building razed by fire
§ Year 1 – Bad Debt • Purpose: Set aside a part of the business
Expense = 100K income in order to accumulate fund to
§ Credit Allowance or provide for the replacement of that asset
Provision for Doubtful when it is no longer serviceable.
Accounts = 100K • A taxpayer is supposed to declare income and
expenses only for that taxable year. It cannot

declare as expense something that will benefit
it for more than one taxable year.
o Depreciation: purpose is to extricate
the bla bla – REFER TO
MATCHING PRINCIPLE
• General Foods Corporation: An intangible asset
can be the subject of depreciation, IF it has a
definite life.
• E.g. copyright, patent, trademark à NOT
GOOD WILL
7. Depletion
• Distinction between depreciation and
depletion:
o Depletion is a deduction that can be
claimed only by taxpayers who are
operating WASTING ASSETS like
mines, oil wells, etc. It is a procedure
by which they can recover their
invested capital. But the invested
capital should not pertain to
depreciable assets (like bull dozers,
back hoes) (But they also have to
depreciate the depreciable assets)
o Invested capital à construction of
roads, bridges, bunk houses; digging
of tunnels (will benefit them for as
long as the wasting asset is
operational)
o Similarity: Aim of both is to
recover total invested capital
• How to determine allowable depletion every
year:
o Regulations à There is only
depletion procedure allowed à
COST-DEPLETION METHOD
• COST DEPLETION METHOD
o The recovery of invested capital is to
be determined by the number of
units that you are expected to extract
from the mine site. It involves some
sort of estimates by experts.
o E.g. Invested 10M pesos and the
engineer said you are expected to
recover = 10M grams of gold from
the mine site à depletion for every
gram that you recover is one peso
§ So if year 1, recovered only
1 gram = depletion is 1
peso
§ Year 2 = recovered 1000
grams = depletion is 1000
pesos
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§ Total invested capital
DIVIDED BY the
expected units to be
recovered
o Fernandez Hermanos v. CIR: Once the
invested capital has equaled the
expected units, then there is no
depletion deduction that is allowed.
o What if the expected recovery is
overestimated? What happens to the
unrecovered invested capital? à
ABANDONMENT LOSSES à
deductible also from gross income
o What if the output was
underestimated? Once you have
recovered the entire invested capital,
then no further depletion deduction
is allowed.
8. Charitable and other contributions
2 categories for income tax purposes:
a. Deductible in full
b. Subject to limitation
Deductible in full
a. Donation to government à but not absolute à
It must be in furtherance of the priority programs
established by the Government (education, sports,
etc. cf. Sec. 34H). If not, then would fall under
subject to limitation
b. Donation to foreign institutions or international
organizations à UNESCO, UNICEF, Red Cross
à Applying the principle of international comity.
No limitation.
c. Donations to accredited or qualified NGOs à
See requirements for deductibility (Sec. 34)
• Donee institution must be an accredited
NGO
• NGO must have been organized in
furtherance of the purposes recognized
under Sec. 34H
• Contribution must be utilized for the
purpose for which the donee-institution
was established not later than the 15th day
of the month following the close of the
taxable year (Otherwise, not deductible in
full but subject to limit)
• Not more than 30% of the contribution
must be used by the donee for
administration purposes (salaries, rentals,
etc.), otherwise, not deductible in full à
At least 70% must be utilized for the
purpose for which the donee was
established

Subject to limitation
à All other contributions
• Limitation à Shall not exceed 10% for
individuals and 5% for corporations of taxable
income before contribution
9. Contributions to pension trusts (under RA
4917)
• ABC Corporation maintains a reasonable
private benefit plan for all its EEs. It is a
contributory plan à 50% EE, 50% ER. A is
one of the covered EEs. During the taxable
year, the total contributions = 12K (1K per
month). Is A allowed to claim the 12K as
deduction?
o No. This deduction pertains to the
contributions made by the ER, not the
EE. The contributions by the EE are not
deductible (no deductions allowed against
compensation income).
§ Therefore, in some cases, the
ER puts up a non-contributory
plan.
o Note: The contributions are not the same
à Factors like age of the EE upon
employment, salary grade, etc. have to be
considered.
Take note: This only pertains to the current pension liability
of the ER à
 How is this determined? (L) Optional Standard Deduction.* - In lieu of the deductions
• The contributions made during the payroll period
will answer for the current liability of the ER (to
cover for all the pension requirements of its EEs)
• If the plan was established only during the 5th year
à contributions for past service cost à the ER
has to make a lump sum contribution to the fund
(Note that pensions are paid based on all your
years of service, beginning from the first year of
business)
• Can this lump sum contribution be claimed as a
deduction in the year the contribution was made?
o No. It must be ratably distributed or
amortized over a period of 10 years.
o Same principle for lump sum
contribution to answer to any deficiency
in the fund.
• What if the contribution in pension plan was made
in properties? Is it deductible?
o Must sell the property to make the plan
actuarially sound.
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10. Premium payments on health and/or
hospitalization insurance of an individual
taxpayer
• At least 200/month or P2400 per year à
MAXIMUM à a family deduction. Allowed
only when the aggregate gross family income
does not exceed 250K.
• Can be claimed only the spouse who claimed
for additional personal exemption.
• Allowed to all individual taxpayers (whether
plain compensation income earner or mixed)
REQUIREMENTS FOR DEDUCTIBILITY
NATIONAL INTERNAL REVENUE CODE
Section 34. Deductions from Gross Income.
(K) Additional Requirements for Deductibility of Certain Payments. -
Any amount paid or payable which is otherwise deductible
from, or taken into account in computing gross income or for
which depreciation or amortization may be allowed under this
Section, shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom has
been paid to the Bureau of Internal Revenue in accordance
with this Section 58 and 81 of this Code.
OPTIONAL STANDARD DEDUCTION
NATIONAL INTERNAL REVENUE CODE
Section 34. Deductions from Gross Income.
allowed under the preceding Subsections, an individual subject
to tax under Section 24, other than a nonresident alien, may
elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case
may be. In the case of a corporation subject to tax under
section 27(A) and 28(A)(1), it may elect a standard deduction in
an amount not exceeding forty percent (40%) of it gross
income as defined in Section 32 of this Code. Unless the
taxpayer signifies in his return his intention to elect the optional
standard deduction, he shall be considered as having availed
himself of the deductions allowed in the preceding Subsections.
Such election when made in the return shall be irrevocable for
the taxable year for which the return is made: Provided, That an
individual who is entitled to and claimed for the optional
standard 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
otherwise permits, the said individual shall keep such records
pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his gross
income as defined in Section 32 of this Code during the taxable
year, as may be required by the rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
[As amended by RA 9504 (2008)]

§ Can be claimed by individuals who are engaged in
TBP (40% of gross sales/ gross receipts) and by
corporations (domestic or resident foreign) (40%
of gross income)
o A non-resident FC cannot claim it
because it taxed on gross income.
o A non-resident who is engaged in trade
or business cannot claim it.
§ Gross sales v. Gross receipts
o This is to make a distinction between an
accrual basis taxpayer and a cash-basis
taxpayer. (paid or incurred phrase in Sec.
34)
§ Paid – cash-basis
§ Incurred – Accrual basis
§ A taxpayer who claims OSD must do it by
checking the appropriate box in the ITR.
Otherwise, the presumption (under the law) is that
he has claimed itemized deductions. It does not
matter if the amount of deduction is equal to
OSD.
§ Once claimed, taxpayer need not prove the
existence of actual expenses. Not required to
maintain all the receipts and invoices to
substantiate the expenses incurred by them during
the taxable year. Need not attach financial
statement to the ITR.
§ Once claimed, taxpayer will not be allowed to shift
to itemized deductions for that taxable year. The
choice or claim is IRREVOCABLE.
o Can a taxpayer who lost his receipts but
subsequently found them amend his ITRs
to include the deductions covered by
such receipts. à NO. Irrevocable nga.
Touch move, bes.
PERSONAL AND ADDITIONAL EXEMPTIONS
NATIONAL INTERNAL REVENUE CODE
Section 35. Allowance of Personal Exemption for
Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided
in Section 24(A) of this title, there shall be allowed a basic
personal exemption amounting to Fifty thousand pesos
(P50,000) for each individual taxpayer.
In the case of married individual where only one of the spouses
is deriving gross income, only such spouse shall be allowed the
personal exemption.
(B) Additional Exemption for Dependents. - There shall be allowed
an additional exemption of Twenty-five thousand pesos
(25,000) for each dependent not exceeding four (4).
The additional exemption for dependents shall be claimed by
only one of the spouses in the case of married individuals.
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In the case of legally separated spouses, additional exemptions
may be claimed only by the spouse who has custody of the
child or children:
Provided, That the total amount of additional exemptions that
may be claimed by both shall not exceed the maximum
additional exemptions herein allowed.
For purposes of this Subsection, a "dependent" means a
legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent
is not more than twenty-one (21) years of age, unmarried and
not gainfully employed or if such dependent, regardless of age,
is incapable of self-support because of mental or physical
defect.
(C) Change of Status. - If the taxpayer marries or should have
additional dependent(s) as defined above during the taxable
year, the taxpayer may claim the corresponding additional
exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still
claim the personal and additional exemptions for himself and
his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such
dependents marries, becomes twenty-one (21) years old or
becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse
or any of the dependents died, or as if such dependents
married, became twenty-one (21) years old or became gainfully
employed at the close of such year.
(D) Personal Exemption Allowable to Nonresident Alien
Individual. - A nonresident alien individual engaged in trade,
business or in the exercise of a profession in the Philippines
shall be entitled to a personal exemption in the amount equal
to the exemptions allowed in the income tax law in the country
of which he is a subject - or citizen, to citizens of the
Philippines not residing in such country, not to exceed the
amount fixed in this Section as exemption for citizens or
resident of the Philippines: Provided, That said nonresident
alien should file a true and accurate return of the total income
received by him from all sources in the Philippines, as required
by this Title.
SPECIFIC TAX RULES APPLICABLE TO
INDIVIDUAL TAXPAYERS
A. THOSE EARNING ONLY ONE TYPE OF
RETURNABLE INCOME during the taxable year
a. Compensation Income
§ Gross Income
§ Minus: Exclusions
§ Minus: Deduction under Sec.
34M if the aggregate family
(gross) compensation income
does not exceed 250K
§ Minus: Personal exemptions

§ Equals: Taxable Income
§ Tax Rate: Graduated Rate
Under Section 24
b. Business Income (Self-employed
individual)
§ Gross Income
§ Minus: Exclusions
§ Minus: Deductions under Sec.
34 (Itemized or OSD)
§ Minus: Personal exemptions
§ Equals: Taxable Income
§ If he wants to claim OSD, he
can claim 40% deduction from
his gross sales.
§ If he wants itemized deductions,
he can claim deduction from his
gross income.
§ Example: Gross sales = 10M.
Expenses = 5M. Gross income
= 5M. How much OSD can he
claim? 40% of 10M = 4M.
B. MIXED-INCOME EARNERS
§ One who earns compensation income
and income from TBP.
§ Use the compartmentalized approach
in determining taxable income.
o Compute taxable compensation
income separately from the
taxable income from TBP.
o Then add them.
o Then use the graduated rates
under Sec. 24
§ Note: Personal exemptions should be
claimed first from compensation income,
and the excess will be claimed from the
income from TBP (50K for each TP,
25K for each dependent = max 4 à
150K max)
§ Husband and wife should always be taxed
under separate income, but consolidated
return (because only one of them can
claim additional exemptions).
o If it cannot be directly
attributable to any of them, 50-
50 distribution between the two
of them. E.g., coffee shop
registered under their names.
o Directly attributable à salaries
C. PASSIVE INCOME
§ Memorize daw huhu
§ Or tax-paid income, because subject to
final withholding tax at source. The
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withholding agent, not the income earner,
is the one legally obligated to pay the tax.
The BIR cannot go after the income
earner.
1. Interests – 20% FWT
a. Currency, bank deposits, trust funds
and similar arrangements – 20%
b. 20-Lender Rule – deposit substitutes
(bonds, money market placements,
government securities, time deposits)
à 20% FWT on the interest
derived therefrom
2. Royalties – 20%
a. Royalties on books, literary works
and musical compositions – 10%
3. Prizes exceeding 10K – 20%
a. If 10K or less = returnable income
4. Cash and property dividends received by
individuals – 10%
a. Why not stock dividends? Because
they are not considered realized gain.
There is no income. No change in
the investment. What is changed is
only the original units representing
your investment. So unless you sell
your shares at an adjusted basis,
there is no income realized.
i. But when there is a change
in the ownership interest,
taxable. (supra)
SPECIFIC TAX RULES APPLICABLE TO
CORPORATIONS
§ Corporation under the NIRC is so broad. Cf. Sec.
22B
§ Purposive test – if an association is organized for
profit or business, then it is taxable as a
corporation; otherwise, it is a mere association.
o Gatchalian v. CIR: Several EEs
contributed to a common fund for the
purpose of buying a sweepstake ticket.
Intention – divide the winnings among
themselves. They won. At that time,
sweepstake winnings are taxable.
§ Held: The winnings should be
taxed as income of the
corporation. They associated
with one another to pursue a
profit motive. Thus, members
not taxed individually.
o Obillos v. CIR: Obillos, Sr. tried to acquire
a huge parcel of land from Ortigas et al.
under an installment plan in order to

provide a common residential lot for his
children. But after the contract to sell, he
died. The four Obillos children paid for
the remaining installments. Upon
payment of the final amortization, the
children demanded from the President of
Ortigas Realty Company that the Deed of
Absolute Sale be executed in the name of
the four children (because they paid for
it). Ortigas complied, so the four children
became co-owners of the property.
Instead of constructing their principal
residences on the property, they decided
to liquidate the ownership. They sold it
and divided the profit among themselves.
They realized a substantial amount of
gain from the disposition (increase in the
value of the property there). Problem:
Will the gain that was realized be taxed
against them individually or against them
as a corporation?
§ CIR: The children had formed a
corporation.
§ Held: CIR is wrong, because at
the time the children associated
themselves, the intention to
make profit was not there. The
sharing of the profits was only
incidental in their desire to
terminate the ownership.
o Reyes v. CIR: Father and son acquired a
land and building, then hired a building
administrator (introduced improvements,
looked for tenants, collected the rents)
who turned over the net rents to F & S
share and share alike. How will the net
rents be taxed?
§ Held: The association was
imbued with a profit motive, as
shown by the acts of the father
and son.
o Heirs of Evangelista v. CIR and Heirs of Oña
v. CIR: The same principle applies to
estates that are not under judicial
settlement. If under judicial settlement, it
becomes a special type of taxpayer.
§ GR: The heirs are only taxable
in their individual capacity,
corresponding to their
respective shares in the
inheritance.
§ E: If the continued association
among the heirs is intended to
pursue a profit motive à the
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association shall be taxed as a
corporation.
o CIR and Heirs of Oña v. CIR: After
execution of extrajudicial settlement, the
properties were still held under a single
management with the intent of making
profits.
§ Held: The association among
the heirs is considered as a
taxable corporation.
o Pascual and Dragon v. CIR: The character
of habituality peculiar to business
transactions for the purpose of gain must
be present.
TAXATION OF DOMESTIC CORPORATION
NATIONAL INTERNAL REVENUE CODE
Section 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, 1998, the rate of income tax shall be thirty-
four percent (34%); effective January 1, 1999, the rate shall be
thirty-three percent (33%); and effective January 1, 2000 and
thereafter, the rate shall be thirty-two percent (32%).
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 reduced corporate income tax rates shall be applied on the
amount computed by multiplying the number of months
covered by the new rates within the fiscal year by the taxable
income of the corporation for the period, divided by twelve.
Provided, further, That the President, upon the
recommendation of the Secretary of Finance, may effective
January 1, 2000, allow corporations the option to be taxed at
fifteen percent (15%) of gross income as defined herein, after
the following conditions have been satisfied:
1) A tax effort ratio of twenty percent (20%) of Gross
National Product (GNP);
2) A ratio of forty percent (40%) of income tax
collection to total tax revenues;
3) A VAT tax effort of four percent (4%) of GNP; and
4) A 0.9 percent (0.9%) ratio of the Consolidated Public
Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to gross sales
or receipts from all sources does not exceed fifty-five percent
(55%).
The election of the gross income tax option by the corporation
shall be irrevocable for three (3) consecutive taxable years
during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived
from business shall be equivalent to gross sales less sales
returns, discounts and allowances and cost of goods sold. "Cost
of goods sold' shall include all business expenses directly
incurred to produce the merchandise to bring them to their
present location and use.
For a trading or merchandising concern, 'cost of goods' sold
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are
in transit.
For a manufacturing concern, 'cost of goods manufactured and
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances and
discounts.
(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.
(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 Philippine Charity Sweepstakes Office
(PCSO) and the Philippine Amusement and Gaming
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Corporation (PAGCOR), shall pay such rate of tax upon their
taxable income as are imposed by this Section upon
corporations or associations engaged in s similar business,
industry, or activity.
(D) Rates of Tax on Certain Passive Incomes. -
1) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes and from
Trust Funds and Similar Arrangements, and
Royalties. - A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest
on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from
trust funds and similar arrangements received by
domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however,
That interest income derived by a domestic
corporation 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.
2) Capital Gains from the Sale of Shares of Stock Not
Traded in the Stock Exchange. - A final tax at the
rates prescribed below shall be imposed on net capital
gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed
of through the stock exchange:
Not over P100,000 5%
Amount in excess of P100,000 10%
3) Tax on Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency
deposit system from foreign currency transactions
with local commercial banks, including branches of
foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
foreign currency depository system units and other
depository banks under the expanded foreign
currency deposit system, including interest income
from foreign currency loans granted by such
depository banks under said expanded foreign
currency deposit system to residents, shall be subject
to a final income tax at the rate of ten percent (10%)
of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
4) Intercorporate Dividends. - Dividends received by a
domestic corporation from another domestic
corporation shall not be subject to tax.
5) Capital Gains Realized from the Sale, Exchange or
Disposition of Lands and/or Buildings. - A final tax
of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange
or disposition of lands and/or buildings which are

not actually used in the business of a corporation and
are treated as capital assets, based on the gross selling
price of fair market value as determined in
accordance with Section 6(E) of this Code, whichever
is higher, of such lands and/or buildings.
(E) Minimum Corporate Income Tax on Domestic Corporations. -
1) Imposition of Tax. - A minimum corporate income
tax of two percent (2%0 of the gross income as of
the end of the taxable year, as defined herein, is
hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year
immediately following the year in which such
corporation commenced its business operations,
when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for
the taxable year.
2) Carry Froward of Excess Minimum Tax. - Any excess
of the minimum corporate income tax over the
normal income tax as computed under Subsection
(A) of this Section shall be carried forward and
credited against the normal income tax for the three
(3) immediately succeeding taxable years.
3) Relief from the Minimum Corporate Income Tax
Under Certain Conditions. - The Secretary of Finance
is hereby authorized to suspend the imposition of the
minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor
dispute, or because of force majeure, or because of
legitimate business reverses.
The Secretary of Finance is hereby authorized to
promulgate, upon recommendation of the
Commissioner, the necessary rules and regulation that
shall define the terms and conditions under which he
may suspend the imposition of the minimum
corporate income tax in a meritorious case.
4) Gross Income Defined. - For purposes of applying
the minimum corporate income tax provided under
Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and
allowances and cost of goods sold. "Cost of goods
sold' shall include all business expenses directly
incurred to produce the merchandise to bring them
to their present location and use.
For a trading or merchandising concern, 'cost of goods sold'
shall include the invoice cost of the goods sold, plus import
duties, freight in transporting the goods to the place where the
goods are actually sold including insurance while the goods are
in transit.
For a manufacturing concern, cost of 'goods manufactured and
sold' shall include all costs of production of finished goods,
such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances,
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discounts and cost of services. 'Cost of services' shall mean all
direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A)
salaries and employee benefits of personnel, consultants and
specialists directly rendering the service and (B) cost of facilities
directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies: Provided,
however, That in the case of banks, 'cost of services' shall
include interest expense.
Basis question: Under what law is the corporation organized?
If under the laws of the Philippines, then it is a domestic
corporation. We do not follow the ownership test.
• A DC and a RFC are almost taxed in the same
manner:
i. Both taxed on their taxable income.
ii. Both can claim deductions (either
itemized or OSD)
iii. Both can also be subject to minimum
corporate income tax or MCIT.
a. In no case shall the income tax
liability of a DC be lower than
2% of the gross income. (Sec.
27E)
b. In no case shall the income tax
liability of an RFC be lower
than 2% of the gross income. –
cf. Sec. 28A2
• Distinction: DC taxed from sources within and
without. RFC taxed only from sources within.
Taxation of proprietary educational institutions
• GR: The tax rate applied to PEIs is either 10% or
30%, depending on their dominant income. (Sec.
27B) à pre-dominance test (exceeds 50%)
• If their dominant income is from school-related
activities (income from tuition fees, library fees,
book store inside the campus, cafeteria that caters
solely to students and faculty, dormitories that
caters only to students), then the aggregate taxable
or net income shall be taxed at 10%.
• But if the dominant income is derived from non-
school related activities, then regular 30% rate.
Can a proprietary educational institution be subject to MCIT?
• Yes, for as long as the aggregate income is subject
to the regular tax rate of 30% applicable to
domestic corporations.
• What if 50-50? Sir: Then add one centavo to the
school-related income, because you want to avail
of the lower rate. LELS
Taxation of GOCCs, agencies or instrumentalities (Sec.
27C)

• GR: Taxable on their taxable income, at the rate
imposed upon corporations or associations in
similar business, industry or activity.
• Exempt: GSIS, SSS, PhilHealth, local water
districts, PCSO
Tax Sparing Rule (Sec. 34.C.3)
• This shall include not only the tax actually paid,
but also the tax deemed paid here in the
Philippines
• Purpose: reduce the impact of double taxation
• Scope: Only those who are exposed to
international double taxation, or those who are
taxed for income sourced from within and without
the Philippines à Resident citizen and domestic
corporation
• Wander Philippines v. CIR. Sir: Correct decision!!!
Tax on dividends
• Second layer on income tax. It is a tax on the
limited liability of the corporation.
Improperly Accumulated Earnings Tax (Sec. 29)
• Rate: 10% of the IAE
• There is no improper accumulation if it is done to
meet the reasonable needs of the business (e.g.,
plant expansion, or business expansion) but this
should comply with the immediacy test.
• The accumulation must be distributed within one
year from the close of the taxable year when the
income was earned.
• But accumulation not exceeding the paid-up
capital is allowed. It is not improper.
• What if IAE tax was paid, and a month after that,
the corporation declared all the dividends and
distributed them to all stockholders of records, is
the distribution subject to the 10% dividends tax?
o Yes. The 10% IAE tax and the 10%
dividends tax are different. One is a
penalty tax (to correct the wrongful
behavior of the corporation à to
compel the distribution of after tax
profits), while the other is merely a tax on
the shareholders.
o Therefore, the corporation is not relieved
of the obligation to withhold FWT of
10%.
TAXATION OF RESIDENT FOREIGN
CORPORATIONS
NATIONAL INTERNAL REVENUE CODE
Section 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
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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, 1998, the rate of income tax
shall be thirty-four percent (34%); effective January 1, 1999, the
rate shall be thirty-three percent (33%), and effective January 1,
2000 and thereafter, the rate shall be thirty-two percent (32%).
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 reduced corporate income tax rates shall be applied on the
amount computed by multiplying the number of months
covered by the new rates 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).
(2) Minimum Corporate Income Tax on Resident Foreign Corporations.
- A minimum corporate income tax of two percent (2%) of
gross income, as prescribed under Section 27 (E) of this Code,
shall be imposed, under the same conditions, on a resident
foreign corporation taxable under paragraph (1) of this
Subsection.
(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 port outside the
Philippines on another airline, only the aliquot
portion of the cost of the ticket corresponding to the
leg flown from the Philippines to the point of
transshipment shall form part of 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.

(4) Offshore Banking Units. - The provisions of any law to the
contrary notwithstanding, income derived by offshore banking
units authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with offshore banking units, including any
interest income derived from foreign currency loans granted to
residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with said offshore banking
units shall be exempt from income tax.
(5) Tax on Branch Profits Remittances. - Any profit remitted by a
branch to its head office shall be subject to a tax of fifteen
(15%) which shall be based on the 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). The tax shall
be collected and paid in the same manner as provided in
Sections 57 and 58 of this Code: provided, that interests,
dividends, rents, royalties, including remuneration for technical
services, salaries, wages premiums, annuities, emoluments or
other fixed or determinable annual, periodic or casual gains,
profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within
the Philippines shall not be treated as branch profits unless the
same are effectively connected with the conduct of its trade or
business in the Philippines.
(6) Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. -
a) Regional or area headquarters as defined in Section
22(DD) shall not be subject to income tax.
b) Regional operating headquarters as defined in Section
22(EE) shall pay a tax of ten percent (10%) of their
taxable income.
(7) Tax on Certain Incomes Received by a Resident Foreign Corporation.
- office, without the participation of the branch
a) Interest from Deposits and Yield or any other
Monetary Benefit from Deposit Substitutes, Trust
Funds and Similar Arrangements and Royalties. -
Interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements and
royalties derived from sources within the Philippines
shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident
foreign corporation 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.
b) Income Derived under the Expanded Foreign
Currency Deposit System. - Income derived by a
depository bank under the expanded foreign currency
deposit system from foreign currency transactions
with local commercial banks including branches of
foreign banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact business with
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foreign currency deposit system units, including
interest income from foreign currency loans granted
by such depository banks under said expanded
foreign currency deposit system to residents, shall be
subject to a final income tax at the rate of ten percent
(10%) of such income.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
c) Capital Gains from Sale of Shares of Stock Not
Traded in the Stock Exchange. - 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 P100,000 5%
On any amount in excess of 10%
P100,000
d) Intercorporate Dividends. - Dividends received by a
resident foreign corporation from a domestic
corporation liable to tax under this Code shall not be
subject to tax under this Title.
Resident FC (Sec. 28A) – one which has established its
physical presence in the Philippines, either through a branch
or its own establishment, independent of its main office
abroad. Insofar as income attributable to the branch
concerned, that is income of RFC.
• Note: However, if despite the existence of a
branch, the RFC earns income through its main
office, then that is income of earned by the
nonresident FC. Therefore, a foreign corporation
can be taxed both as a resident and nonresident
FC in the same taxable year à dual tax
personality of a foreign corporation
• Marubeni v. CIR (1989)– established under the laws
of Japan. There is a Manila branch.
• Attribution rule – in determining who earned the
income or the dividends. SC: Considering that the
investment was made directly by the home office
without the participation of the branch, then any
and all income received from such income is
attributable to the main office, therefore, subject to
income tax.
Two types of dividends that is exempt from income tax
a. Dividends received by a DC from another DC
(Sec. 27D4)
b. Dividends received by a RFC from a domestic
corporation (Sec. 28A5)

TAXATION OF NON-RESIDENT FOREIGN
CORPORATIONS
NATIONAL INTERNAL REVENUE CODE
Section 28. Rates of Income Tax on Foreign Corporations.
(B) Tax on Nonresident Foreign Corporation. -
(1) In General. - Except as otherwise provided in this Code, a
foreign corporation not engaged in trade or business in the
Philippines shall pay a tax equal to thirty-five percent (35%) of
the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends,
rents, royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax
under subparagraphs (C) and (d): Provided, That effective 1,
1998, the rate of income tax shall be thirty-four percent (34%);
effective January 1, 1999, the rate shall be thirty-three percent
(33%); and, effective January 1, 2000 and thereafter, the rate
shall be thirty-two percent (32%).
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. -
A cinematographic film owner, lessor, or distributor shall pay a
tax of twenty-five percent (25%) of its gross income from all
sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine
Nationals. - A nonresident owner or lessor of vessels shall be
subject to a tax of four and one-half percent (4 1/2%) of gross
rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry
Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other
Equipment. - Rentals, charters and other fees derived by a
nonresident lessor of aircraft, machineries and other equipment
shall be subject to a tax of seven and one-half percent (7 1/2%)
of gross rentals or fees.
(5) Tax on Certain Incomes Received by a Nonresident Foreign
Corporation. -
a) Interest on Foreign Loans. - A final withholding tax at
the rate of twenty percent (20%) is hereby imposed
on the amount of interest on foreign loans contracted
on or after August 1, 1986;
b) Intercorporate Dividends. - A final withholding tax at the
rate of fifteen percent (15%) is hereby imposed on
the amount of cash and/or property dividends
received from a domestic corporation, which shall be
collected and paid as provided in Section 57 (A) of
this Code, subject to the condition that the country in
which the nonresident foreign corporation is
domiciled, shall allow a credit against the tax due
from the nonresident foreign corporation taxes
deemed to have been paid in the Philippines
equivalent to twenty percent (20%) for 1997,
nineteen percent (19%) for 1998, eighteen percent
(18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between
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the regular income tax of thirty-five percent (35%) in
1997, thirty-four percent (34%) in 1998, and thirty-
three percent (33%) in 1999, and thirty-two percent
(32%) thereafter on corporations and the fifteen
percent (15%) tax on dividends as provided in this
subparagraph;
c) Capital Gains from Sale of Shares of Stock not Traded in the
Stock Exchange. - 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 P100,000 5%
On any amount in excess of 10%
P100,000
IMPROPERLY ACCUMULATED EARNINGS OF
CORPORATION
Section 29. Imposition of Improperly Accumulated Earnings
Tax. -
(A) In General. - In addition to other taxes imposed by this Title,
there is hereby imposed for each taxable year on the
improperly accumulated taxable income of each corporation
described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly
accumulated taxable income.
(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.
(C) Evidence of Purpose to Avoid Income Tax. -
(1) Prima Facie Evidence. - the fact that any corporation is a mere
holding company or investment company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or
members.
(2) Evidence Determinative of Purpose. - The fact that the earnings
or profits of a corporation are permitted to accumulate beyond
the reasonable needs of the business shall be determinative of
the purpose to avoid the tax upon its shareholders or members
unless the corporation, by the clear preponderance of evidence,
shall prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this
Section, the term 'improperly accumulated taxable income'
means taxable income' adjusted by:
(1) Income exempt from tax;

(2) Income excluded from gross income;
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted;
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Provided, however, That for corporations using the calendar
year basis, the accumulated earnings under tax shall not apply
on improperly accumulated income as of December 31, 1997.
In the case of corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to this
tax, shall be reckoned, as of the end of the month comprising
the twelve (12)-month period of fiscal year 1997-1998.
(E) Reasonable Needs of the Business. - For purposes of this
Section, the term 'reasonable needs of the business' includes
the reasonably anticipated needs of the business.
TAXATION OF GENERAL PROFESSIONAL
PARTNERSHIPS
Section 26. Tax Liability of Members of General
Professional Partnerships. - A general professional
partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as
partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be 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.
TAXATION OF ESTATES AND TRUSTS (Sec. 60-66)
Section 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon
individuals shall apply to the income of estates or of any kind
of property held in trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and
income accumulated or held for future distribution under the
terms of the will or trust;
(2) Income which is to be distributed currently by the fiduciary
to the beneficiaries, and income collected by a guardian of an
infant which is to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the
period of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be
either distributed to the beneficiaries or accumulated.
(B) Exception. - The tax imposed by this Title shall not apply to
employee's trust which forms part of a pension, stock bonus or
profit-sharing plan of an employer for the benefit of some or
all of his employees (1) if contributions are made to the trust by
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such employer, or employees, or both for the purpose of
distributing to such employees the earnings and principal of the
fund accumulated by the trust in accordance with such plan,
and (2) if under the trust instrument it is impossible, at any
time prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus or
income to be (within the taxable year or thereafter) used for, or
diverted to, purposes other than for the exclusive benefit of his
employees: Provided, That any amount actually distributed to
any employee or distributee shall be taxable to him in the year
in which so distributed to the extent that it exceeds the amount
contributed by such employee or distributee.
(C) Computation and Payment. -
(1) In General. - The tax shall be computed upon the taxable
income of the estate or trust and shall be paid by the fiduciary,
except as provided in Section 63 (relating to revocable trusts)
and Section 64 (relating to income for the benefit of the
grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the
case of two or more trusts, the creator of the trust in each
instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall be
consolidated and the tax provided in this Section computed on
such consolidated income, and such proportion of said tax shall
be assessed and collected from each trustee which the taxable
income of the trust administered by him bears to the
consolidated income of the several trusts.
Section 61. Taxable Income. - The taxable income of the estate
or trust shall be computed in the same manner and on the
same basis as in the case of an individual, except that:
(A) There shall be allowed as a deduction in computing the
taxable income of the estate or trust the amount of the income
of the estate or trust for the taxable year which is to be
distributed currently by the fiduciary to the beneficiaries, and
the amount of the income collected by a guardian of an infant
which is to be held or distributed as the court may direct, but
the amount so allowed as a deduction shall be included in
computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction
under this Subsection shall not be allowed as a deduction under
Subsection (B) of this Section in the same or any succeeding
taxable year.
(B) In the case of income received by estates of deceased
persons during the period of administration or settlement of
the estate, and in the case of income which, in the discretion of
the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction
in computing the taxable income of the estate or trust the
amount of the income of the estate or trust for its taxable year,
which is properly paid or credited during such year to any
legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of
the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this
Section shall not be allowed: Provided, That the amount of any
income included in the return of said trust shall not be included
in computing the income of the beneficiaries.
Section 62. Exemption Allowed to Estates and Trusts. - For the
purpose of the tax provided for in this Title, there shall be

allowed an exemption of Twenty thousand pesos (P20,000)
from the income of the estate or trust.
Section 63. Revocable trusts. - Where at any time the power to
revest in the grantor title to any part of the corpus of the trust
is vested (1) in the grantor either alone or in conjunction with
any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom,
or (2) in any person not having a substantial adverse interest in
the disposition of such part of the corpus or the income
therefrom, the income of such part of the trust shall be
included in computing the taxable income of the grantor.
Section 64. Income for Benefit of Grantor.-
(A) Where any part of the income of a trust (1) is, or in the
discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of
the income may be held or accumulated for future distribution
to the grantor, or (2) may, or in the discretion of the grantor or
of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the
grantor, or (3) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the
payment of premiums upon policies of insurance on the life of
the grantor, such part of the income of the trust shall be
included in computing the taxable income of the grantor.
(B) As used in this Section, the term 'in the discretion of the
grantor' means in the discretion of the grantor, either alone or
in conjunction with any person not having a substantial adverse
interest in the disposition of the part of the income in question.
Section 65. Fiduciary Returns. - Guardians, trustees, executors,
administrators, receivers, conservators and all persons or
corporations, acting in any fiduciary capacity, shall render, in
duplicate, a return of the income of the person, trust or estate
for whom or which they act, and be subject to all the
provisions of this Title, which apply to individuals in case such
person, estate or trust has a gross income of Twenty thousand
pesos (P20,000) or over during the taxable year. Such fiduciary
or person filing the return for him or it, shall take oath that he
has sufficient knowledge of the affairs of such person, trust or
estate to enable him to make such return and that the same is,
to the best of his knowledge and belief, true and correct, and
be subject to all the provisions of this Title which apply to
individuals: Provided, That a return made by or for one or two
or more joint fiduciaries filed in the province where such
fiduciaries reside; under such rules and regulations as the
Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance
with the requirements of this Section.
Section 66. Fiduciaries Indemnified Against Claims for Taxes Paid. -
Trustees, executors, administrators and other fiduciaries are
indemnified against the claims or demands of every beneficiary
for all payments of taxes which they shall be required to make
under the provisions of this Title, and they shall have credit for
the amount of such payments against the beneficiary or
principal in any accounting which they make as such trustees or
other fiduciaries.
• When a person dies, and he leaves behind income-
producing property (like a 10-door commercial
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apartment), how will such income be taxed? Who
is the taxpayer? Who will report the income?
o The estate will become an income
taxpayer ONLY if the estate is under
judicial settlement. The law accords it a
juridical personality, independent from
the personality of the heirs and the
decedent. It is the administrator who will
file the return.
o But if the estate is not under judicial
settlement, the rules on co-ownership will
apply. All the heirs should declare it in
their ITRs, in accordance with their
respective shares in the inheritance.
o But if the continued association among
the heirs is intended to pursue business in
order to gain profit, then the association
becomes a taxable corporation.
When does a trust acquire a tax personality?
• E.g. A created a trust, and transferred the interest
in a 10-door commercial apartment by virtue of a
trust instrument to the Trust Department of
Metrobank. However, all the rental income to be
collected by the trustee is to be received by A. Is
this a taxable trust?
o No. The taxpayer is A, the trustor. The
trust is for the benefit of the trustor
(grantor’s trust). There is a taxable trust
only when there is an irrevocable trust –
both as to purpose and as to the
designation of the beneficiary.
o The transfer of the property from the
trustor to the trustee or beneficiary must
be a completed gift for the trust to be
taxable. (Pay donor’s tax à all transfer
of property by trust or otherwise)
o Not an irrevocable trust if: “I reserve my
right of reservation.”
o There can still be an irrevocable trust
even if there is suspension of the transfer
of ownership à e.g., when the minor
becomes of age
• Who will pay the tax?
o The trustee – who is the manager of the
property.
How will the income from the estate or the trust be
taxed? One-layer taxation regime (Sec. 61)
• One-layer taxation regime – Income must be
taxed but once during the taxable year.
• What is taxable is the net income.
• Current distribution trust – the taxpayer is the
beneficiary or heir, because there is nothing left

with the estate or trust (all income during the
taxable year is given to the beneficiary or heir).
• If accumulated income – the taxpayer is the trust
through the trustee. Net income minus the
personal exemption under Sec. 62 of P20K
• Rate: Sec. 24 – graduated rate
• 5 years later, all the income will be distributed to
the minor, it will not be subject to income tax
anymore because the tax thereon has already been
paid by an individual (the trust).
• A trust or an estate is an individual taxpayer.
What are the different types of trusts for income tax purposes?
a. Current distribution trust – can be determined in
the provision of the trust instrument.
• E.g. “The beneficiary is my favorite wife, who
will receive income every year.”
b. Accumulation trust – usually if the beneficiary is a
minor
c. Discretionary trust – combination of both. The
trustor gives the trustee the discretion of whether
to distribute the income or not (current or
accumulated)
• E.g. 2.5M distributed – income tax to be paid
by the beneficiary
• 2.5M retained – income tax to be paid by the
trustee. If later distributed to the beneficiary,
not taxable anymore, following the one-layer
taxation regime.
Note: Same principle applies to estates – to be determined
whether the trustee distributes all income to the heirs, or it
is accumulated first.
INCOME TAX RULES APPLICABLE TO CAPITAL
GAINS AND LOSSES
Section 39. Capital Gains and Losses. -
(A) Definitions. - As used in this Title -
(1) Capital Assets. - the term 'capital assets' means property held
by the taxpayer (whether or not connected with his trade 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 of the
taxable year, or property held by the taxpayer primarily for sale
to customers in the ordinary course of his trade or business, or
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 real property used in trade or
business of the taxpayer.
(2) Net Capital Gain. - The term 'net capital gain' means the
excess of the gains from sales or exchanges of capital assets
over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term 'net capital loss' means the
excess of the losses from sales or exchanges of capital assets
over the gains from such sales or exchanges.
(B) Percentage Taken into Account. - In the case of a taxpayer,
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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;
(C) Limitation on Capital Losses. - Losses from sales or exchanges
of capital assets shall be allowed only to the extent of the gains
from such sales or exchanges. If a bank or trust company
incorporated under the laws of the Philippines, a substantial
part of whose business is the receipt of deposits, sells any
bond, debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including one issued
by a government or political subdivision thereof), with interest
coupons or in registered form, any loss resulting from such sale
shall not be subject to the foregoing limitation and shall not be
included in determining the applicability of such limitation to
other losses.
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a
corporation, sustains in any taxable year a net capital loss, such
loss (in an amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year as a loss
from the sale or exchange of a capital asset held for not more
than twelve (12) months.
(E) Retirement of Bonds, Etc. - For purposes of this Title, amounts
received by the holder upon the retirement of bonds,
debentures, notes or certificates or other evidences of
indebtedness issued by any corporation (including those issued
by a government or political subdivision thereof) with interest
coupons or in registered form, shall be considered as amounts
received in exchange therefor.
(F) Gains or losses from Short Sales, Etc. - For purposes of this
Title -
(1) Gains or losses from short sales of property shall be
considered as gains or losses from sales or exchanges of capital
assets; and
(2) Gains or losses attributable to the failure to exercise
privileges or options to buy or sell property shall be considered
as capital gains or losses.
D. TRANSFER TAXES
Two kinds of donations: Donation inter vivos v.
donation mortis causa
« Donations inter vivos
a. Subject to donor’s tax.
b. Effective during the lifetime of the
owner, without any consideration.
« Donations mortis causa
c. It is death that completes the transfer.
Equivalent to a testamentary disposition.
d. Subject to estate tax.
2. CONTROL – determines whether taxable or not.
a. If you do not have any control over the
disposition of a property, then that
property is not yours. If you divest
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yourself of control over the property relinquished in contemplation of the decedent's death.
during your lifetime, it is a completed gift, (2) For the purpose of this Subsection, the power to alter,
and it shall be subject to donor’s tax. amend or revoke shall be considered to exist on the date of the
decedent's death even though the exercise of the power is
ESTATE TAX subject to a precedent giving of notice or even though the
alteration, amendment or revocation takes effect only on the
Section 84. Rates of Estate Tax. There shall be levied, expiration of a stated period after the exercise of the power,
assessed, collected and paid upon the transfer of the net estate whether or not on or before the date of the decedent's death
as determined in accordance with Sections 85 and 86 of every notice has been given or the power has been exercised. In such
decedent, whether resident or nonresident of the Philippines, a cases, proper adjustment shall be made representing the
tax based on the value of such net estate, as computed in interests which would have been excluded from the power if
accordance with the following schedule: the decedent had lived, and for such purpose if the notice has
If the net estate is: not been given or the power has not been exercised on or
before the date of his
Over But Not The Tax Plus Of the death, such notice shall be considered to have been given, or
Over Shall Be Excess the power exercised, on the date of his death.
Over (D) Property Passing Under General Power of Appointment. - To the
P200,000 Exempt extent of any property passing under a general power of
appointment exercised by the decedent: (1) by will, or (2) by
P200,000 500,000 0 5% P200,000
deed executed in contemplation of, or intended to take effect in
500,000 2,000,000 P15,000 8% 500,000
possession or enjoyment at, or after his death, or (3) by deed
2,000,000 5,000,000 135,000 11% 2,000,000
under which he has retained for his life or any period not
5,000,000 10,000,000 465,000 15% 5,000,000 ascertainable without reference to his death or for any period
10,000,000 And Over 1,215,000 20% 10,000,000 which does not in fact end before his death (a) the possession
or enjoyment of, or the right to the income from, the property,
or (b) the right, either alone or in conjunction with any person,
Section 85. Gross Estate. - the value of the gross estate of the to designate the persons who shall possess or enjoy the
decedent shall be determined by including the value at the time property or the income therefrom; except in case of a bona fide
of his death of all property, real or personal, tangible or sale for an adequate and full consideration in money or
intangible, wherever situated: Provided, however, that in the money's worth.
case of a nonresident decedent who at the time of his death (E) Proceeds of Life Insurance. - To the extent of the amount
was not a citizen of the Philippines, only that part of the entire receivable by the estate of the deceased, his executor, or
gross estate which is situated in the Philippines shall be administrator, as insurance under policies taken out by the
included in his taxable estate. decedent upon his own life, irrespective of whether or not the
(A) Decedent's Interest. - To the extent of the interest therein of insured retained the power of revocation, or to the extent of
the decedent at the time of his death; the amount receivable by any beneficiary designated in the
(B) Transfer in Contemplation of Death. - To the extent of any policy of insurance, except when it is expressly stipulated that
interest therein of which the decedent has at any time made a the designation of the beneficiary is irrevocable.
transfer, by trust or otherwise, in contemplation of or intended (F) Prior Interests. - Except as otherwise specifically provided
to take effect in possession or enjoyment at or after death, or therein, Subsections (B), (C) and (E) of this Section shall apply
of which he has at any time made a transfer, by trust or to the transfers, trusts, estates, interests, rights, powers and
otherwise, under which he has retained for his life or for any relinquishment of powers, as severally enumerated and
period which does not in fact end before his death (1) the described therein, whether made, created, arising, existing,
possession or enjoyment of, or the right to the income from exercised or relinquished before or after the effectivity of this
the property, or (2) the right, either alone or in conjunction Code.
with any person, to designate the person who shall possess or (G) Transfers of Insufficient Consideration. - If any one of the
enjoy the property or the income therefrom; except in case of a transfers, trusts, interests, rights or powers enumerated and
bonafide sale for an adequate and full consideration in money described in Subsections (B), (C) and (D) of this Section is
or money's worth. made, created, exercised or relinquished for a consideration in
(C) Revocable Transfer. - money or money's worth, but is not a bona fide sale for an
(1) To the extent of any interest therein, of which the decedent adequate and full consideration in money or money's worth,
has at any time made a transfer (except in case of a bona fide there shall be included in the gross estate only the excess of the
sale for an adequate and full consideration in money or fair market value, at the time of death, of the property
money's worth) by trust or otherwise, where the enjoyment otherwise to be included on account of such transaction, over
thereof was subject at the date of his death to any change the value of the consideration received therefor by the
through the exercise of a power (in whatever capacity decedent.
exerciseable) by the decedent alone or by the decedent in (H) Capital of the Surviving Spouse. - The capital of the surviving
conjunction with any other person (without regard to when or spouse of a decedent shall not, for the purpose of this Chapter,
from what source the decedent acquired such power), t o alter, be deemed a part of his or her gross estate.
amend, revoke, or terminate, or where any such power is Section 86. Computation of Net Estate. - For the purpose of the

tax imposed in this Chapter, the value of the net estate shall be
determined:
(A) Deductions Allowed to the Estate of Citizen or a Resident. - In the
case of a citizen or resident of the Philippines, by deducting
from the value of the gross estate -
(1) Expenses, Losses, Indebtedness, and taxes. - Such amounts
- to him by gift within the same period prior to his death;
(a) For actual funeral expenses or in an amount equal to five
percent (5%) of the gross estate, whichever is lower, but in no
case to exceed Two hundred thousand pesos (P200,000);
(b) For judicial expenses of the testamentary or intestate
proceedings;
(c) For claims against the estate: Provided, That at the time the
indebtedness was incurred the debt instrument was duly
notarized and, if the loan was contracted within three (3) years
before the death of the decedent, the administrator or executor
shall submit a statement showing the disposition of the
proceeds of the loan;
(d) For claims of the deceased against insolvent persons where
the value of decedent's interest therein is included in the value
of the gross estate; and
(e) For unpaid mortgages upon, or any indebtedness in respect
to, property where the value of decedent's interest therein,
undiminished by such mortgage or indebtedness, is included in
the value of the gross estate, but not including any income tax
upon income received after the death of the decedent, or
property taxes not accrued before his death, or any estate tax.
The deduction herein allowed in the case of claims against the
estate, unpaid mortgages or any indebtedness shall, when
founded upon a promise or agreement, be limited to the extent
that they were contracted bona fide and for an adequate and
full consideration in money or money's worth. There shall also
be deducted losses incurred during the settlement of the estate
arising from fires, storms, shipwreck, or other casualties, or
from robbery, theft or embezzlement, when such losses are not
compensated for by insurance or otherwise, and if at the time
of the filing of the return such losses have not been claimed as
a deduction for the income tax purposes in an income tax
return, and provided that such losses were incurred not later
than the last day for the payment of the estate tax as prescribed
in Subsection (A) of Section 91.
(2) Property Previously Taxed. - An amount equal to the value
specified below of any property forming a part of the gross
estate situated in the Philippines of any person who died within
five (5) years prior to the death of the decedent, or transferred
to the decedent by gift within five (5) years prior to his death,
where such property can be identified as having been received
by the decedent from the donor by gift, or from such prior
decedent by gift, bequest, devise or inheritance, or which can
be identified as having been acquired in exchange for property
so received:
One hundred percent (100%) of the value, if the prior decedent
died within one (1) year prior to the death of the decedent, or if
the property was transferred to him by gift within the same
period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died
more than one (1) year but not more than two (2) years prior to
the death of the decedent, or if the property was transferred to
him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died
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more than two (2) years but not more than three (3) years prior
to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died
more than three (3) years but not more than four (4) years prior
to the death of the decedent, or if the property was transferred
Twenty percent (20%) of the value, if the prior decedent died
more than four (4) years but not more than five (5) years prior
to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death;
These deductions shall be allowed only where a donor's tax or
estate tax imposed under this Title was finally determined and
paid by or on behalf of such donor, or the estate of such prior
decedent, as the case may be, and only in the amount finally
determined as the value of such property in determining the
value of the gift, or the gross estate of such prior decedent, and
only to the extent that the value of such property is included in
the decedent's gross estate, and only if in determining the value
of the estate of the prior decedent, no deduction was allowable
under paragraph (2) in respect of the property or properties
given in exchange therefor. Where a deduction was allowed of
any mortgage or other lien in determining the donor's tax, or
the estate tax of the prior decedent, which was paid in whole or
in part prior to the decedent's death, then the deduction
allowable under said Subsection shall be reduced by the
amount so paid. Such deduction allowable shall be reduced by
an amount which bears the same ratio to the amounts allowed
as deductions under paragraphs (1) and (3) of this Subsection
as the amount otherwise deductible under said paragraph (2)
bears to the value of the decedent's estate. Where the property
referred to consists of two or more items, the aggregate value
of such items shall be used for the purpose of computing the
deduction.
(3) Transfers for Public Use. - The amount of all the bequests,
legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines, or any political
subdivision thereof, for exclusively public purposes.
(4) The Family Home. - An amount equivalent to the current
fair market value of the decedent's family home: Provided,
however, That if the said current fair market value exceeds One
million pesos (P1,000,000), the excess shall be subject to estate
tax. As a sine qua non condition for the exemption or
deduction, said family home must have been the decedent's
family home as certified by the barangay captain of the locality.
(5) Standard Deduction. - An amount equivalent to One
million pesos (P1,000,000).
(6) Medical Expenses. - Medical Expenses incurred by the
decedent within one (1) year prior to his death which shall be
duly substantiated with receipts: Provided, That in no case shall
the deductible medical expenses exceed Five Hundred
Thousand Pesos (P500,000).
(7) Amount Received by Heirs Under Republic Act No. 4917. -
Any amount received by the heirs from the decedent -
employee as a consequence of the death of the decedent-
employee in accordance with Republic Act No. 4917: Provided,
That such amount is included in the gross estate of the
decedent.
(B) Deductions Allowed to Nonresident Estates. - In the case
of a nonresident not a citizen of the Philippines, by deducting

from the value of that part of his gross estate which at the time
of his death is situated in the Philippines:
(1) Expenses, Losses, Indebtedness and Taxes. - That
proportion of the deductions specified in paragraph (1) of
Subsection (A) of this Section which the value of such part
bears to the value of his entire gross estate wherever situated;
(2) Property Previously Taxed. - An amount equal to the value
specified below of any property forming part of the gross estate
situated in the Philippines of any person who died within five
(5) years prior to the death of the decedent, or transferred to
the decedent by gift within five (5) years prior to his death,
where such property can be identified as having been received
by the decedent from the donor by gift, or from such prior
decedent by gift, bequest, devise or inheritance, or which can
be identified as having been acquired in exchange for property
so received:
One hundred percent (100%) of the value if the prior decedent
died within one (1) year prior to the death of the decedent, or if
the property was transferred to him by gift, within the same
period prior to his death;
Eighty percent (80%) of the value, if the prior decedent died
more than one (1) year but not more than two (2) years prior to
the death of the decedent, or if the property was transferred to
him by gift within the same period prior to his death;
Sixty percent (60%) of the value, if the prior decedent died
more than two (2) years but not more than three (3) years prior
to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death;
Forty percent (40%) of the value, if the prior decedent died
more than three (3) years but not more than four (4) years prior
to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death; and
Twenty percent (20%) of the value, if the prior decedent died
more than four (4) years but not more than five (5) years prior
to the death of the decedent, or if the property was transferred
to him by gift within the same period prior to his death.
These deductions shall be allowed only where a donor's tax, or
estate tax imposed under this Title is finally determined and
paid by or on behalf of such donor, or the estate of such prior
decedent, as the case may be, and only in the amount finally
determined as the value of such property in determining the
value of the gift, or the gross estate of such prior decedent, and
only to the extent that the value of such property is included in
that part of the decedent's gross estate which at the time of his
death is situated in the Philippines; and only if, in determining
the value of the net estate of the prior decedent, no deduction
is allowable under paragraph (2) of Subsection (B) of this
Section, in respect of the property or properties given in
exchange therefore. Where a deduction was allowed of any
mortgage or other lien in determining the donor's tax, or the
estate tax of the prior decedent, which was paid in whole or in
part prior to the decedent's death, then the deduction allowable
under said paragraph shall be reduced by the amount so paid.
Such deduction allowable shall be reduced by an amount which
bears the same ratio to the amounts allowed as deductions
under paragraphs (1) and (3) of this Subsection as the amount
otherwise deductible under paragraph (2) bears to the value of
that part of the decedent's gross estate which at the time of his
death is situated in the Philippines. Where the property referred
to consists of two (2) or more items, the aggregate value of
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such items shall be used for the purpose of computing the
deduction.
(3) Transfers for Public Use. - The amount of all bequests,
legacies, devises or transfers to or for the use of the
Government of the Republic of the Philippines or any political
subdivision thereof, for exclusively public purposes.
(C) Share in the Conjugal Property. - the net share of the surviving
spouse in the conjugal partnership property as diminished by
the obligations properly chargeable to such property shall, for
the purpose of this Section, be deducted from the net estate of
the decedent.
(D) Miscellaneous Provisions. - No deduction shall be allowed in
the case of a nonresident not a citizen of the Philippines, unless
the executor, administrator, or anyone of the heirs, as the case
may be, includes in the return required to be filed under
Section 90 the value at the time of his death of that part of the
gross estate of the nonresident not situated in the Philippines.
(E) Tax Credit for Estate Taxes paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title shall be credited
with the amounts of any estate tax imposed by the authority of
a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under
this Section shall be subject to each of the following
limitations:
(a) The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against
which such credit is taken, which the decedent's net estate
situated within such country taxable under this Title bears to
his entir net estate; and
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the decedent's net estate situated outside the Philippines taxable
under this Title bears to his entire net estate.
Section 87. Exemption of Certain Acquisitions and
Transmissions. - The following shall not be taxed:
(A) The merger of usufruct in the owner of the naked title;
(B) The transmission or delivery of the inheritance or legacy by
the fiduciary heir or legatee to the fideicommissary;
(C) The transmission from the first heir, legatee or donee in
favor of another beneficiary, in accordance with the desire of
the predecessor; and
(D) All bequests, devises, legacies or transfers to social welfare,
cultural and charitable institutions, no part of the net income of
which insures to the benefit of any individual: Provided,
however, That not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be used by such
institutions for administration purposes.
Section 88. Determination of the Value of the Estate. -
(A) Usufruct. - To determine the value of the right of usufruct,
use or habitation, as well as that of annuity, there shall be taken
into account the probable life of the beneficiary in accordance
with the latest Basic Standard Mortality Table, to be approved
by the Secretary of Finance, upon recommendation of the
Insurance Commissioner.
(B) Properties. - The estate shall be appraised at its fair market
value as of the time of death. However, the appraised value of
real property as of the time of death shall be, whichever is
higher of -

(1) The fair market value as determined by the Commissioner,
or
(2) The fair market value as shown in the schedule of values
fixed by the Provincial and City Assessors.
Section 89. Notice of Death to be Filed. - In all cases of transfers
subject to tax, or where, though exempt from tax, the gross
value of the estate exceeds Twenty thousand pesos (P20,000),
the executor, administrator or any of the legal heirs, as the case
may be, within two (2) months after the decedent's death, or
within a like period after qualifying as such executor or
administrator, shall give a written notice thereof to the
Commissioner.
Section 90. Estate Tax Returns. -
(A) Requirements. - In all cases of transfers subject to the tax
imposed herein, or where, though exempt from tax, the gross
value of the estate exceeds Two hundred thousand pesos
(P200,000), or regardless of the gross value of the estate, where
the said estate consists of registered or registrable property
such as real property, motor vehicle, shares of stock or other
similar property for which a clearance from the Bureau of
Internal Revenue is required as a condition precedent for the
transfer of ownership thereof in the name of the transferee, the
executor, or the administrator, or any of the legal heirs, as the
case may be, shall file a return under oath in duplicate, setting
forth:
(1) The value of the gross estate of the decedent at the time of
his death, or in case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated in the
Philippines;
(2) The deductions allowed from gross estate in determining
the estate as defined in Section 86; and
(3) Such part of such information as may at the time be
ascertainable and such supplemental data as may be necessary
to establish the correct taxes.
Provided, however, That estate tax returns showing a gross
value exceeding Two million pesos (P2,000,000) shall be
supported with a statement duly certified to by a Certified
Public Accountant containing the following:
(a) Itemized assets of the decedent with their corresponding
gross value at the time of his death, or in the case of a
nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section
86; and
(c) The amount of tax due whether paid or still due and
outstanding.
(B) Time for filing. - For the purpose of determining the estate
tax provided for in Section 84 of this Code, the estate tax
return required under the preceding Subsection (A) shall be
filed within six (6) months from the decedent's death.
A certified copy of the schedule of partition and the order of
the court approving the same shall be furnished the
Commissioner within thirty (30) after the promulgation of such
order.
(C) Extension of Time. - The Commissioner shall have authority
to grant, in meritorious cases, a reasonable extension not
exceeding thirty (30) days for filing the return.
(D) Place of Filing. - Except in cases where the Commissioner
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otherwise permits, the return required under Subsection (A)
shall be filed with an authorized agent bank, or Revenue
District Officer, Collection Officer, or duly authorized
Treasurer of the city or municipality in which the decedent was
domiciled at the time of his death or if there be no legal
residence in the Philippines, with the Office of the
Commissioner.
Section 91. Payment of Tax. -
(A) Time of Payment. - The estate tax imposed by Section 84 shall
be paid at the time the return is filed by the executor,
administrator or the heirs.
(B) Extension of Time. - When the Commissioner finds that the
payment on the due date of the estate tax or of any part thereof
would impose undue hardship upon the estate or any of the
heirs, he may extend the time for payment of such tax or any
part thereof not to exceed five (5) years, in case the estate is
settled through the courts, or two (2) years in case the estate is
settled extrajudicially. In such case, the amount in respect of
which the extension is granted shall be paid on or before the
date of the expiration of the period of the extension, and the
running of the Statute of Limitations for assessment as
provided in Section 203 of this Code shall be suspended for the
period of any such extension.
Where the taxes are assessed by reason of negligence,
intentional disregard of rules and regulations, or fraud on the
part of the taxpayer, no extension will be granted by the
Commissioner.
If an extension is granted, the Commissioner may require the
executor, or administrator, or beneficiary, as the case may be,
to furnish a bond in such amount, not exceeding double the
amount of the tax and with such sureties as the Commissioner
deems necessary, conditioned upon the payment of the said tax
in accordance with the terms of the extension.
(C) Liability for Payment - The estate tax imposed by Section 84
shall be paid by the executor or administrator before delivery to
any beneficiary of his distributive share of the estate. Such
beneficiary shall to the extent of his distributive share of the
estate, be subsidiarily liable for the payment of such portion of
the estate tax as his distributive share bears to the value of the
total net estate.
For the purpose of this Chapter, the term 'executor' or
'administrator' means the executor or administrator of the
decedent, or if there is no executor or administrator appointed,
qualified, and acting within the Philippines, then any person in
actual or constructive possession of any property of the
decedent.
Section 92. Discharge of Executor or Administrator from
Personal Liability. - If the executor or administrator makes a
written application to the Commissioner for determination of
the amount of the estate tax and discharge from personal
liability therefore, the Commissioner (as soon as possible, and
in any event within one (1) year after the making of such
application, or if the application is made before the return is
filed, then within one (1) year after the return is filed, but not
after the expiration of the period prescribed for the assessment
of the tax in Section 203 shall not notify the executor or
administrator of the amount of the tax. The executor or
administrator, upon payment of the amount of which he is

notified, shall be discharged from personal liability for any
deficiency in the tax thereafter found to be due and shall be
entitled to a receipt or writing showing such discharge.
Section 93. Definition of Deficiency. - As used in this Chapter, the
term 'deficiency' means:
(a) The amount by which the tax imposed by this Chapter
exceeds the amount shown as the tax by the executor,
administrator or any of the heirs upon his return; but the
amounts so shown on the return shall first be increased by the
amounts previously assessed (or collected without assessment)
as a deficiency and decreased by the amount previously abated,
refunded or otherwise repaid in respect of such tax; or
(b) If no amount is shown as the tax by the executor,
administrator or any of the heirs upon his return, or if no
return is made by the executor, administrator, or any heir, then
the amount by which the tax exceeds the amounts previously
assessed (or collected without assessment) as a deficiency; but
such amounts previously assessed or collected without
assessment shall first be decreased by the amounts previously
abated, refunded or otherwise repaid in respect of such tax.
Section 94. Payment before Delivery by Executor or Administrator. -
No judge shall authorize the executor or judicial administrator
to deliver a distributive share to any party interested in the
estate unless a certification from the Commissioner that the
estate tax has been paid is shown.
Section 95. Duties of Certain Officers and Debtors. - Registers of
Deeds shall not register in the Registry of Property any
document transferring real property or real rights therein or any
chattel mortgage, by way of gifts inter vivos or mortis causa,
legacy or inheritance, unless a certification from the
Commissioner that the tax fixed in this Title and actually due
thereon had been paid is show, and they shall immediately
notify the Commissioner, Regional Director, Revenue District
Officer, or Revenue Collection Officer or Treasurer of the city
or municipality where their offices are located, of the non
payment of the tax discovered by them. Any lawyer, notary
public, or any government officer who, by reason of his official
duties, intervenes in the preparation or acknowledgment of
documents regarding partition or disposal of donation
intervivos or mortis causa, legacy or inheritance, shall have the
duty of furnishing the Commissioner, Regional Director,
Revenue District Officer or Revenue Collection Officer of the
place where he may have his principal office, with copies of
such documents and any information whatsoever which may
facilitate the collection of the aforementioned tax. Neither shall
a debtor of the deceased pay his debts to the heirs, legatee,
executor or administrator of his creditor, unless the
certification of the Commissioner that the tax fixed in this
Chapter had been paid is shown; but he may pay the executor
or judicial administrator without said certification if the credit is
included in the inventory of the estate of the deceased.
Section 96. Restitution of Tax Upon Satisfaction of Outstanding
Obligations. - If after the payment of the estate tax, new
obligations of the decedent shall appear, and the persons
interested shall have satisfied them by order of the court, they
shall have a right to the restitution of the proportional part of
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the tax paid.
Section 97. Payment of Tax Antecedent to the Transfer of Shares,
Bonds or Rights. - There shall not be transferred to any new
owner in the books of any corporation, sociedad anonima,
partnership, business, or industry organized or established in
the Philippines any share, obligation, bond or right by way of
gift inter vivos or mortis causa, legacy or inheritance, unless a
certification from the Commissioner that the taxes fixed in this
Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person, who
maintained a bank deposit account alone, or jointly with
another, it shall not allow any withdrawal from the said deposit
account, unless the Commissioner has certified that the taxes
imposed thereon by this Title have been paid: Provided,
however, That the administrator of the estate or any one (1) of
the heirs of the decedent may, upon authorization by the
Commissioner, withdraw an amount not exceeding Twenty
thousand pesos (P20,000) without the said certification. For
this purpose, all withdrawal slips shall contain a statement to
the effect that all of the joint depositors are still living at the
time of withdrawal by any one of the joint depositors and such
statement shall be under oath by the said depositors.
TAXATION OF GRATUITOUS TRANSFER OF
PROPERTY
Transfer in contemplation of death (Sec. 85.B)
• Note Sec. 40.B.2 and 40.B.3 vis-à-vis Sec. 85B (For
the final exam)
• Governor donated a parcel of land to Lady
Charmel, receiving the right to the income to
himself for the first five years, and the right shall
transferred to Lady Charmel upon the end of the
period.
o During the time of donation, there is no
taxable gift, because there is no
completed gift, as there is no total
divestment of control over the property.
• However, if the Governor outlives the five-year
period, then it will become a taxable gift, because
there is now a total divestment of control over the
property. Within 30 days after the period, file and
pay the tax.
• If the Governor dies within the period, the
property will still go to Lady Charmel, but not by
way of donation inter vivos, but as donation
mortis causa.
• Motive of Lady Charmel for killing the Governor
on the 4th year: To save on income tax. Sec. 40.B.2
versus 40.B.3 (carry-over basis).
ESTATE TAX
1) It is a tax on the privilege of transmitting
properties upon death and to the special privilege
that a person is given in controlling to a certain

extent the disposition of his properties to take
effect upon his death.
2) WON a property will form part of the estate of the
decedent or WON it will be subject to estate tax
à Always consider CONTROL.
a. All properties where the decedent has
control over their disposition at the time
of his death, or control of which is
ascertainable only at the time of his
death, must be included to his estate, and
shall be subject to estate tax.
i. That’s why revocable transfers
form part of the gross estate.
(Sec. 85.C)
ii. Proceeds of life insurance the
beneficiary of which
revocable also forms part of the
gross estate. (Sec. 85.E) But if
irrevocable, exclude from gross
estate, because at the time of his
death, he had no control over
the disposition of the proceeds.
b. Donation where there is right to income
until “six months before death.” à Not
ascertainable period, therefore, there is
still control at the time of death.
DONOR’S TAX
« When does a gift occur?
o It is the relinquishment of control that
makes the donation taxable.
« Donor who retained the right to income for life à
equivalent to a testamentary disposition.
« But if after a few years, the donor relinquishes the
right to the income, then it becomes a completed
gift subject to donor’s tax.
COMPOSITION OF THE GROSS ESTATE
« Only properties within the control of the
decedent.
« Rule of situs different from that in income tax.
o Residents and citizens – All properties
wherever situated.
o Non-resident aliens – Only properties
situated in the Philippines, provided that,
with respect to intangible personal
properties, we follow the rule of
reciprocity.
§ Retain control à estate tax;
relinquish control à donor’s
tax.
§ Sec. 85 in relation to Sec. 104,
NIRC
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§ Donor Z who is a resident and
citizen of X foreign country.
Said country does not impose
any transfer taxes of whatever
nature and type. Z donated one
million worth of shares of
stocks in a corporation doing
business in that X foreign
country to his son who is a
resident since birth of the
Philippines, and is about to be
married to his Filipina fiancée
(donation in contemplation of
marriage). Can the donor
invoke the rule of reciprocity in
order to be exempt from
is Philippine’s donor’s tax?
• No, because the
donation is simply not
taxable in the
Philippines. The
donor is a non-
resident alien, and the
property is an
intangible personal
property not situated
in the Philippines.
§ Would the answer be the same
if the shares were that of San
Miguel Corporation, a domestic
corporation?
• No, the donor can
now invoke the rule
of reciprocity. All
nonresident aliens are
taxable on all
properties situated in
the Philippines.
§ The rule of reciprocity
applies only to intangible
personal properties situated
in the Philippines owned by
a non-resident alien.
[Collector v. Campos Rueda
(1971)] (Asked three years ago)
SPECIFIC RULES ON INCLUSIONS AND
EXCLUSIONS (Sec. 85)
« Decedent’s Interest
1) If co-owned property, and only one dies, only the
decedent’s share in said property will be included
as part of his gross estate. The FMV of 5 million
of said share will be included.
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2) Decedent maintains an account in a bank, and « What if he sold the house and lot to the
maintained with a co-depositor. Only 50% will be son for 10M, which is its FMV, but
the extent of the decedent’s interest. retained enjoyment thereof until his
a. If a bank has knowledge of the death of a death? Is it still TICOD?
depositor (whether a lone depositor or a o No, because the first
co-depositor), no withdrawal shall be requirement is missing.
allowed under the law, except upon
presentation of a certification that the « Revocable transfer
estate tax thereon has been paid. (Ask in « Where the decedent reserve the right to
1981?) alter or revoke the transfer, WON that
b. Exception: Written authorization of the right was exercised by the decedent
CIR, but only up to P20K (just enough to during his lifetime, that property shall
augment funeral expenses) form part of the estate of the decedent.
WON a deed of donation is executed, it
« TICOD – Transfer in contemplation of death is not considered a taxable gift.
« If a property owner has been diagnosed
of terminal cancer and was given by the « Property passing under general power of
doctor six months to live, confirmed by appointment
second and third opinions. X went to his « Two types of appointment for purposes
wife and told her that he has 18 months of donor’s tax
to live (PUTA 6 + 6 + 6 = 18 MONTHS o Special power – if power is
HAHAH). Because of his fear of granted to a specific person or
impending death, he decided to sell his specific class of persons.
house and lot to his only son. The house § Mr. X owns a valuable
and lot is worth 10M, and sold it for real property in QC.
10M. Six months later, he decided to die He executed a last will
(Sir’s favorite’s phrase). Is that and testament, naming
TICOD? Is the property includable as his son to be his heir
part of X’s gross estate? over such property.
o It is not TICOD, therefore, not But in the same will,
includable, because it is a sale he gave his son the
for a valuable consideration in power to appoint the
money for money’s worth. latter’s only son (X’s
« Requirements of a TICOD (must grandson) to succeed
concur): over the property in
The transfer must be for the event that the son
insufficient consideration OR dies.
without consideration; AND § If X dies, will the
o The enjoyment or possession property form part of
will NOT vest on the transferee his gross estate?
before the transferor’s death. • Yes. Because
« Therefore, the proximity of the death to when he died,
the transfer is not controlling. he
transmitted
« Same facts. What if he donates because of the property
his fear of his impending death? to his son,
o No. That is a complete gift, therefore,
therefore, subject to donor’s tax. subject to
o Different answer if there is a estate tax.
proviso in the deed of donation The grantee
that the property will be enjoyed has no
by the donee only upon the control over
donor’s death = TICOD, the next heir.
therefore, included as part of § If the son dies, the
the gross estate. property is not
includable.
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§ Transfer of property (A) The merger of usufruct in the owner of the naked title;
from first heir to (B) The transmission or delivery of the inheritance or legacy by
second heir, in the fiduciary heir or legatee to the fideicommissary;
accordance with the (C) The transmission from the first heir, legatee or donee in
wishes of the decedent favor of another beneficiary, in accordance with the desire of
will not be subject to the predecessor; and
tax. (Generation (D) All bequests, devises, legacies or transfers to social welfare,
Skipping Transfer à cultural and charitable institutions, no part of the net income of
effective way of tax which inures to the benefit of any individual: Provided,
avoidance) however, That not more than thirty percent (30%) of the said
bequests, devises, legacies or transfers shall be used by such
§ Use of SPA
institutions for administration purposes.
• Will work to
relieve the
« Merger of the usufruct in the owner of
heir from the
the naked title
imposition of
G transfers to X, but income to W for life, and
the estate tax
remainder to S à merger
upon his tax.
« G is subject to donor’s tax. W is subject
• The two to income tax. Transmission of full
transfers will ownership to S is tax-exempt.
be taxed but 1. It is exempt because W has no control over the
once. transmission of the usufruct to the owner of the
naked title.
o General power – opposite à
person named to assign can « Transmission or delivery of the
name anybody inheritance or legacy by the fiduciary heir
§ Therefore, when X or legatee to the fideicommissary.
died, the transfer is (Generation Skipping Scheme)
taxable. 2. Classic example of a property passing under a
special power of appointment.
« Proceeds of life insurance
« Not subject to income tax (Sec. 32.B) « Transmission from the first heir, legatee
« May or may form part of the estate tax, or donee in favor of another beneficiary,
depending on the type of the designation in accordance with the desire of the
of the beneficiary. If irrevocable, then not predecessor.
subject to estate tax. If revocable, WON « Transmission should be a one-degree
exercised during his lifetime, then transfer.
includable in the estate, and subject to « Exempt because first heir has no control
estate tax. over the transmission to the second heir.
« Nature of designation is immaterial if the The transfer was already taxed when the
beneficiary is the estate, executor or heir’s predecessor died.
administrator. The obvious intention of
the decedent is to make the proceeds « Bequests, devises, legacies or transfers to
available for distribution among all his social welfare, cultural and charitable
heirs. institutions, no part of the net income of
which inures to the benefit of any
« Transfer for insufficient consideration individual, Provided, however, That not
« Only the difference between the FMV more than 30% of said BDLT shall be
and actual consideration will be included. used by such institutions for
« Relate this to TICOD> administration purposes.
« Counterpart provision in Sec. 101 (also
« Capital of surviving spouse exempt from donor’s tax)
EXEMPT TRANSFERS (Sec. 87) RULES OF VALUATION (Sec. 88)

SEC. 87 Exemption of Certain Acquisitions and « FMV as of the time of death

Transmissions. - The following shall not be taxed:

« Real property – the FMV shall be the high value
between the FMV determined by the CIR (zonal
value) (power of the CIR under Sec. 6 to subdivide
the entire country into zones) and the FMV as
shown in the schedule of values fixed by the
Provincial and City Assessors (Assessed Value à
Tax Declaration)
o For zonal value, unless published in the
Official Gazette or in a newspaper of
general circulation
o Cf. Sec. 218 of the LGC à cannot go
beyond this [note only provinces and
cities, and municipalities within Metro
Manila (Pateros na lang) can impose RPT]
« Personal Property recently acquired by
the decedent à Purchase price may
indicate FMV
o If decedent purchased Toyota
Fortuner from Cubao, ginamit
niya pauwi. Di sanay sa aircon,
namatay siya. FMV will be the
purchase price as shown in the
receipt.
o If old, rely on the classified ads.
« Shares of stocks à the FMV will depend
on WON the shares are traded in
o Traded shares – arithmetic
mean between the highest and
lowest quotation (opening bid
and close bid; bid price and
asked price)
o Unlisted shares
§ Common shares –
Book value (*RR 6-
2013 à Adjusted net
asset method)
• Adjusted net
asset method:
The FMV of
the shares is
the FMV of
the
underlying
assets.
• Lands
compare
zonal value,
assessed
value,
• Revalued
properties
less total
liabilities
equals
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shareholder’s
equity
§ Preferred shares – Par
value
DEDUCTIONS FORM THE GROSS ESTATE (Sec.
86)
« ELIT (Expenses, Losses, Indebtedness, and Taxes)
Two Types of Expenses
• Funeral Expenses
o 5% of gross estate OR actual, whichever
is lower, but in no case shall it go beyond
P200K. The least is the one that is
deductible.
o Mourning apparel of the widow, death
notices in the newspapers (obits),
expenses for the religious rites prior to
the burial (padasal, pakape LOL), cost of
tombstone, mausoleum (but not its
upkeep à duh, tapos na funeral), burial
plot, [card of thanks not included kasi
tapos na ‘yung libing LOL],
• Judicial Expenses of the testamentary or
intestate proceedings
• Note that for casualty losses to be deductible,
the loss should happen after the decedent’s
death, during the settlement of the estate
(within six months from death).
• Owner with property with FMV of 10M.
Accidental fire razed it to the ground. The
owner checked the insurance and found out
that the policy expired a week before. He died
after. Is it deductible? No.
« Indebtedness
« Claims against insolvent persons, but only if the
value of decedent’s interest therein is included in
the value of the gross estate. Remember, it is a
receivable, but it cannot be received because the
debtor became bankrupt.
o It is better to include first, because by
à doing so, you are increasing the threshold
of 5% of the gross estate for the
deductions for funeral expenses.
« Claims against the estate à should be
substantiated.
a. Loan documents should be notarized.
And if the loan is incurred within three
years from death, then there has to be a

document showing the nature of the
disposition of the proceeds.
b. Presumption if loan incurred so close to
the death: The proceeds is still intact.
Then it should be included in the gross
estate.
« Taxes
o All the taxes that have accrued before
death (became due and payable before
death) AND remained unpaid as of the
time of death. If already paid, not
deductible already, otherwise, double
deduction. E.g. RPT
« Property Previously Taxed (PPT) or Vanishing
Deduction or Alternating Vanishing Deduction
o Reason: To reduce the harshness of
successive taxation for the transmission
of the same property within a period of
five years
o Never mind about the computation! Bar
examiner will not ask. LOL. What will be
asked is WON entitled to vanishing
deduction.
o Requirements:
§ Location of the property – must
be one that forms part of the
gross estate of the decedent and
is situated in the Philippines
§ Identification with substitution
– must be identified to be the
same property, or a property
acquired in exchange to the
original one (deed of exchange
à Range Rover in exchange
for a bicycle LEL)
§ Interval of transfer – must be
within five years (That’s why
called vanishing deduction,
because the deduction vanishes
after five years, or if already
availed of)
§ Previous payment of estate tax
or donor’s tax on the first
transmission
§ No vanishing deduction in
previous estate involving the
same property or property in
exchange therefor
« Transfer for Public Use – mode of transfer
o Five adjacent properties, donated one
during his lifetime to the QC
Government for public use (public
library). Is it deductible? No. There are
only four properties existing at the time
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of death, otherwise, double deduction!
(Already deducted from donor’s tax)
o Mode of transfer à should be a transfer
by death (bequests, legacies, devises)
« Family Home
o Maximum: 1M (refers only to the
interest of the decedent on the property.
Therefore, if conjugal property, and the
value of the home is 1M, the deduction
should only be 500K).
o Purpose: Perpetuate the family home.
o But value now is so low (adopted in
1992).
« Standard Deduction
o 1M
o Ratio: Arrest the effect of inflation (Tax
Reform Act of 1997)
o If a bachelor died, and the value of his
estate is 1.2M, is his estate liable for any
estate tax? No. 1M standard deduction,
and 200K exempt. (cf. Sec. 84)
« Medical Expenses
o Incurred by the decedent within one year
prior to his death WON paid, duly
substantiated with receipts.
o Max: 500K
« Benefits under RA 4917 or the Employer’s Trust
Act (reasonable private benefit plan)
o Death benefits received by the heirs,
provided, it is first included as part of the
gross estate (same with claims against the
estate à again this is advantageous,
because the 5% threshold for the funeral
expenses increases).
ADMINISTRATIVE PROVISIONS
1. Notice of death – all cases of transfers subject to
tax or exempt but value of gross estate exceeds
P20,000
a. Failure – minor criminal offense, which
can be compromised
b. Sir: Antedate na lang, mga bes.
2. Time of giving notice – within 2 months from
death or within like period after qualifying as such
executor or administrator
3. Filing of estate tax return
a. Who will file – executor, administrator, or
heirs (or any person in possession of the
properties)
b. Time for filing and payment – within 6
months from death; pay-as-you-file
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procedure; extension of time to file return

– not more than 30 days (B) Tax Payable by Donor if Donee is a Stranger. - When the donee
c. Extension of time to pay due to financial or beneficiary is stranger, the tax payable by the donor shall be
difficulties – 5 years if settled judicially, thirty percent (30%) of the net gifts. For the purpose of this
and 2 years if extrajudicially (But in both tax, a 'stranger,' is a person who is not a:
cases, CIR may require posting of a bond) (1) Brother, sister (whether by whole or half-blood), spouse,
i. Posting of a bond is prudent ancestor and lineal descendant; or
or more advantageous to the (2) Relative by consanguinity in the collateral line within the
Government – failure, collect fourth degree of relationship.
on the bond, and the bonding (C) Any contribution in cash or in kind to any candidate,
company will be subrogated to political party or coalition of parties for campaign purposes
shall be governed by the Election Code, as amended.
the right of the Government
to collect from the estate
Section 100. Transfer for Less Than Adequate and full Consideration.
d. Effects of nonpayment of estate tax – no - Where property, other than real property referred to in
property can be transferred to an heir Section 24(D), is transferred for less than an adequate and full
i. Cf. Sec. 94 and 95 à estate tax consideration in money or money's worth, then the amount by
clearance which the fair market value of the property exceeded the value
ii. “This is to certify that the of the consideration shall, for the purpose of the tax imposed
estate of X has paid this by this Chapter, be deemed a gift, and shall be included in
amount of tax, and thereby, computing the amount of gifts made during the calendar year.
this Office interposes no
objection to the transmission Section 101. Exemption of Certain Gifts. - The following gifts or
of the following properties…” donations shall be exempt from the tax provided for in this
iii. Only the properties specified Chapter:
in the estate tax clearance (A) In the Case of Gifts Made by a Resident. -
(“Nothing follows”) can be (1) Dowries or gifts made on account of marriage and before
transmitted. its celebration or within one year thereafter by parents to each
iv. Show to the Register of Deeds, of their legitimate, recognized natural, or adopted children to
concerned bank manager, etc. the extent of the first Ten thousand pesos (P10,000):
(2) Gifts made to or for the use of the National Government
v. Only upon the full payment of
or any entity created by any of its agencies which is not
the estate tax will the BIR
conducted for profit, or to any political subdivision of the said
issue the estate tax clearance. Government; and
(3) Gifts in favor of an educational and/or charitable, religious,
DONOR’S TAX cultural or social welfare corporation, institution, accredited
nongovernment organization, trust or philanthrophic
Section 98. Imposition of Tax. - organization or research institution or organization: Provided,
(A) There shall be levied, assessed, collected and paid upon the however, That not more than thirty percent (30%) of said gifts
transfer by any person, resident or nonresident, of the property shall be used by such donee for administration purposes. For
by gift, a tax, computed as provided in Section 99. the purpose of the exemption, a 'non-profit educational and/or
(B) The tax shall apply whether the transfer is in trust or charitable corporation, institution, accredited nongovernment
otherwise, whether the gift is direct or indirect, and whether the organization, trust or philanthrophic organization and/or
property is real or personal, tangible or intangible. research institution or organization' is a school, college or
university and/or charitable corporation, accredited
Section 99. Rates of Tax Payable by Donor. - nongovernment organization, trust or philanthrophic
(A) In General. - The tax for each calendar year shall be organization and/or research institution or organization,
computed on the basis of the total net gifts made during the incorporated as a nonstock entity, paying no dividends,
calendar year in accordance with the following schedule: governed by trustees who receive no compensation, and
If the net gift is: devoting all its income, whether students' fees or gifts,
Over But Not The Tax Plus Of Excess donation, subsidies or other forms of philanthrophy, to the
Over Shall Be Over accomplishment and promotion of the purposes enumerated in
P100,000 Exempt its Articles of Incorporation.
P100,000 200,000 0 2% P100,000 (B) In the Case of Gifts Made by a Nonresident not a Citizen
200,000 500,000 2,000 4% 200,000 of the Philippines. -
500,000 1,000,000 14,000 6% 500,000 (1) Gifts made to or for the use of the National Government
1,000,000 3,000,000 44,000 8% 1,000,000 or any entity created by any of its agencies which is not
3,000,000 5,000,000 204,000 10% 3,000,000 conducted for profit, or to any political subdivision of the said
5,000,000 10,000,000 404,000 12% 5,000,000 Government.
10,000,000 1,004,000 15% 10,000,000 (2) Gifts in favor of an educational and/or charitable, religious,

cultural or social welfare corporation, institution, foundation,
trust or philanthrophic organization or research institution or
organization: Provided, however, That not more than thirty
percent (30% of said gifts shall be used by such donee for
administration purposes.
(C) Tax Credit for Donor's Taxes Paid to a Foreign Country. -
(1) In General. - The tax imposed by this Title upon a donor
who was a citizen or a resident at the time of donation shall be
credited with the amount of any donor's tax of any character
and description imposed by the authority of a foreign country.
(2) Limitations on Credit. - The amount of the credit taken under
this Section shall be subject to each of the following
limitations:
(a) The amount of the credit in respect to the tax paid to any
country shall not exceed the same proportion of the tax against
which such credit is taken, which the net gifts situated within
such country taxable under this Title bears to his entire net
gifts; and
(b) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which
the donor's net gifts situated outside the Philippines taxable
under this title bears to his entire net gifts.
Section 102. Valuation of Gifts Made in Property. - If the gift is
made in property, the fair market value thereof at the time of
the gift shall be considered the amount of the gift. In case of
real property, the provisions of Section 88(B) shall apply to the
valuation thereof.
Section 103. Filing of Return and Payment of Tax. -
(A) Requirements. - any individual who makes any transfer by gift
(except those which, under Section 101, are exempt from the
tax provided for in this Chapter) shall, for the purpose of the
said tax, make a return under oath in duplicate. The return shall
se forth:
(1) Each gift made during the calendar year which is to be
included in computing net gifts;
(2) The deductions claimed and allowable;
(3) Any previous net gifts made during the same calendar year;
(4) The name of the donee; and
(5) Such further information as may be required by rules and
regulations made pursuant to law.
(B) Time and Place of Filing and Payment. - The return of the
donor required in this Section shall be filed within thirty (30)
days after the date the gift is made and the tax due thereon shall
be paid at the time of filing. Except in cases where the
Commissioner otherwise permits, the return shall be filed and
the tax paid to an authorized agent bank, the Revenue District
Officer, Revenue Collection Officer or duly authorized
Treasurer of the city or municipality where the donor was
domiciled at the time of the transfer, or if there be no legal
residence in the Philippines, with the Office of the
Commissioner. In the case of gifts made by a nonresident, the
return may be filed with the Philippine Embassy or Consulate
in the country where he is domiciled at the time of the transfer,
or directly with the Office of the Commissioner.
Section 104. Definitions. - For purposes of this Title, the terms
'gross estate' and 'gifts' include real and personal property,
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whether tangible or intangible, or mixed, wherever situated:
Provided, however, That where the decedent or donor was a
nonresident alien at the time of his death or donation, as the
case may be, his real and personal property so transferred but
which are situated outside the Philippines shall not be included
as part of his 'gross estate' or 'gross gift': Provided, further,
That franchise which must be exercised in the Philippines;
shares, obligations or bonds issued by any corporation or
sociedad anonima organized or constituted in the Philippines in
accordance with its laws; shares, obligations or bonds by any
foreign corporation eighty-five percent (85%) of the business
of which is located in the Philippines; shares, obligations or
bonds issued by any foreign corporation if such shares,
obligations or bonds have acquired a business situs in the
Philippines; shares or rights in any partnership, business or
industry established in the Philippines, shall be considered as
situated in the Philippines: Provided, still further, that no tax
shall be collected under this Title in respect of intangible
personal property: (a) if the decedent at the time of his death or
the donor at the time of the donation was a citizen and resident
of a foreign country which at the time of his death or donation
did not impose a transfer tax of any character, in respect of
intangible personal property of citizens of the Philippines not
residing in that foreign country, or (b) if the laws of the foreign
country of which the decedent or donor was a citizen and
resident at the time of his death or donation allows a similar
exemption from transfer or death taxes of every character or
description in respect of intangible personal property owned by
citizens of the Philippines not residing in that foreign country.
The term 'deficiency' means: (a) the amount by which tax
imposed by this Chapter exceeds the amount shown as the tax
by the donor upon his return; but the amount so shown on the
return shall first be increased by the amount previously
assessed (or Collected without assessment) as a deficiency, and
decreased by the amounts previously abated, refunded or
otherwise repaid in respect of such tax, or (b) if no amount is
shown as the tax by the donor, then the amount by which the
tax exceeds the amounts previously assessed, (or collected
without assessment) as a deficiency, but such amounts
previously assessed, or collected without assessment, shall first
be decreased by the amount previously abated, refunded or
otherwise repaid in respect of such tax.
Donation – it is a valid transfer of property from one
person to another without compensation or consideration
therefor (Prentice Hall Federal Tax Course)
• Not limited to donations per se, because of the
concept of “deemed gifts” under Sec. 100.
Smith v. Shaughnessy: The donor’s tax was enacted not
only to prevent estate tax avoidance, but also to prevent
income tax avoidance by reducing yearly income and
thereby escaping the effect of the progressive rates of the
income tax.
Question: Can the sale of a property less than its FMV be
subject to income tax? (Painting worth 1M, sold for 500M)
• Yes. (Cf. Sec. 40B)

• Will the gain of 500M in its entirety be subject to
income tax?
o Acquired painting for 100K, sold it for
500K. Is the seller liable to pay income
tax for the entire 400K gain?
o “Where there is no law that exempts it
from taxation” à (Rules of exclusion)
à
o Sec. 39.B (holding period) (12mos)
o The amount of gain taxable depends of
the holding period of the seller. It can be
100% taxable if the holding period does
not go beyond 12 months. If it does, then
only 50% of the gain will be taxed for
income tax.
• Will the transaction be subject to donor’s tax?
o Yes. But only the difference between the
FMV and the selling price (or amount
• Do we need to establish donative intent?
o No, it is a presumed gift (donative intent
is presumed). It is a gift by virtue of law.
o Rate of 30% of the net gifts (500K) à
gift to a stranger
o Direct tax. The legal obligation to pay the
tax and the economic burden falls on the
same person à the donor.
What constitutes a gift?
• Direct donation = must comply with requirements
of donation under law of contracts (cf. Civil Code)
o Statute of Frauds (500K = must be in
writing)
o Real Property = must be in a public
instrument
o With Donative intent
• Sales and exchanges if the consideration received is
lower than the FMV of the property transferred
(Indirect or Deemed Gift)
o Amount of donation = difference
between the consideration received and
FMV of the property transferred
o Deemed gift provision will not apply if
the property is subject to 6% capital gains
tax
§ The evil sought to be avoided
by Sec. 100 does not exist if it
subject.
o Purpose of Sec. 100: All parties of the
sale will agree to a decreased price in
order to lessen their income tax exposure
otherwise. This compels the parties to
declare the true value of the selling price.
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Meaning of consideration
• When the transferor gives something away and
does not at the same time replace it with money of
equal value or some goods or services capable of
being valuated in money, he is deemed to gave
made a gift within the taxing law (CIR v. Bristol)
o Must be measurable in money or money’s
worth. Mere legal consideration is not
sufficient.
o Consideration must flow to the donor;
mere detriment to the donee does not
satisfy the purpose of the statute.
o Example: Chain smoker. Friend said that
he will give him 1M if chain smoker does
not smoke for six months. Is that a
taxable donation? à YES
When does a gift occur?
• When the donor surrenders CONTROL over the
property. If the donor retains an unlimited power
to revoke a gift, no gift has occurred.
o If the donor does not relinquish
control over the property during
his lifetime (i.e. right of
possession, enjoyment, income),
the donation is a donation mortis
causa subject to estate tax. It is
not a completed gift during the
donor’s lifetime, but is
equivalent to a testamentary
disposition.
o What if donated, but the right
of income is reserved for five
years. Three years thereafter, a
special deed was executed,
waiving the right to the income.
It will then become a taxable
gift.
§ If the donor outlives
the five-year period,
the tax will be donor’s
tax, because it became
a completed gift after
the expiration of the
period.
§ But if the donor dies
within the five-year
period, the donation
becomes a donation
mortis causa = because
at the time of death,
the donor still had
control over the
property = subject to
estate tax.
Composition of Gross Gift

• Only properties upon which the donor divests
himself of control during his lifetime
• Residents and citizens = all properties wherever
situated
• NRAs = only properties situated in the
Philippines, provided that, with respect to
intangible personal properties, we follow rule of
reciprocity
• Sec. 98 in relation to Sec. 104
Rules of Valuation (cf. Sec. 102)
• FMV as of time of donation (Sec. 102)
• RP – higher value between FMV
• Shares of stock
o Traded – FMV – arithmetic mean
between highest and lowest quotation at
the date nearest
o Unlisted – Adjusted net asset method
(supra)
Net Gift
• Tax base = cumulative net gifts during the
calendar year
o All the taxes paid for previous gifts will
be allowed as deductions.
• Refers to the economic benefit that accrues to the
donee
• If a donee will be given a property but he will be
required to assume the mortgage thereon as a
condition for the donation, the net gift would be
the difference between the FMV minus the
mortgage assumed by the donee (can be a valid
deduction from the gross gift)
• If given 1M, but required to give 100K to charity,
then the 100K will be allowed as a deduction. Only
900K is the economic benefit that accrues to the
donee.
Gift Splitting
• A very popular tax avoidance scheme; but this
applies only if the gifts are between relatives.
Because if strangers, the gift will always be subject
to a flat rate.
Rate of Donor’s Tax
• Donations between relatives = graduated rates of
2-15%. First 100K of net gift is exempt
• Donation to strangers = 30% (cf. Sec. 99B)
Exempt Donations (cf. Sec. 101)
• Dowry = 10K
o Gifts made on account of marriage and
before its celebration or within one year
thereafter by parents to each of their
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legitimate, recognized natural, or adopted
children to the extent of the first 100K.
o Condition: the marriage must actually be
celebrated
o 10K each for husband and wife, if the
property donated is conjugal property,
and both executed the deed of donation.
o But if only the husband executed a deed
of donation of a conjugal property, there
will only be one donation. The
presumption is that the husband
borrowed the share of the wife, which is
subject to limitation upon settlement of
their estate. Necessarily, only 10K will be
exempt from donor’s tax. [Tangco v. CA]
• Gifts in favor of the government
• Gifts in favor of an educational, charitable, etc.
institutions (counterpart provision under Sec. 87
for estate tax, subject to the same requirement)
Administrative Provisions
• Filing of the donor’s tax return
o If you donate, you should be prepared to
pay the donor’s tax. You cannot invoke
financial incapacity to escape payment.
Eh di wag ka nang magdonate kung wala kang
pambayad ng tax. Bes.
o Who will file – donor
o Time for filing and payment
§ Within 30 days from donation
§ Pay-as-you-file procedure
§ No extension of time to file
return
o Effects of non-payment – No property
can be transferred to a donee (RD cannot
cancel title, Secretary of Corporation will
not cancel certificate of shares of stock,
bank will not allow withdrawal)
§ There must be a tax clearance
« Strengthening of
o Sec. 40 = always the controlling provision
for the measurement of gain or loss
o Sec. 100 is activated to supplement the
income tax rule
o Effectivity – May 20, 2008
« Trust Arrangements
o Irrevocable Trusts are taxed as a donation
upon transfer or property to the trustee
o Revocable trust – not a donation
o Trust income subject to income tax but
the incidence of the tax depends on the
provision on distribution.
o Transfer of divided interest will make the
usufructuary liable to income tax. Merger

of the usufruct in the owner of the naked
title is not subject to estate tax.
« Other tax implications of inter vivos gifts
o Splitting of gifts during the calendar year
to avoid cumulative effect of the donor’s
tax is a tax avoidance scheme recognized
under our jurisdiction.
o Property donated is not subject to
income tax in the hands of the donee but
the income from said property is taxable.
o Encumbrances on the property reduce
the value of the taxable gift.
E. VALUE-ADDED TAX (VAT)
CONCEPT AND CHARACTERISTICS OF THE
PHILIPPINE VAT
Concept
• It is a business tax levied on certain goods,
properties, and services.
• It is a multi-layered sales tax imposed in all stages
of distribution starting from the point of
production and culminates at the point of
consumption.
• Sir: It is the only type of tax that forces
businessmen to be honest.
Features of the Philippine VAT
• It is a consumption-type tax.
o The ultimate burden falls on consumers.
Note: All indirect taxes are consumption-
type of tax, because it is passed on the
buyer.
o Sir: VAT is the only type of tax that is
NOT inflationary, because everything is
taxed at the same rate (12%) (beer man ‘yan
or kape, same rate lang). It is neutral, not
distortionary. The economic decision of
buyers on what goods to buy and of
businessmen on what goods to sell does
not take into consideration the rate of the
tax. Law of supply and demand lang talaga,
mga bes.
• It adheres to the destination principle or the
cross-border doctrine
o This means that imports are taxable,
while exports are zero-rated. The tax will
be imposed on all goods and services
destined to be consumed in the
Philippines.
o Sir: Banks are the most taxed business in
the Philippines, although exempt from
VAT.
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• Credit-invoice-method VAT
o The VAT payable is established through
the VAT invoice/receipts issued. VAT
on sales less VAT on purchases. This is
also called the indirect subtraction
method VAT.
o Indirect subtraction method VAT = Sales
x 12% minus 12% of purchases.
§ Sir: We prefer this because it
makes the system transparent. It
is in fact the most transparent
tax system among all the
methods (Addition method;
Direct subtraction method).
Why VAT?
• Tax reform for sustainable growth
o Sir: It is the only tax that eliminates the
tax cascade = tax upon tax (cf. Sec. 106A
then relate to Sec. 108, infra)
o Tax base = gross selling price
o “The term gross selling price means the total
amount of money or its equivalent which
the purchaser pays or is obligated to pay
to the seller in consideration of the sale,
barter or exchange of the goods or
properties, excluding the value-added
tax. The excise tax, if any, on such goods
and properties shall form part of the
gross selling price.”
§ Unlike the sales tax! The
cascading effect of taxes is
prevalent in ALL forms of
indirect taxes.
• Equitable tax system
o There is an even distribution of tax
burden in all stages of distribution from
production to consumption. Everyone
pays 12% tax on the value-added amount
(=value added to his cost).
§ Buy product for 100, sell it for
110. Pay VAT on 100.
§ Input tax
§ Output tax
§ If you sell it for the same price
when you purchased it, then you
don’t pay VAT, because nothing
is added to your cost. Your
input tax is 12, your output tax
is 12, then the VAT payable is 0.
• Simplified tax administration
o The tax agency will be monitoring only
one rate of tax (under the old law,
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essential goods are taxed at a rate a)
different from tax on semi-essential or
non-essential goods = encourages
monopoly, and hinders progress). b)
o If different tax rates, taxpayers will be
encouraged to restructure their business
in order to pay at the lowest rate.
c)
• Fosters honesty
o Self-policing mechanism embedded in the
d)
VAT provisions
o VAT invoice or VAT official receipt e)
(Credit invoice method VAT)
Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
The right or the privilege to use patent,
copyright, design or model, plan, secret formula
or process, goodwill, trademark, trade brand or
other like property or right;
The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
The right or the privilege to use motion picture
films, tapes and discs; and
Radio, television, satellite transmission and
cable television time.

• Higher government revenues
o Whether a purchase or a sale, somebody
should remit a tax, which is collectible by
the Government.
o Plus the built-in self-policing mechanism.
TAXABLE TRANSACTIONS
Section 105. Persons Liable. - Any person who, in the course of
trade or business, sells barters, exchanges, leases goods or
properties, renders services, and any person who imports
goods shall be subject to the value-added tax (VAT) imposed in
Sections 106 to 108 of this Code.
The value-added tax is an indirect tax and the amount of tax
may be shifted or passed on to the buyer, transferee or lessee
of the goods, properties or services. This rule shall likewise
apply to existing contracts of sale or lease of goods, properties
or services at the time of the effectivity of Republic Act No.
7716.
The phrase 'in the course of trade or business' means the
regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a
nonstock, nonprofit private organization (irrespective of the
disposition of its net income and whether or not it sells
exclusively to members or their guests), or government entity.
The rule of regularity, to the contrary notwithstanding, services
as defined in this Code rendered in the Philippines by
nonresident foreign persons shall be considered as being course
of trade or business.
Section 106. Value-Added Tax on Sale of Goods or Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and
collected on every sale, barter or exchange of goods or
properties, value-added tax equivalent to ten percent (10%) of
the gross selling price or gross value in money of the goods or
properties sold, bartered or exchanged, such tax to be paid by
the seller or transferor.
1) The term 'goods' or 'properties' shall mean all
tangible and intangible objects which are capable of
pecuniary estimation and shall include:
The term 'gross selling price' means the total amount of money
or its equivalent which the purchaser pays or is obligated to pay
to the seller in consideration of the sale, barter or exchange of
the goods or properties, excluding the value-added tax. The
excise tax, if any, on such goods or properties shall form part
of the gross selling price.
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 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);
3. Sale of raw materials or packaging materials
to export-oriented enterprise whose export
sales exceed seventy percent (70%) of total
annual production;
4. Sale of gold to the Bangko Sentral ng
Pilipinas (BSP); and
5. Those considered export sales under
Executive Order NO. 226, otherwise
known as the Omnibus Investment Code of
1987, and other special laws.
b) Foreign Currency Denominated Sale. - The
phrase 'foreign currency denominated sale'
means sale to a nonresident of goods, except

those mentioned in Sections 149 and 150,
assembled or manufactured in the Philippines
for delivery to a resident in the Philippines, paid
for in acceptable foreign currency and
accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas
(BSP).
c) 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.
(B) Transactions Deemed Sale. - The following transactions shall
be deemed sale:
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;
2) Distribution or transfer to:
a) Shareholders or investors as share in the profits
of the VAT-registered persons; or
b) Creditors in payment of debt;
3) Consignment of goods if actual sale is not made
within sixty (60) days following the date such goods
were consigned; and
4) Retirement from or cessation of business, with
respect to inventories of taxable goods existing as of
such retirement or cessation.
(C) Changes in or Cessation of Status of a VAT-registered Person. -
The tax imposed in Subsection (A) of this Section shall also
apply to goods disposed of or existing as of a certain date if
under circumstances to be prescribed in rules and regulations
to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, the status of a person
as a VAT-registered person changes or is terminated.
(D) Determination of the Tax. -
1) The tax shall be computed by multiplying the total
amount indicated in the invoice by one-eleventh
(1/11).
2) Sales Returns, Allowances and Sales Discounts. - The
value of goods or properties sold and subsequently
returned or for which allowances were granted by a
VAT-registered person may be deducted from the
gross sales or receipts for the quarter in which a
refund is made or a credit memorandum or refund is
issued. Sales discount granted and indicated in the
invoice at the time of sale and the grant of which
does not depend upon the happening of a future
event may be excluded from the gross sales within
the same quarter it was given.
3) Authority of the Commissioner to Determine the
Appropriate Tax Base. - The Commissioner shall, by
rules and regulations prescribed by the Secretary of
Finance, determine the appropriate tax base in cases
where a transaction is deemed a sale, barter or
exchange of goods or properties under Subsection
(B) hereof, or where the gross selling price is
unreasonably lower than the actual market value.
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Section 107. Value-Added Tax on Importation of Goods. -
(A) In General. - There shall be levied, assessed and collected on
every importation of goods a value-added tax equivalent to ten
percent (10%) based on the total value used by the Bureau of
Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges, such tax to be
paid by the importer prior to the release of such goods from
customs custody: Provided, That where the customs duties are
determined on the basis of the quantity or volume of the
goods, the value-added tax shall be based on the landed cost
plus excise taxes, if any.
(B) Transfer of Goods by Tax-exempt Persons. - In the case of tax-
free importation of goods into the Philippines by persons,
entities or agencies exempt from tax where such goods are
subsequently sold, transferred or exchanged in the Philippines
to non-exempt persons or entities, the purchasers, transferees
or recipients shall be considered the importers thereof, who
shall be liable for any internal revenue tax on such importation.
The tax due on such importation shall constitute a lien on the
goods superior to all charges or liens on the goods, irrespective
of the possessor thereof.
Section 108. Value-added Tax on Sale of Services and Use or Lease of
Properties. -
(A) Rate and Base of Tax. - There shall be levied, assessed and
collected, a value-added tax equivalent to ten percent (10%)
(now 12% per RMC 7-2006, effective Jan. 31, 2006) of gross
receipts derived from the sale or exchange of services,
including the use or lease of properties; Provided, That the
President, upon the recommendation of the Secretary of
Finance, shall, effective Jan. 1, 2006, raise the rate of VAT to
12%, after any of the following conditions has been satisfied:
i. Value-added tax collection as a percentage of Gross
Domestic Product (GDP) of previous year exceeds
two and four-fifth percent; or
ii. National government deficit as a percentage of GDP
of previous year exceeds one and one-half percent.
The phrase 'sale or exchange of services' means the
performance of all kinds or services in the Philippines for
others for a fee, remuneration or consideration, including those
performed or rendered by construction and service contractors;
stock, real estate, commercial, customs and immigration
brokers; lessors of property, whether personal or real;
warehousing services; lessors or distributors of
cinematographic films; persons engaged in milling processing,
manufacturing or repacking goods for others; proprietors,
operators or keepers of hotels, motels, resthouses, pension
houses, inns, resorts; proprietors or operators of restaurants,
refreshment parlors, cafes and other eating places, including
clubs and caterers; dealers in securities; lending investors;
transportation contractors on their transport of goods or
cargoes, including persons who transport goods or cargoes for
hire another domestic common carriers by land, air and water
relative to their transport of goods or cargoes; services of
franchise grantees of telephone and telegraph, radio and
television broadcasting and all other franchise grantees except
those under Section 119 of this Code; services of banks, non-
bank financial intermediaries and finance companies; and non-
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life insurance companies (except their crop insurances), acceptable foreign currency and accounted for in
including surety, fidelity, indemnity and bonding companies; accordance with the rules and regulations of the
and similar services regardless of whether or not the Bangko Sentral ng Pilipinas (BSP);
performance thereof calls for the exercise or use of the physical 3) Services rendered to persons or entities whose
or mental faculties. The phrase 'sale or exchange of services' exemption under special laws or international
shall likewise include: agreements to which the Philippines is a signatory
effectively subjects the supply of such services to
1) The lease or the use of or the right or privilege to use zero percent (0%) rate; à EFFECTIVELY ZERO-
any copyright, patent, design or model, plan secret RATED
formula or process, goodwill, trademark, trade brand 4) Services rendered to persons in international shipping
or other like property or right; or international air transport, including leases of
2) The lease of the use of, or the right to use of any property for use thereof;
industrial, commercial or scientific equipment; 5) Services performed by subcontractors and/or
3) The supply of scientific, technical, industrial or contractors in processing, converting, of
commercial knowledge or information; manufacturing goods for an enterprise whose export
4) The supply of any assistance that is ancillary and sales exceed seventy percent (70%) of total annual
subsidiary to and is furnished as a means of enabling production;
the application or enjoyment of any such property, or 6) Transport of passengers and cargo by air or sea
right as is mentioned in subparagraph (2) or any such vessels from the Philippines to a foreign country; and
knowledge or information as is mentioned in 7) Sale of power or fuel generated through renewable
subparagraph (3); sources of energy such as, but not limited to,
5) The supply of services by a nonresident person or his biomass, solar, wind, hydropower, geothermal, ocean
employee in connection with the use of property or energy, and other emerging energy sources using
rights belonging to, or the installation or operation of technologies such as fuel cells and hydrogen fuels.
any brand, machinery or other apparatus purchased
from such nonresident person. (C) Determination of the Tax. - The tax shall be computed by
6) The supply of technical advice, assistance or services multiplying the total amount indicated in the official receipt by
rendered in connection with technical management one-eleventh (1/11).
or administration of any scientific, industrial or
commercial undertaking, venture, project or scheme; a) Sales of goods and properties
7) The lease of motion picture films, films, tapes and b) Sales of services
discs; and c) Importation of goods
8) The lease or the use of or the right to use radio,
television, satellite transmission and cable television
time. • As a rule, the transaction must be in the course of
trade or business to be taxable, except (1)
Lease of properties shall be subject to the tax herein imposed importation, and (2) services performed in the
irrespective of the place where the contract of lease or licensing Philippines by non-residents.
agreement was executed if the property is leased or used in the o #1 intended to achieve protectionism
Philippines. o #2, in order to encourage patronization
of local services
The term 'gross receipts' means the total amount of money or
its equivalent representing the contract price, compensation, TAX BASE FOR VAT
service fee, rental or royalty, including the amount charged for Sir: Avoids the cascading effect of indirect taxes.
materials supplied with the services and deposits and advanced
payments actually or constructively received during the taxable Tax Base
quarter for the services performed or to be performed for Sale of goods Gross selling price
another person, excluding value-added tax. representing the amount
paid for the goods exclusive
(B) Transactions Subject to Zero Percent (0%) Rate - The following
of the VAT charged by the
services performed in the Philippines by VAT- registered
seller
persons shall be subject to zero percent (0%) rate.
1) Processing, manufacturing or repacking goods for Importation of goods Value used by the BOC in
other persons doing business outside the Philippines determining tariff and
which goods are subsequently exported, where the customs duties plus customs
services are paid for in acceptable foreign currency duties and excise taxes if
and accounted for in accordance with the rules and there are any
regulations of the Bangko Sentral ng Pilipinas (BSP); Sale of services Gross receipts representing
2) Services other than those mentioned in the preceding the amount paid as
paragraph, the consideration for which is paid for in compensation for the

services exclusive of the VTA
charged by the service
provider/seller of service
Sale of real property Selling price/market
value/zonal value,
whichever is higher.
If the tax base is market
value / zonal value, the
same is deemed exclusive of
VAT.
If the tax base is selling price
and the VAT is separately
billed, selling price is
deemed inclusive of VAT
(as amended by RR4-2007).
Cessation of business Adjusted acquisition cost or
current market price,
whichever is higher.
VAT ON SALE OF GOODS OR PROPERTIES
Cf. Sec. 106
TRANSACTIONS DEEMED SALE;
RECOUPMENT RULES
• Tax on goods and properties is not limited to
actual sales but to deemed sales as well, to allow
the Government to recover the VAT on the
purchases which were utilized as input tax credits
where the goods will not be ultimately sold.
1) Self-deliveries – transfer use or
consumption not in the course of
business of goods or properties originally
intended for sale or for use in the
business
2) Distribution to shareholder or investor as
share in the profits of a VAT-registered
person
3) Consignment if actual sale does not
happen in 60 days
4) Retirement or cessation of business with
respect to inventory of taxable goods.
ZERO-RATED SALES
1) Zero-rated sales of goods (cf. Sec. 106.A.2, supra)
a. Export sales
b. Foreign currency denominated sales
c. Effectively zero-rated sales
2) Zero-rated sales of services (cf. Sec. 108.B, supra)
• This provides total immunity from VAT of zero-
rated sales and effectively zero-rated sales of goods
or properties.
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• A zero-rated sale is still considered a taxable
transaction for VAT purposes, although the VAT
rate applied is 0%. A sale by a VAT-registered
taxpayer of goods and/or services taxed at 0%
shall not result in any output tax, while the input
tax on its purchase of goods or services related to
such zero-rated sale shall be available as tax credit
or refund [Atlas Consolidated v. CIR, June 8, 2007].
VAT-EXEMPT TRANSACTIONS
Cf. Sec. 109(1)(A) to (V)
• VAT-exempt transactions refer to sales of goods/
properties and/or services and the use or lease of
properties that is not subject to VAT (output tax)
and the seller is not allowed any tax credit for VAT
(input tax) on purchases. The seller is not covered
within the VAT network. The VAT passed on to
him by a VAT-registered supplier is simply buried
as part of his cost.
• Important VAT thresholds (see RR 16-2011):
o Sale of goods and services = P1,919,000
o Residential lot = P1,919,000
o House and lot = P3,199,200
o Lease of residential units = P12,8000 per
unit
Why pawnshops are VAT-exempt
• For purposes of determining their tax liability,
pawnshops are treated as non-bank financial
intermediaries. The VAT on non-bank financial
intermediaries was first levied under RA 7716
(Expanded VAT Law), its effectivity deferred until
January 1, 2003. Hence, from taxable years 1996-
2002, non-bank financial intermediaries including
pawnshops are not subject to VAT. [H. Tambunting
Pawnshop v. CIR, October 13, 2010]
ENTITLEMENT TO INPUT TAX CREDITS
• On local purchases, in general, the transaction
must be between two VAT-registered taxpayers
and evidenced by a VAT invoice or VAT official
receipt. However, if a non-VAT supplier issues a
VAT invoice/receipt, the buyer shall be entitled to
claim the input tax on this purchase that is covered
by a VAT invoice/receipt.
• On importation the goods, the importer must
show proof of payment of VAT with the BOC
which is a condition for the release of goods from
custom’s custody.
Transitional or Presumptive input tax credits

• Transitional input tax credit allowed on the
beginning inventory of persons becoming liable to
VAT – 2%
• Presumptive input tax credit for manufacturers of
sardines, mackerel, milk, refined sugar, cooking oil,
and, in addition, on packed noodle-based instant
meals – 4%
• The presumptive input tax of 1 ½ % on public
works was expressly repealed.
REGISTRATION OF THE TAXPAYER FOR VAT
PURPOSES
• The liability to VAT attaches to a:
1) VAT-registered person; and
2) VAT-registrable person.
Mandatory Registration
1) Gross sales or gross receipts for 12-month period
exceeds P1,919,000.
2) There is reasonable ground to believe that gross
sales or gross receipts for the next 12-month
period will exceed P1,919,000.
3) Franchise grantees of radio and television
broadcasting whose annual gross receipt for the
preceding calendar year exceeded P10 million.
Optional Registration (to make taxpayers competitive)
1) VAT-registered person may opt to treat his VAT-
exempt sales under Sec. 109 to be subject to 12%
VAT. The said election shall be irrevocable for
three years.
2) Those taxable under Sec. 116 (3% percentage tax
for failing to reach threshold). Registration is
irrevocable for three years.
3) Franchises on radio and/or television broadcasting
companies with gross receipts not exceeding P10
million (Sec. 119). VAT registration is irrevocable.
DEPRECIABLE CAPITAL GOODS
• The input tax shall be spread over the month
acquisition and 59 months therafter
• If constructed and more than one month
complete, month of completion is the month
acquisition.
• If sold within five years, unutilized portion
input tax shall continue to be amortized.
FINAL WITHHOLDING VAT ON GOVERNMENT
PURCHASES
• A uniform rate of 5% FWT is applied to payments
made to contractors by the Government or any of
its political subdivisions, instrumentalities or
agencies, including GOCCs.
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INVOICING REQUIREMENTS
• A VAT-registered person shall issue a VAT
invoice for sale of goods or properties and a VAT
official receipt (OR) for sale of services or lease of
goods or properties. The following information
shall appear in the VAT invoice or VAT OR:
1) A statement that the seller is a VAT-
registered followed by his TIN
2) The amount of tax shown as a separate
item
3) The words “VAT-EXEMPT SALE”
written or printed prominently if the sale
is VAT-exempt
4) The words “ZERO-RATED SALE”
written or printed prominently if the sale
is subject to zero-percent
5) Option to issue combined or separate
invoices or receipts if sale is a
combination of valuable and VAT-
exempt sale. If the sale is combined, the
invoice or receipt should indicate the
breakdown of the sale price between the
taxable and the exempt component and
the calculation of the VAT.
6) Date of transaction, quantity, unit cost
and description of the goods or
properties or the nature of the service.
7) For sales to VAT-registered persons
amounting to P1,000 or more, indicate
the name, business style, address and
TIN of the purchaser.
• The failure to print the word “zero-rated” on the
invoice is fatal to a claim for credit/refund of input
VAT on zero-rated sales as it helps segregate sales
that are subject to 12% VAT from those sales that
zero-rated [KEPCO Philippines Corp. v. CIR,
November 24, 2010].
of Penalties for erroneous issuance of VAT invoice or
VAT official receipt
to
Infraction Penalty
of
A non-VAT person issues a Payment of 12% VAT on
VAT invoice or official his sales (without the benefit
of
receipt of input tax) in addition to
applicable percentage tax
50% surcharge on the VAT
due
If the VAT invoice/OR
issued by him contains the
required information,
purchaser shall be allowed

to recognize an input tax
credit.
A VAT-registered person Sale will be subject to 12%
issues a VAT invoice/OR VAT
for a VAT-exempt sale
without the words “VAT-
EXEMPT SALE” written
or printed in the invoice
ATTRIBUTION OF INPUT TAXES
• In claims for refund, input taxes must be allocated
between VAT and non-VAT transactions,
whenever the claimant is engaged in mixed
transactions. Only input taxes attributable to zero-
rated transactions are refundable. [CIR v. Eastern
Telecommunications Philippines, July 7, 2010]
VAT REFUNDS
Section 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.
(B) Capital Goods. - A 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.
(C) Cancellation of VAT Registration. - A person whose
registration has been cancelled due to retirement from or
cessation of business, or due to changes in or cessation of
status under Section 106(C) of this Code may, within two (2)
years from the date of cancellation, apply for the issuance of a
tax credit certificate for any unused input tax which may be
used in payment of his other internal revenue taxes.
(D) Period within which Refund or Tax Credit of Input Taxes shall be
Made. - In proper cases, the Commissioner shall grant a refund
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or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of
submission of compete documents in support of the
application filed in accordance with Subsections (A) and (B)
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.-
(E) Manner of Giving Refund. - Refunds shall be made upon
warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by
the Chairman, Commission on audit, the provisions of the
Administrative Code of 1987 to the contrary notwithstanding:
Provided, That refunds under this paragraph shall be subject to
post audit by the Commission on Audit.
• The two-year prescriptive period for filing a claim
for refund is reckoned from the close of taxable
quarter when the relevant sales were made. The
Commissioner should decide within 120 days from
filing of the claim and in case of inaction within
the period, the aggrieved claimant should consider
the inaction as a deemed-adverse decision. Failure
to observe the 120-day period under Sec. 112(D)
of the NIRC will result in premature filing of the
judicial claim before the CTA. [CIR v. Aichi Forging
Company of Asia, Inc. October 6, 2010]
F. TAX REMEDIES UNDER THE NIRC
METHODS OF COLLECTION OF INTERNAL
REVENUE TAXES
1) Self-assessment system
o A system that relies on the honesty of
taxpayers. It follows the pay-as-you-file
principle. It is anchored on voluntary
compliance, but is it complemented by
BIR Audit (taxpayer’s honesty but not as
yet).
2) Withholding Tax System
o The payor of the income is mandated by
law to withhold the tax.
o There are two types of withholding tax:
a) Creditable withholding tax – it is
an advance payment of the tax
due which will be determined
upon the filing of the return.
This complements the self-
assessment system.
b) Final withholding tax – the tax
withheld is a final settlement of

the payor’s tax liability. The
withholding agent becomes
directly liable in case of non-
payment.
LEGAL BASIS OF AUDIT
Section 6. Power of the Commissioner to Make assessments and
Prescribe additional Requirements for Tax Administration and
Enforcement. -
(A) Examination of Returns and Determination of Tax Due. - After a
return has been filed as required under the provisions of this
Code, the Commissioner or his duly authorized representative
may authorize the examination of any taxpayer and the
assessment of the correct amount of tax: Provided, however;
That failure to file a return shall not prevent the Commissioner
from authorizing the examination of any taxpayer.
PROCEDURE IN THE CONDUCT OF AUDIT BY
THE BIR
Section 266. Failure to Obey Summons. - Any person who, being
duly summoned to appear to testify, or to appear and produce
books of accounts, records, memoranda or other papers, or to
furnish information as required under the pertinent provisions
of this Code, neglects to appear or to produce such books of
accounts, records, memoranda or other papers, or to furnish
such information, shall, upon conviction, be punished by a fine
of not less than Five thousand pesos (P5,000) but not more
than ten thousand pesos (P10,000) and suffer imprisonment of
not less than one (1) year but not more than two (2) years.
Sanctions for Failure to Present Books of Account
• The production of books of accounts for
examination is subject to the subpoena powers of
the CIR.
• For the taxpayer’s failure to produce the books of
accounts and related accounting records, he can be
criminally liable charge under Sec. 266 of the
NIRC for failure to obey summons.
• The taxpayer shall, upon conviction, be punished
by a fine of not less than P5,000 but not more than
P10,000 and imprisonment of not less than one
year but not more than 2 years.
WHAT IS AN ASSESSMENT?
• It is a formal notice to the taxpayer stating that the
amount thereon is due as a tax and containing a
demand for the payment thereof. An assessment
contains not only a computation of tax liabilities
but also a demand for payment within a prescribed
period. [Alhambra Cigar v. Collector (1959)]
• An affidavit, which was executed by revenue
officers, stating that the tax liabilities of a taxpayer
and attached to a criminal complaint for tax
evasion, cannot be deemed an assessment that can
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be questioned before the CTA. [CIR v. Pascor Realty
(1999)]
REQUISITES OF A VALID ASSESSMENT
Section 203. Period of Limitation Upon Assessment and Collection. -
Except as provided in Section 222, internal revenue taxes shall
be assessed within three (3) years after the last day prescribed
by law for the filing of the return, and no proceeding in court
without assessment for the collection of such taxes shall be
begun after the expiration of such period: Provided, That in a
case where a return is filed beyond the period prescribed by
law, the three (3)-year period shall be counted from the day the
return was filed. For purposes of this Section, a return filed
before the last day prescribed by law for the filing thereof shall
be considered as filed on such last day.
Section 228. Protesting of Assessment. - When the Commissioner
or his duly authorized representative finds that proper taxes
should be assessed, he shall first notify the taxpayer of his
findings: provided, however, That a preassessment notice shall
not be required in the following cases:
a) 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
b) When a discrepancy has been determined between
the tax withheld and the amount actually remitted by
the withholding agent; or
c) 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
d) When the excise tax due on exciseable articles has not
been paid; or
e) 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.
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.
Within a period to be prescribed by implementing rules and
regulations, the taxpayer shall be required to respond to said
notice. If the taxpayer fails to respond, the Commissioner or
his duly authorized representative shall issue an assessment
based on his findings.
Such assessment may be protested administratively by filing a
request for reconsideration or reinvestigation within thirty (30)
days from receipt of the assessment in such form and manner
as may be prescribed by implementing rules and regulations.
Within sixty (60) days from filing of the protest, all relevant
supporting documents shall have been submitted; otherwise,

the assessment shall become final.
If the protest is denied in whole or in part, or is not acted upon
within one hundred eighty (180) days from submission of
documents, the taxpayer adversely affected by the decision or
inaction may appeal to the Court of Tax Appeals within thirty
(30) days from receipt of the said decision, or from the lapse of
one hundred eighty (180)-day period; otherwise, the decision
shall become final, executory and demandable.
1) It must be made within the prescriptive period to
assess (Sec. 203)
2) There must be a preliminary assessment previously
issued except in those instances allowed by law
(Sec. 228)
3) The taxpayer must be informed in writing about
the facts and the law on which the assessment is
based (Sec. 228; CIR v. Azucena Reyes, 2006)
4) It must be served upon the taxpayer or any of his
duly authorized representatives (Gabriel v. CIR,
2004).
PERIOD OF LIMITATION ON ASSESSMENT
Section 203. Supra
Section 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 preceeding 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
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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: Within three years after the last day
prescribed by law for the filing of the return, OR from the
day the return was filed if filed beyond the period. (Sec. 203)
Exception: If no return is filed or a return was filed but
said return is false or fraudulent, assessment shall be within
ten years from the discovery of the omission to file, or the
falsity of fraud (Sec. 222)
WHEN IS AN ASSESSMENT DEEMED MADE?
• It is not the issue date of the demand and/or
notice that is the reckoning point in prescription
but rather, it is the date when the demand letter or
notice of assessment is released, mailed or sent
to the taxpayer that constitutes an actual
assessment. (Basilan Estates v. CIR)
• An assessment notice that is not served upon the
taxpayer or any of his authorized representatives is
not valid and the failure to protest the same within
the period provided by law (30 days from receipt
of the assessment) will not make the assessment
final, executory and incontestable. (Estate of the late
vda. De Gabriel v. CIR, January 1, 2004)
TAXPAYER’S REMEDIES AGAINST AN
ASSESSMENT
Remedy before payment
Cf. Sec. 228, supra
• This comes in the form of an administrative
protest which can either be a:
1) Request for reconsideration; or
§ Where the taxpayer would
invoke misappreciation of facts,
misapplication of law, or both.
2) Request for reinvestigation
§ Where the taxpayer would
introduce newly-discovered
evidence
• A protest must be filed within 30 days from receipt
of the Final Assessment Notice (FAN). A protest
filed out of time will make the assessment final,
executory and demandable.
• A late protest will not suspend the prescriptive
period to collect [CIR v. Atlas Con. Mining, (2000)].

• Upon the filing of the protest within 30 days from
receipt, the taxpayer must submit all relevant
documents within 60 days; otherwise, the
assessment becomes final. The submission of
relevant documents is required only if the protest
is required for reinvestigation [RCBC v. CIR
(2007)] in order to introduce newly-discovered
evidence.
• The Commissioner should render a decision within
180 days from the submission of all relevant
documents. If the decision is adverse to the
taxpayer, an appeal may be had by filing a Petition
for Review within 30 days from receipt of the
adverse decision.
• An MR of the denial of the administrative protest
does not toll the 30-day period to appeal to the
CTA. [Fishwealth Canning Corp. v. CIR (2010)]
When may a formal letter of demand be considered an appealable
decision?
• If the wording of the Formal Letter of Demand
clearly states that it is the “final decision based on
investigation and if you disagree, you many appeal
this final decision within 30 days from receipt,” the
decision of the taxpayer not to protest the Formal
Letter of Demand and to elevate the case to the
CTA is justified. [Allied Banking Corp. v. CIR
(2010)]
Taxpayer’s alternative remedies against CIR’s inaction on a protest
1) To file a petition for review with the CTA within
30 days after the expiration of the 180-day period
for the CIR to resolve the protest.
2) To await the final decision of the CIR (until
kingdom come) and appeal within 30 days after
receipt of a copy of the decision.
• These options are mutually exclusive. Resort to
one bars the application of the other. [RCBC v.
CIR (2007)]
• The 30-day period to appeal under Option 1 is
jurisdictional and failure to comply therewith
would bar the appeal and deprive the CTA of
jurisdiction to entertain and determine the
correctness of the assessment. [RCBC v. CIR
(2007)]
Remedy after payment
• Claim for refund of erroneously paid taxes
pursuant to Sec. 204 and 229 provided the
assessment is paid within the protest period.
Section 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,
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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.
(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
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following facts and information, among others: names and taxpayer is no longer allowed to apply for cash
addresses of taxpayers whose cases have been the subject of refund or tax credit. [Asiaworld Properties v. CIR
abatement or compromise; amount involved; amount (2010)]
compromised or abated; and reasons for the exercise of power:
Provided, That the said report shall be presented to the Refundable amount per return
Oversight Committee in Congress that shall be constituted to
determine that said powers are reasonably exercised and that • In a claim for refund of excess creditable
the government is not unduly deprived of revenues. withholding tax, the taxpayer must prove the
inclusion of the income payments which were the
Section 229. Recovery of Tax Erroneously or Illegally Collected. - no
basis of the withholding taxes and the fact of
suit or proceeding shall be maintained in any court for the
recovery of any national internal revenue tax hereafter alleged
withholding by submitting all the relevant
to have been erroneously or illegally assessed or collected, or of Certificates of Creditable Tax Withheld at Source.
any penalty claimed to have been collected without authority, [CIR v. Far East Bank (now BPI) (2010)]
of any sum alleged to have been excessively or in any manner
wrongfully collected without authority, or of any sum alleged to Party to claim refund
have been excessively or in any manner wrongfully collected,
until a claim for refund or credit has been duly filed with the • The withholding agent is a proper party to claim
Commissioner; but such suit or proceeding may be maintained, for refund on behalf of the taxpayer. However, the
whether or not such tax, penalty, or sum has been paid under withholding agent must return the same to the
protest or duress. principal taxpayer,
• The withholding agent is considered (1) a
In any case, no such suit or proceeding shall be filed after the “taxpayer” under the NIRC as he is personally
expiration of two (2) years from the date of payment of the tax
liable for the withholding tax as well as for
or penalty regardless of any supervening cause that may arise
deficiency assessments, surcharges, and penalties,
after payment: Provided, however, That the Commissioner
may, even without a written claim therefor, refund or credit any
should the amount of tax withheld be finally found
tax, where on the face of the return upon which payment was to be less than the amount that should have been
made, such payment appears clearly to have been erroneously withheld under the law, and (2) an agent of the
paid. taxpayer, his authority to file the necessary ITR
and to remit the tax withheld to the government
Authority of the CIR to refund taxes impliedly includes the authority to file a claim for
refund and to bring an action for recovery of such
• Refund of taxes is anchored on the principle of
claim. [CIR v. Smart Communication (2010)]
solutio indebiti. No one, not even the Government,
shall enrich himself at the expense of another.
PERIOD OF LIMITATION ON COLLECTION
[Philex Mining v. CIR]
Cf. Sec. 222, supra
Legal requirements for a claim for refund
Period to Collect
1) A written claim for refund filed by the taxpayer There was an assessment 5 years from the date of
with the CIR (Sec. 204.3 and 229) issued assessment (Sec. 222.c)
2) The claim for refund must be a categorical demand
for reimbursement [Bermejo v. Collector (1950)] Note: This rule is believed to
3) The claim for refund or tax credit must be filed cover by implication regular
with the CIR, or the suit or proceeding therefor assessments, otherwise, the
must be commenced in court within two years from period to collect an
the date of payment of the tax or penalties regardless assessment issued under
of any supervening cause. normal circumstances shall
[Note: If refund for VAT, within two years from the close be imprescriptible.
of the taxable quarter when the relevant sales were made.] No assessment issued, and a 5 years from the date the tax
return was filed (not false or is due
Options on overpaid tax per return fraudulent)
No return was filed 10 years from the date of
discovery of the omission to
• The taxpayer may claim it as refund/TCC or carry
file without need of an
it over to the succeeding quarters of the
assessment [Sec. 222.a;
succeeding taxable year/s. (Sec. 76)
Evangelista v. Collector (1957)]
• Once the option to carry over is chosen, such
Return filed was false or 10 years from discovery of
option is irrevocable for that period and the

fraudulent the fraud or falsity, without
need of an assessment [Sec.
222.a; Ungab v. Cusi]
EXCEPTIONS TO THE PRESCRIPTIVE PERIODS
ON ASSESSMENT AND COLLECTION
Cf. Sec. 222, supra
1) False or fraudulent return, omission to file a return
2) If there is an agreement in writing to extend the
period to assess or to collect
REQUISITES OF A VALID WAIVER
1) The waiver must not be indefinite. The phrase
“but not after ______ 20____” must be filled out.
2) The waiver must be signed by the taxpayer or his
duly authorized representative.
3) The waiver should be duly notarized.
4) The CIR or officer authorized by him must sign
the waiver indicating that the BIR has accepted
and agreed to the waiver.
5) Both the execution by the taxpayer and acceptance
by the CIR must be made before the expiration of
the period of assessment.
6) A copy must be served to the taxpayer.
[CIR v. Kudos Metal Corp. (2010)]
SUSPENSION OF THE PRESCRIPTIVE PERIODS
Section 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.
When suspended?
1) For the period where the CIR is prohibited from
making the assessment or beginning distraint or
levy or a proceeding in court and for 60 days
thereafter. [Republic v. Kerr & Co]
2) When the taxpayer requests for a reinvestigation
which is granted by the CIR. A request for
reinvestigation will not suspend the prescriptive
period to collect. [BPI v. CIR (2005)]
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3) When the taxpayer cannot be located in the
address given by him in the return filed upon
which the tax is being assessed or collected.
4) When warrant of distraint or levy is duly served
and property could be located [Republic v. Salud
Hizon (1999)]
5) When the taxpayer is out of the Philippines.
• To suspend the running of the prescriptive period
to collect on the ground of request for
reinvestigation by the taxpayer, two requisites must
concur: (a) that the taxpayer requests for
reinvestigation; and (b) that the CIR grants such
request. If the request was ignored or denied, the
same does not stall the running of the prescriptive
period. [CIR v. Hambredcht (2010)]
AUTHORITY OF THE CIR TO COMPROMISE
AND ABATE TAXES
Cf. Sec. 204, supra
The Commissioner can compromise a tax liability based on
either of the following grounds:
1) Reasonable doubt on the validity of the
assessment;
2) Financial incapacity on the part of the taxpayer.
What may be compromised?
1) Civil liability – tax assessments
2) All criminal violations, except:
a. Those already filed in court
b. Those involving fraud
Minimum amounts of compromise:
1) Financial incapacity – 10% of the basic tax
assessed
2) Other cases – 40% of the basic tax assessed.
• Where the basic tax involved exceeds P1 million or
settlement offered is less than the minimum
amounts, the compromise shall be subject to the
approval by the NEB
• The taxpayer’s offer for compromise based on
financial incapacity shall not be considered unless
he waives his privilege under RA 1405.
Abatement
• Means the cancellation of the taxpayer’s tax
liability and is authorized on the following
grounds:
1) The tax or any portion thereof appears to
be unjustly or excessively assessed; or
2) The tax administration and collection
cost involved do not justify the collection
of the amount due.
GOVERNMENT COLLECTION REMEDIES

Section 219. Nature and Extent of Tax Lien. - If any person,
corporation, partnership, joint-account (cuentas en
participacion), association or insurance company liable to pay
an internal revenue tax, neglects or refuses to pay the same
after demand, the amount shall be a lien in favor of the
Government of the Philippines from the time when the
assessment was made by the Commissioner until paid, with
interests, penalties, and costs that may accrue in addition
thereto upon all property and rights to property belonging to
the taxpayer: Provided, That this lien shall not be valid against
any mortgagee purchaser or judgment creditor until notice of
such lien shall be filed by the Commissioner in the office of the
Register of Deeds of the province or city where the property of
the taxpayer is situated or located.
Section 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.
Section 207. Summary Remedies. -
(A) Distraint of Personal Property. - Upon the failure of the person
owing any delinquent tax or delinquent revenue to pay the
same at the time required, the Commissioner or his duly
authorized representative, if the amount involved is in excess
of One million pesos (P1,000,000), or the Revenue District
Officer, if the amount involved is One million pesos
(P1,000,000) or less, shall seize and distraint any goods, chattels
or effects, and the personal property, including stocks and
other securities, debts, credits, bank accounts, and interests in
and rights to personal property of such persons ;in sufficient
quantity to satisfy the tax, or charge, together with any
increment thereto incident to delinquency, and the expenses of
the distraint and the cost of the subsequent sale.
A report on the distraint shall, within ten (10) days from receipt
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of the warrant, be submitted by the distraining officer to the
Revenue District Officer, and to the Revenue Regional
Director: Provided, That the Commissioner or his duly
authorized representative shall, subject to rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, have the power to lift
such order of distraint: Provided, further, That a consolidated
report by the Revenue Regional Director may be required by
the Commissioner as often as necessary.
(B) Levy on Real Property. - After the expiration of the time
required to pay the delinquent tax or delinquent revenue as
prescribed in this Section, real property may be levied upon,
before simultaneously or after the distraint of personal property
belonging to the delinquent. To this end, any internal revenue
officer designated by the Commissioner or his duly authorized
representative shall prepare a duly authenticated certificate
showing the name of the taxpayer and the amounts of the tax
and penalty due from him. Said certificate shall operate with
the force of a legal execution throughout the Philippines.
Levy shall be affected by writing upon said certificate a
description of the property upon which levy is made. At the
same time, written notice of the levy shall be mailed to or
served upon the Register of Deeds for the province or city
where the property is located and upon the delinquent
taxpayer, or if he be absent from the Philippines, to his agent
or the manager of the business in respect to which the liability
arose, or if there be none, to the occupant of the property in
question.
In case the warrant of levy on real property is not issued before
or simultaneously with the warrant of distraint on personal
property, and the personal property of the taxpayer is not
sufficient to satisfy his tax delinquency, the Commissioner or
his duly authorized representative shall, within thirty (30) days
after execution of the distraint, proceed with the levy on the
taxpayer's real property.
Within ten (10) days after receipt of the warrant, a report on
any levy shall be submitted by the levying officer to the
Commissioner or his duly authorized representative: Provided,
however, That a consolidated report by the Revenue Regional
Director may be required by the Commissioner as often as
necessary: Provided, further, That the Commissioner or his
duly authorized representative, subject to rules and regulations
promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, shall have the authority
to lift warrants of levy issued in accordance with the provisions
hereof.
Section 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.
1) Tax Lien – the tax liability shall be a lien in favor
of the Government from the time the assessment

was made until paid with interest, penalties and
costs that may accrue in addition thereto upon all
property and rights to property belonging to the
taxpayer (Sec. 219)
2) Distraint – the collection of taxes is enforced on
the goods, chattels or effects of the taxpayer
including other personal properties such as stocks,
debts, credits, bank accounts and interests in and
rights to personal properties (Sec. 207.A)
3) Levy – the collection of taxes is enforced on the
real property of the taxpayer. The levy may be
made before, simultaneously with, or after the
distraint of personal property (Sec. 207.B)
4) Civil Action – filing of a collection case in the
regular courts or with the CTA where the
assessment is already final and demandable. No
civil action for recovery of taxes shall be
commenced without the approval of the CIR.
5) Criminal Action – instituted on behalf of the
Government of the Philippines by the legal officers of
the BIR. No criminal action shall be commenced
without the approval of the CIR. Judgment in
criminal case shall not only impose the penalty but
shall also order the payment of taxes subject of the
criminal case as finally decided by the CIR. (Sec.
205.b)
6) Forfeiture – in case there is no bidder for the real
property in the public sale (levy on real property)
or if the amount of the highest bid is insufficient
to pay the taxes, the property shall be forfeited in
favor of the Government.
III. LOCAL GOVERNMENT CODE OF 1991, AS
AMENDED (LGC)
A. LOCAL GOVERNMENT TAXATION
NATURE AND SOURCE OF TAXING POWER
1987 PHILIPPINE CONSTITUTION
Article X, Section 5. Each local government unit shall have
the power to create its own sources of revenues and to levy
taxes, fees, and charges subject to such guidelines and
limitations as the Congress may provide, consistent with the
basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local governments.
• The power to tax is not inherent in local
governments. They enjoy it pursuant to a direct
authority conferred by the Constitution. It is
subject to such guidelines and limitations as the
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Congress may provide which, however, must be
consistent with the basic policy of local autonomy.
[Mactan Cebu International Airport Authority v. Marcos
(1996)]
• The power to tax is not granted by the LGC but
directly conferred by the Constitution. [City of San
Pablo v. Reyes (1999)]
LOCAL TAXING AUTHORITY
LOCAL GOVERNMENT CODE
Section 129. Power to Create Sources of Revenue. - 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.
• Sec. 129 of the LGC mandates that each LGU
shall exercise its power to create its own sources of
revenue.
• The LGC defined the specific taxing powers of
each LGU and enumerated the taxes that can be
levied or imposed by each one of them—
provinces, cities, municipalities and barangays.
AUTHORITY TO PRESCRIBE PENALTIES FOR
TAX VIOLATIONS
• The power to levy taxes carries with it the power
to prescribe penalties in the tax ordinances.
LOCAL GOVERNMENT CODE
Section 516. Penalties for Violation of Tax Ordinances. - The
sanggunian of a local government unit is authorized to
prescribe fines or other penalties for violation of tax ordinances
but in no case shall such fines be less than One thousand pesos
(P1,000.00) nor more than Five thousand pesos (P5,000.00),
nor shall imprisonment be less than one (1) month nor more
than six (6) months. Such fine or other penalty, or both, shall
be imposed at the discretion of the court. The sangguniang
barangay may prescribe a fine of not less than One hundred
pesos (P100.00) nor more than One thousand pesos
(P1,000.00).
• Sec. 516 limits the amount of fine and the period
of imprisonment that the ordinance may provide.
• In general, fine of not less than P1K nor more
than P5K and/or imprisonment of not less than 1
month nor more than 6 months
• For barangays, fine of not less than P100 nor more
than P1K.
POWER TO GRANT LOCAL TAX EXEMPTIONS
LOCAL GOVERNMENT CODE

Section 192. Authority to Grant Tax Exemption Privileges. - Local
government units may, through ordinances duly approved,
grant tax exemptions, incentives or reliefs under such terms
and conditions as they may deem necessary.
• The power to levy taxes carries with the power to
grant tax exemptions.
• The power to grant tax exemptions does not
extend to regulatory fees.
• Tax exemptions shall be conferred through the
issuance of a Tax Exemption Certificate which
shall be non-transferrable.
Rules for grant of tax exemptions and tax reliefs
• Tax exemptions or tax reliefs may be granted in
cases of natural calamities, civil disturbance,
general failure of crops, or adverse economic
conditions such as substantial decrease of prices of
agri-based products.
• The grant of exemptions shall be through an
ordinance.
• Any exemption or relief granted to a type or kind
of business shall apply to all businesses similarly
situated.
• It shall take effect only during the next calendar
year for a period not exceeding 12 months.
• In case of shared revenues, it shall extend only to
LGU granting the exemption or relief (i.e. the
factory is in a municipality different from the
location of the principal office).
Rules on grant tax incentives
• Granted only to new investments in the locality
• For a definite period not exceeding one calendar
year
• Must be by an ordinance passed prior to January 1
of any year
• Shall apply to all business similarly situated. [Sec.
282(B), RR Implementing the LGC]
AUTHORITY TO ADJUST LOCAL TAXES
LOCAL GOVERNMENT CODE
Section 191. Authority of Local Government Units to Adjust Rates of
Tax Ordinances. - Local government units shall have the
authority to adjust the tax rates as prescribed herein not oftener
than once every five (5) years, but in no case shall such
adjustment exceed ten percent (10%) of the rates fixed under
this Code.
RESIDUAL TAXING POWERS OF LGUs
LOCAL GOVERNMENT CODE
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Section 186. Power To Levy Other Taxes, Fees or Charges. - Local
government units may exercise the power to levy taxes, fees or
charges on any base or subject not otherwise specifically
enumerated herein or taxed under the provisions of the
National Internal Revenue Code, as amended, or other
applicable laws: Provided, That the taxes, fees, or charges shall
not be unjust, excessive, oppressive, confiscatory or contrary to
declared national policy: Provided, further, That the ordinance
levying such taxes, fees or charges shall not be enacted without
any prior public hearing conducted for the purpose.
1) The taxes imposed must not be within the scope
of taxes enumerated in the LGC or under the
NIRC or other applicable taxes
2) The taxes shall not be unjust, excessive, oppressive,
confiscatory or contrary to declared national policy
3) The imposition must be by an ordinance which shall
not be enacted without a prior public hearing
conducted.
What are the limitations on LGU’s residual powers?
1) Constitutional limitations
2) Common limitations under Sec. 133, LGC (infra)
3) Fundamental principles governing the exercise of
taxing powers (Sec. 130, LGC, infra)
4) The power must be exercised through the
enactment of an ordinance after public hearing has
been conducted
5) It should follow the principle of preemption.
THE PRINCIPLE OF PREEMPTION
• Whenever the national government elects to tax a
particular area, the local government should not be
allowed to tax the same field. However, should
Congress allow LGUs to cover fields of taxation it
already occupies, then the doctrine of preemption
will not apply.
• A province may not ordinarily tax stones, sand,
gravel, earth and quarry resources as they are
already taxed under the NIRC. However, it may
tax them when extracted from public lands because
it is expressly allowed under the LGC. [Bulacan v.
CA (1998)]
FUNDAMENTAL PRINCIPLES OF LOCAL
TAXING POWER
Section 130. Fundamental Principles. - The following
fundamental principles shall govern the exercise of the taxing
and other revenue-raising powers of local government units:
a) Taxation shall be uniform in each local government
unit;
b) Taxes, fees, charges and other impositions shall:
1) be equitable and based as far as practicable on
the taxpayer's ability to pay;
2) be levied and collected only for public

purposes;
3) not be unjust, excessive, oppressive, or
confiscatory;
4) not be contrary to law, public policy, national
economic policy, or in the restraint of trade;
c) The collection of local taxes, fees, charges and other
impositions shall in no case be let to any private
person;
d) The revenue collected pursuant to the provisions of
this Code shall inure solely to the benefit of, and be
subject to the disposition by, the local government
unit levying the tax, fee, charge or other imposition
unless otherwise specifically provided herein; and,
e) Each local government unit shall, as far as
practicable, evolve a progressive system of taxation.
Principles that are either inherent or constitutional limitation on the
power to tax
1) Uniformity of taxation
2) Equitability and progressivity of taxation
3) Public purpose of taxes
4) Taxes must accrue exclusively to the benefit of the
LGU
Principles that are statutory in origin
1) Local taxes must not be unjust, oppressive or
confiscatory
2) Not contrary to law, public policy, national
economic policy or with restraint of trade
3) The collection of local taxes, fees, charges and
other impositions shall in no case be let to any
private person
COMMON LIMITATIONS ON THE TAXING
POWER OF LGUs
Section 133. Common Limitations on the Taxing Powers of Local
Government Units. - Unless otherwise provided herein, the
exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the
following:
a) Income tax, except when levied on banks and other
financial institutions;
b) Documentary stamp tax;
c) Taxes on estates, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided herein;
d) Customs duties, registration fees of vessel and
wharfage on wharves, tonnage dues, and all other
kinds of customs fees, charges and dues except
wharfage on wharves constructed and maintained by
the local government unit concerned;
e) Taxes, fees, and charges and other impositions upon
goods carried into or out of, or passing through, the
territorial jurisdictions of local government units in
the guise of charges for wharfage, tolls for bridges or
otherwise, or other taxes, fees, or charges in any form
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whatsoever upon such goods or merchandise;
f) Taxes, fees or charges on agricultural and aquatic
products when sold by marginal farmers or
fishermen;
g) Taxes on business enterprises certified to by the
Board of Investments as pioneer or non-pioneer for a
period of six (6) and four (4) years, respectively from
the date of registration;
h) Excise taxes on articles enumerated under the
national Internal Revenue Code, as amended, and
taxes, fees or charges on petroleum products;
i) Percentage or value-added tax (VAT) on sales, barters
or exchanges or similar transactions on goods or
services except as otherwise provided herein;
j) Taxes on the gross receipts of transportation
contractors and persons engaged in the
transportation of passengers or freight by hire and
common carriers by air, land or water, except as
provided in this Code;
k) Taxes on premiums paid by way or reinsurance or
retrocession;
l) Taxes, fees or charges for the registration of motor
vehicles and for the issuance of all kinds of licenses
or permits for the driving thereof, except tricycles;
m) Taxes, fees, or other charges on Philippine products
actually exported, except as otherwise provided
herein;
n) Taxes, fees, or charges, on Countryside and Barangay
Business Enterprises and cooperatives duly registered
under R.A. No. 6810 and Republic Act Numbered
Sixty-nine hundred thirty-eight (R.A. No. 6938)
otherwise known as the "Cooperative Code of the
Philippines" respectively; and
o) Taxes, fees or charges of any kind on the National
Government, its agencies and instrumentalities, and
local government units.
PROCEDURES FOR THE ENACTMENT OF
LOCAL TAX ORDINANCE
Section 187. Procedure for Approval and Effectivity of Tax,
Ordinances and Revenue Measures; Mandatory Public Hearings. - The
procedure for approval of local tax ordinances and revenue
measures shall be in accordance with the provisions of this
Code: Provided, That public hearings shall be conducted for
the purpose prior to the enactment thereof: Provided, further,
That any question on the constitutionality or legality of tax
ordinances or revenue measures may be raised on appeal within
thirty (30) days from the effectivity thereof to the Secretary of
Justice who shall render a decision within sixty (60) days from
the date of receipt of the appeal: Provided, however, That such
appeal shall not have the effect of suspending the effectivity of
the ordinance and the accrual and payment of the tax, fee, or
charge levied therein: Provided, finally, That within thirty (30)
days after receipt of the decision or the lapse of the sixty-day
period without the Secretary of Justice acting upon the appeal,
the aggrieved party may file appropriate proceedings with a
court of competent jurisdiction.

Section 188. Publication of Tax Ordinances and Revenue Measures. -
Within ten (10) days after their approval, certified true copies
of all provincial, city, and municipal tax ordinances or revenue
measures shall be published in full for three (3) consecutive
days in a newspaper of local circulation: Provided, however,
That in provinces, cities and municipalities where there are no
newspapers of local circulation, the same may be posted in at
least two (2) conspicuous and publicly accessible places.
Section 189. Furnishing of Copies of Tax Ordinances and Revenue
Measures. - Copies of all provincial, city, and municipal and
barangay tax ordinances and revenue measures shall be
furnished the respective local treasurers for public
dissemination.
1) It should follow the same procedures relating to
local ordinances in general
a. Necessity of quorum in the Sanggunian
b. Approval by the Chief Executive
c. The matter of veto and overriding the
same as well as their publication and
effectivity
2) Public hearings prior to enactment (Sec. 187)
3) Publication for three consecutive days in
newspaper of general circulation to be made within
10 days after approval. In places with no
newspapers, posting in at least 2 conspicuous and
publicly accessible places (Sec. 188)
4) Public dissemination by the respective local
treasurers (Sec. 189)
SPECIFIC TAXING POWERS OF PROVINCES
Section 135. Tax on Transfer of Real Property Ownership.
(a) The province may impose a tax on the sale, donation,
barter, or on any other mode of transferring ownership or title
of real property at the rate of not more than fifty percent (50%)
of the one percent (1%) of the total consideration involved in
the acquisition of the property or of the fair market value in
case the monetary consideration involved in the transfer is not
substantial, whichever is higher. The sale, transfer or other
disposition of real property pursuant to R.A. No. 6657 shall be
exempt from this tax.
(b) For this purpose, the Register of Deeds of the province
concerned shall, before registering any deed, require the
presentation of the evidence of payment of this tax. The
provincial assessor shall likewise make the same requirement
before cancelling an old tax declaration and issuing a new one
in place thereof, Notaries public shall furnish the provincial
treasurer with a copy of any deed transferring ownership or
title to any real property within thirty (30) days from the date of
notarization.
It shall be the duty of the seller, donor, transferor, executor or
administrator to pay the tax herein imposed within sixty (60)
days from the date of the execution of the deed or from the
date of the decedent's death.
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Section 136. Tax on Business of Printing and Publication. - The
province may impose a tax on the business of persons engaged
in the printing and/or publication of books, cards, posters,
leaflets, handbills, certificates, receipts, pamphlets, and others
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.
In the case of a newly started business, the tax shall not exceed
one-twentieth (1/20) of one percent (1%) of the capital
investment. In the succeeding calendar year, regardless of when
the business started to operate, the tax shall be based on the
gross receipts for the preceding calendar year, or any fraction
thereof, as provided herein.
The receipts from the printing and/or publishing of books or
other reading materials prescribed by the Department of
Education, Culture and Sports as school texts or references
shall be exempt from the tax herein imposed.
Section 138. Tax on Sand, Gravel and Other Quarry Resources. -
The province may levy and collect not more than ten percent
(10%) of fair market value in the locality per cubic meter of
ordinary stones, sand, gravel, earth, and other quarry resources,
as defined under the National Internal Revenue Code, as
amended, extracted from public lands or from the beds of seas,
lakes, rivers, streams, creeks, and other public waters within its
territorial jurisdiction.
The permit to extract sand, gravel and other quarry resources
shall be issued exclusively by the provincial governor, pursuant
to the ordinance of the sangguniang panlalawigan.
The proceeds of the tax on sand, gravel and other quarry
resources shall be distributed as follows:
(1) Province - Thirty percent (30%);
(2) Component City or Municipality where the sand, gravel,
and other quarry resources are extracted - Thirty percent
(30%); and
(3) Barangay where the sand, gravel, and other quarry resources
are extracted - Forty percent (40%).
Section 140. Amusement Tax. -
(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 hereon
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, interest 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.
Section 141. Annual Fixed Tax For Every Delivery Truck or Van of
Manufacturers or Producers, Wholesalers of, Dealers, or Retailers in,
Certain Products. -
(a) The province may levy an annual fixed tax for every truck,
van or any vehicle used by manufacturers, producers,
wholesalers, dealers or retailers in the delivery or distribution of
distilled spirits, fermented liquors, soft drinks, cigars and
cigarettes, and other products as may be determined by the
sangguniang panlalawigan, to sales outlets, or consumers,
whether directly or indirectly, within the province in an amount
not exceeding Five hundred pesos (P500.00).
(b) The manufacturers, producers, wholesalers, dealers and
retailers referred to in the immediately foregoing paragraph
shall be exempt from the tax on peddlers prescribed elsewhere
in this Code.
1. Tax on transfer of real property ownership (Sec.
133)
2. Printer’s or publisher’s tax (Sec. 136)
3. Franchise tax
4. Tax on sand, gravel and other quarry resources
extracted from public lands (Sec. 138)
5. Professional tax – for professions requiring
government examination in an amount not
exceeding P300
6. Amusement tax (Sec. 140)
7. Fixed tax on delivery trucks and vans (Sec. 141)
SPECIFIC TAXING POWERS OF
MUNICIPALITIES
Section 143. Tax on Business. - The municipality may impose
taxes on the following businesses:
(a) On manufacturers, assemblers, repackers, processors,
brewers, distillers, rectifiers, and compounders of liquors,
distilled spirits, and wines or manufacturers of any article of
commerce of whatever kind or nature, in accordance with the
following schedule:
xx
(b) On wholesalers, distributors, or dealers in any article of
commerce of whatever kind or nature in accordance with the
following schedule:
xx
(c) On exporters, and on manufacturers , millers, producers,
wholesalers, distributors, dealers or retailers of essential
commodities enumerated hereunder at a rate not exceeding
one-half (½) of the rates prescribed under subsection (a), (b)
and (d) of this Section:
(1) Rice and corn;
(2) Wheat or cassava flour, meat, dairy products, locally
manufactured, processed or preserved food, sugar, salt and
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other agricultural, marine, and fresh water products, whether in
their original state or not;
(3) Cooking oil and cooking gas;
(4) Laundry soap, detergents, and medicine;
(5) Agricultural implements. equipment and post-harvest
facilities, fertilizers, pesticides, insecticides, herbicides and other
farm inputs;
(6) Poultry feeds and other animal feeds;
(7) School supplies; and
(8) Cement.
(d) On retailers.
xx
Provided, however, That barangays shall have the exclusive
power to levy taxes, as provided under Section 152 hereof, on
gross sales or receipts of the preceding calendar year of Fifty
thousand pesos (P50,000.00) or less, in the case of cities, and
Thirty thousand pesos (P30,000.00) or less, in the case of
municipalities.
(e) On contractors and other independent contractors, in
accordance with the following schedule:
xx
(f) On banks and other financial institutions, at a rate not
exceeding fifty percent (50%) of one percent (1%) on the gross
receipts of the preceding calendar year derived from interest,
commissions and discounts from lending activities, income
from financial leasing, dividends, rentals on property and profit
from exchange or sale of property, insurance premium.
(g) On peddlers engaged in the sale of any merchandise or
article of commerce, at a rate not exceeding Fifty pesos
(P50.00) per peddler annually.
(h) On any business, not otherwise specified in the preceding
paragraphs, which the sanggunian concerned may deem proper
to tax: Provided, That on any business subject to the excise,
value-added or percentage tax under the National Internal
Revenue Code, as amended, the rate of tax shall not exceed
two percent (2%) of gross sales or receipts of the preceding
calendar year.
The sanggunian concerned may prescribe a schedule of
graduated tax rates but in no case to exceed the rates prescribed
herein.
1. Manufacturers
2. Wholesalers, distributors or dealers
3. Exporters and manufacturers, millers, producers,
wholesalers, dealers or retailers or essential
commodities
4. Retailers
5. Contractors and other independent contractors
6. Banks and other financial institutions
7. Peddlers of any merchandise
8. Other businesses
• In Metro Manila, municipalities may impose a tax
not to exceed by 50% the maximum rates
prescribed in the LGC. (Pateros na lang)
SPECIFIC TAXING POWERS OF BARANGAYS
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Section 152. Scope of Taxing Powers. - The barangays may levy o The city may levy the taxes, fees, and
taxes, fees, and charges, as provided in this Article, which shall charges which the province or
exclusively accrue to them: municipality may impose.
(a) Taxes - On stores or retailers with fixed business
establishments with gross sales of receipts of the preceding SITUS OF LOCAL TAXATION
calendar year of Fifty thousand pesos (P50,000.00) or less, in Cf. Sec. 143, LGC, supra
the case of cities and Thirty thousand pesos (P30,000.00) or
less, in the case of municipalities, at a rate not exceeding one Principal office and branch operations
percent (1%) on such gross sales or receipts. • For businesses operating a branch or sales outlet in
(b) Service Fees or Charges. - Barangays may collect reasonable another municipality, the sales shall be recorded by
fees or charges for services rendered in connection with the
the branch or sales outlet and the tax paid to the
regulations or the use of barangay-owned properties or service
municipality where the branch or sales outlet is
facilities such as palay, copra, or tobacco dryers.
(c) Barangay Clearance. - No city or municipality may issue any
located.
license or permit for any business or activity unless a clearance • If there is no branch or sales outlet in the
is first obtained from the barangay where such business or municipality where sales took place, the same must
activity is located or conducted. For such clearance, the be recorded in the principal office is located. 9Sec.
sangguniang barangay may impose a reasonable fee. The 143)
application for clearance shall be acted upon within seven (7) • For manufacturers, assemblers, contractors,
working days from the filing thereof. In the event that the producers, and exporters with factories, project
clearance is not issued within the said period, the city or offices, plants and plantations:
municipality may issue the said license or permit. o 30% of sales recorded in the principal
(d) Other fees and Charges. - The barangay may levy office shall be taxable by the city or
reasonable fees and charges: municipality where the principal office is
(1) On commercial breeding of fighting cocks, cockfights and located; and
cockpits;
o 70% of all sales recorded in the principal
(2) On places of recreation which charge admission fees; and
office shall be taxable by the city or
(3) On billboards, signboards, neon signs, and outdoor
advertisements. municipality where the factory, project
office, plant or plantation is located.
§ If the plantation is located at a
1. Taxes place different from the factory,
2. Services fees and charges the 70% of all sales shall be
3. Barangay clearance allocated as follows:
4. Other fees and charges
• 60% to the city or
municipality where the
PREEMPTION AMONG LGUs
factory is located; and
• 40% to the city or
Section 142. Scope of Taxing Powers. - Except as otherwise
municipality where the
provided in this Code, municipalities may levy taxes, fees, and
charges not otherwise levied by provinces.
plantation is located.
§ In cases where there are two or
Section 151. Scope of Taxing Powers. - Except as otherwise more factories, project offices,
provided in this Code, the city, may levy the taxes, fees, and plants or plantations located in
charges which the province or municipality may impose: different localities, the 70%
Provided, however, That the taxes, fees and charges levied and allocation (60% and 40%) shall
collected by highly urbanized and independent component be prorated in proportion to the
cities shall accrue to them and distributed in accordance with volume of production.
the provisions of this Code.
Illustration of sales allocation
The rates of taxes that the city may levy may exceed the • Era Manufacturing Corporation is a manufacturer
maximum rates allowed for the province or municipality by not of canned sweet corn with principal office (PO) in
more than fifty percent (50%) except the rates of professional Quezon City, factory in Marikina, and plantation in
and amusement taxes. Silang, Cavite. The sales were recorded by the PO
amounting to P10 million for taxable year 2012.
• Taxes levied by provinces cannot be levied by o PO (QC) – 30% of sales = P3M
municipalities. o Factory (Marikina) & Plantation (Silang)
• Provinces and municipalities may not preempt – 70% of sales = P7M
cities on the imposition of local taxes.

§ Marikina (60% of P7M) =
P4.2M
§ Silang (40% of P7M) = P2.8M
COMMON REVENUE-RAISING POWERS
Section 153. Service Fees and Charges. - Local government units
may impose and collect such reasonable fees and charges for
services rendered.
Section 154. Public Utility Charges. - Local government units
may fix the rates for the operation of public utilities owned,
operated and maintained by them within their jurisdiction.
COMMUNITY TAX
Section 156. Community Tax. - Cities or municipalities may levy
a community tax in accordance with the provisions of this
Article.
Section 157. Individuals Liable to Community Tax. - Every
inhabitant of the Philippines eighteen (18) years of age or over
who has been regularly employed on a wage or salary basis for
at least thirty (30) consecutive working days during any
calendar year, or who is engaged in business or occupation, or
who owns real property with an aggregate assessed value of
One thousand pesos (P1,000.00) or more, or who is required
by law to file an income tax return shall pay an annual
additional tax of Five pesos (P5.00) and an annual additional
tax of One peso (P1.00) for every One thousand pesos
(P1,000.00) of income regardless of whether from business,
exercise of profession or from property which in no case shall
exceed Five thousand pesos (P5,000.00).
In the case of husband and wife, the additional tax herein
imposed shall be based upon the total property owned by them
and the total gross receipts or earnings derived by them.
Section 158. Juridical Persons Liable to Community Tax. - Every
corporation no matter how created or organized, whether
domestic or resident foreign, engaged in or doing business in
the Philippines shall pay an annual community tax of Five
hundred pesos (P500.00) and an annual additional tax, which,
in no case, shall exceed Ten thousand pesos (P10,000.00) in
accordance with the following schedule:
(1) For every Five thousand pesos (P5,000.00) worth of real
property in the Philippines owned by it during the preceding
year based on the valuation used for the payment of real
property tax under existing laws, found in the assessment rolls
of the city or municipality where the real property is situated -
Two pesos (P2.00); and
(2) For every Five thousand pesos (P5,000.00) of gross receipts
or earnings derived by it from its business in the Philippines
during the preceding year - Two pesos (P2.00).
The dividends received by a corporation from another
corporation however shall, for the purpose of the additional
tax, be considered as part of the gross receipts or earnings of
said corporation.
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Section 159. Exemptions. - The following are exempt from the
community tax:
(1) Diplomatic and consular representatives; and
(2) Transient visitors when their stay in the Philippines does
not exceed three (3) months.
Section 160. Place of Payment. - The community tax shall be paid
in the place of residence of the individual, or in the place where
the principal office of the juridical entity is located.
Section 161. Time for Payment; Penalties for Delinquency. -
(a) The community tax shall accrue on the first (1st) day of
January of each year which shall be paid not later than the last
day of February of each year. If a person reaches the age of
eighteen (18) years or otherwise loses the benefit of exemption
on or before the last day of June, he shall be liable for the
community tax on the day he reaches such age or upon the day
the exemption ends. However, if a person reaches the age of
eighteen (18) years or loses the benefit of exemption on or
before the last day of March, he shall have twenty (20) days to
pay the community tax without becoming delinquent.
Persons who come to reside in the Philippines or reach the age
of eighteen (18) years on or after the first (1st) day of July of
any year, or who cease to belong to an exempt class or after the
same date, shall not be subject to the community tax for that
year.
(b) Corporations established and organized on or before the
last day of June shall be liable for the community tax for that
year. But corporations established and organized on or before
the last day of March shall have twenty (20) days within which
to pay the community tax without becoming delinquent.
Corporations established and organized on or after the first day
of July shall not be subject to the community tax for that year.
If the tax is not paid within the time prescribed above, there
shall be added to the unpaid amount an interest of twenty-four
percent (24%) per annum from the due date until it is paid.
Section 162. Community Tax Certificate. - A community tax
certificate shall be issued to every person or corporation upon
payment of the community tax. A community tax certificate
may also be issued to any person or corporation not subject to
the community tax upon payment of One peso (P1.00).
Who are authorized to levy
• Cities or municipalities
Persons liable
1. Inhabitant of the Philippines at age 18 years or
more who is:
a. Employed on wage or salary basis for at
least 30 consecutive working days
b. Engaged in business or occupation
c. Owns real property with assessed value
of at least P1K
d. Required by law to file an ITR
Amount = Annual community tax of P5 plus P1 for
every P1K of income but not to exceed P5K

2. Juridical persons doing business in the PH
Amount = Annual community tax of P500 and an
annual additional tax which in no case shall exceed
P10K
i. For every P5K worth of real property –
P2
ii. For every P5K of gross receipts or
earnings (including dividends) derived by
it – P2
Who are exempt from community tax?
1. Diplomatic and consular representatives
2. Transient visitors whose stay does not exceed 3
months
COLLECTION OF LOCAL TAXES
Section 165. Tax Period and Manner of Payment. - Unless
otherwise provided in this Code, the tax period of all local
taxes, fees and charges shall be the calendar year. Such taxes,
fees and charges may be paid in quarterly installments.
Section 166. Accrual of Tax. - Unless otherwise provided in this
Code, all local taxes, fees, and charges shall accrue on the first
(1st) day of January of each year. However, new taxes, fees or
charges, or changes in the rates thereof, shall accrue on the first
(1st) day of the quarter next following the effectivity of the
ordinance imposing such new levies or rates.
Section 167. Time of Payment. - Unless otherwise provided in
this Code, all local taxes, fees, and charges shall be paid within
the first twenty (20) days of January or of each subsequent
quarter, as the case may be. The sanggunian concerned may,
for a justifiable reason or cause, extend the time for payment of
such taxes, fees, or charges without surcharges or penalties, but
only for a period not exceeding six (6) months.
Section 168. Surcharges and Penalties on Unpaid Taxes, Fees, or
Charges. - The sanggunian may impose a surcharge not
exceeding twenty-five (25%) of the amount of taxes, fees or
charges not paid on time and an interest at the rate not
exceeding two percent (2%) per month of the unpaid taxes,
fees or charges including surcharges, until such amount is fully
paid but in no case shall the total thirty-six (36%) months.
Section 169. Interests on Other Unpaid Revenues. - Where the
amount of any other revenue due a local government unit,
except voluntary contributions or donations, is not paid on the
date fixed in the ordinance, or in the contract, expressed or
implied, or upon the occurrence of the event which has given
rise to its collection, there shall be collected as part of that
amount an interest thereon at the rate not exceeding two
percent (2%) per month from the date it is due until it is paid,
but in no case shall the total interest on the unpaid amount or a
portion thereof exceed thirty-six (36) months.
Section 170. Collection of Local Revenue by Treasurer. - All local
taxes, fees, and charges shall be collected by the provincial, city,
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municipal, or barangay treasurer, or their duly authorized
deputies.
The provincial, city or municipal treasurer may designate the
barangay treasurer as his deputy to collect local taxes, fees, or
charges. In case a bond is required for the purpose, the
provincial, city or municipal government shall pay the
premiums thereon in addition to the premiums of bond that
may be required under this Code.
Tax period and manner of payment
• Calendar year but may be payable in quarterly
installments (Sec. 165)
Accrual of tax
• Accrues on the 1st day of January. For new taxes,
they accrue 1st day of the quarter following
effectivity of ordinance (Sec. 166)
Time of payment
• Shall be paid on the first 20 days of January or of
each subsequent quarter. May be extended for
justifiable reasons without penalties but not
exceeding 6 months (Sec. 167)
Penalties of unpaid taxes, fees or charges
• Not more than 25% surcharge and interest for a
period not exceeding 36 months (Sec. 168). The
interest is 2% per month until paid (Sec. 169)
Authority in the collection and inspection of books
• By the treasurer or duly authorized deputies of the
LGUs (Sec. 170)
PRESCRIPTION OF ASSESSMENT AND
COLLECTION
Section 194. Periods of Assessment and Collection. -
(a) Local taxes, fees, or charges shall be assessed within five (5)
years from the date they became due. No action for the
collection of such taxes, fees, or charges, whether
administrative or judicial, shall be instituted after the expiration
of such period: Provided, That. taxes, fees or charges which
have accrued before the effectivity of this Code may be
assessed within a period of three (3) years from the date they
became due.
(b) In case of fraud or intent to evade the payment of taxes,
fees, or charges, the same may be assessed within ten (10) years
from discovery of the fraud or intent to evade payment.
(c) Local taxes, fees, or charges may be collected within five (5)
years from the date of assessment by administrative or judicial
action. No such action shall be instituted after the expiration of
said period: Provided, however, That, taxes, fees or charges
assessed before the effectivity of this Code may be collected
within a period of three (3) years from the date of assessment.
(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.
TAXPAYER’S REMEDIES
1. Protest against a newly enacted ordinance
2. Protest against an assessment
3. Claim for refund or tax credit
Section 195. Protest of Assessment. - When the local treasurer or
his duly authorized representative finds that correct taxes, fees,
or charges have not been paid, he shall issue a notice of
assessment stating the nature of the tax, fee, or charge, the
amount of deficiency, the surcharges, interests and penalties.
Within sixty (60) days from the receipt of the notice of
assessment, the taxpayer may file a written protest with the
local treasurer contesting the assessment; otherwise, the
assessment shall become final and executory. The local
treasurer shall decide the protest within sixty (60) days from the
time of its filing. If the local treasurer finds the protest to be
wholly or partly meritorious, he shall issue a notice cancelling
wholly or partially the assessment. However, if the local
treasurer finds the assessment to be wholly or partly correct, he
shall deny the protest wholly or partly with notice to the
taxpayer. The taxpayer shall have thirty (30) days from the
receipt of the denial of the protest or from the lapse of the
sixty (60) day period prescribed herein within which to appeal
with the court of competent jurisdiction otherwise the
assessment becomes conclusive and unappealable.
Section 196. Claim for Refund of Tax Credit. - No case or
proceeding shall be maintained in any court for the recovery of
any tax, fee, or charge erroneously or illegally collected until a
written claim for refund or credit has been filed with the local
treasurer. No case or proceeding shall be entertained in any
court after the expiration of two (2) years from the date of the
payment of such tax, fee, or charge, or from the date the
taxpayer is entitled to a refund or credit.
Period of assessment and collection
• The period to assess is within 5 years from due
date or in case of fraud or intent to evade, 10 years
from discovery.
• The period to collect is 5 years from date of
assessment. (Sec. 194)
Suspension of prescriptive periods
1. The treasurer is legally prevented from making the
assessment or collection
2. The taxpayer requests for reinvestigation and
executes a waiver in writing before prescription
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3. The taxpayer is out of the country or cannot be
located (Sec. 195)
Protest against a newly-enacted ordinance (Sec. 187)
• Any question on the legality or constitutionality is
appealable to the Secretary of Justice within 30
days from the date of effectivity
• The appeal will not suspend the accrual and
payment of the tax, fee or charge levied therein
• The Secretary must render a decisions within 60
days from date of receipt of the appeal
• Decision of the SOJ or inaction within 60 days is
appealable to the regular courts (RTC) within 30
days from receipt or lapse of 60 days. CTA has no
jurisdiction.
Protest against assessment
• Filed with the local treasurer within 60 days from
receipt
• 30 days from denial of the protest or from the
lapse of 60 days (deemed denial) – appeal to court
of proper jurisdiction (not CTA)
Claim for refund or tax credit
• Claim must be filed within 3 years from date of
payment or from the date taxpayer is entitled to
refund or credit
• Denial is appealable to regular courts (not CTA)
CIVIL REMEDIES BY THE LGU FOR THE
COLLECTION OF TAXES
Section 173. Local Government's Lien. - Local taxes, fees, charges
and other revenues constitute a lien, superior to all liens,
charges or encumbrances in favor of any person, enforceable
by appropriate administrative or judicial action, not only upon
any property or rights therein which may be subject to the lien
but also upon property used in business, occupation, practice
of profession or calling, or exercise of privilege with respect to
which the lien is imposed. The lien may only be extinguished
upon full payment of the delinquent local taxes fees and
charges including related surcharges and interest.
Section 174. Civil Remedies. - The civil remedies for the
collection of local taxes, fees, or charges, and related surcharges
and interest resulting from delinquency shall be:
(a) By administrative action thru distraint of goods, chattels, or
effects, and other personal property of whatever character,
including stocks and other securities, debts, credits, bank
accounts, and interest in and rights to personal property, and
by levy upon real property and interest in or rights to real
property;
(b) By judicial action.
Either of these remedies or all may be pursued concurrently or
simultaneously at the discretion of the local government unit
concerned.

Section 175. Distraint of Personal Property. - The remedy by
distraint shall proceed as follows:
(a) Seizure - Upon failure of the person owing any local tax,
fee, or charge to pay the same at the time required, the local
treasurer or his deputy may, upon written notice, seize or
confiscate any personal property belonging to that person or
any personal property subject to the lien in sufficient quantity
to satisfy the tax, fee, or charge in question, together with any
increment thereto incident to delinquency and the expenses of
seizure. In such case, the local treasurer or his deputy shall
issue a duly authenticated certificate based upon the records of
his office showing the fact of delinquency and the amounts of
the tax, fee, or charge and penalty due. Such certificate shall
serve as sufficient warrant for the distraint of personal property
aforementioned, subject to the taxpayer's right to claim
exemption under the provisions of existing laws. Distrained
personal property shall be sold at public auction in the manner
hereon provided for.
(b) Accounting of distrained goods. - The officer executing the
distraint shall make or cause to be made an account of the
goods, chattels or effects distrained, a copy of which signed by
himself shall be left either with the owner or person from
whose possession the goods, chattels or effects are taken, or at
the dwelling or place or business of that person and with
someone of suitable age and discretion, to which list shall be
added a statement of the sum demanded and a note of the time
and place of sale.
(c) Publication - The officer shall forthwith cause a notification
to be exhibited in not less than three (3) public and
conspicuous places in the territory of the local government unit
where the distraint is made, specifying the time and place of
sale, and the articles distrained. The time of sale shall not be
less than twenty (20) days after the notice to the owner or
possessor of the property as above specified and the
publication or posting of the notice. One place for the posting
of the notice shall be at the office of the chief executive of the
local government unit in which the property is distrained.
(d) Release of distrained property upon payment prior to sale -
If at any time prior to the consummation of the sale, all the
proper charges are paid to the officer conducting the sale, the
goods or effects distrained shall be restored to the owner.
(e) Procedure of sale - At the time and place fixed in the notice,
the officer conducting the sale shall sell the goods or effects so
distrained at public auction to the highest bidder for cash.
Within five (5) days after the sale, the local treasurer shall make
a report of the proceedings in writing to the local chief
executive concerned.
Should the property distrained be not disposed of within one
hundred and twenty (120) days from the date of distraint, the
same shall be considered as sold to the local government unit
concerned for the amount of the assessment made thereon by
the Committee on Appraisal and to the extent of the same
amount, the tax delinquencies shall be cancelled.
Said Committee on Appraisal shall be composed of the city or
municipal treasurer as chairman, with a representative of the
Commission on Audit and the city or municipal assessor as
members.
(f) Disposition of proceeds - The proceeds of the sale shall be
applied to satisfy the tax, including the surcharges, interest, and
other penalties incident to delinquency, and the expenses of the
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distraint and sale. The balance over and above what is required
to pay the entire claim shall be returned to the owner of the
property sold. The expenses chargeable upon the seizure and
sale shall embrace only the actual expenses of seizure and
preservation of the property pending the sale, and no charge
shall be imposed for the services of the local officer or his
deputy. Where the proceeds of the sale are insufficient to
satisfy the claim, other property may, in like manner, be
distrained until the full amount due, including all expenses, is
collected.
Section 176. Levy on Real Property. - After the expiration of the
time required to pay the delinquent tax, fee, or charge, real
property may be levied on before, simultaneously, or after the
distraint of personal property belonging to the delinquent
taxpayer. To this end, the provincial, city or municipal
treasurer, as the case may be, shall prepare a duly authenticated
certificate showing the name of the taxpayer and the amount of
the tax, fee, or charge, and penalty due from him. Said
certificate shall operate with the force of a legal execution
throughout the Philippines. Levy shall be effected by writing
upon said certificate the description of the property upon
which levy is made. At the same time, written notice of the levy
shall be mailed to or served upon the assessor and the Register
of Deeds of the province or city where the property is located
who shall annotate the levy on the tax declaration and
certificate of title of the property, respectively, and the
delinquent taxpayer or, if he be absent from the Philippines, to
his agent or the manager of the business in respect to which
the liability arose, or if there be none, to the occupant of the
property in question.
In case the levy on real property is not issued before or
simultaneously with the warrant of distraint on personal
property, and the personal property of the taxpayer is not
sufficient to satisfy his delinquency, the provincial, city or
municipal treasurer, as the case may be, shall within thirty (30)
days after execution of the distraint, proceed with the levy on
the taxpayer's real property.
A report on any levy shall, within ten (10) days after receipt of
the warrant, be submitted by the levying officer to the
sanggunian concerned
1. Local government’s lien – on property and
property rights and extinguished only upon full
payment (Sec. 173)
2. Civil remedies
a. By administrative action
i. Distraint of personal property
ii. Levy on real property and rights
to real property
b. By judicial action – through the filing of
collection case in court by the local
treasurer
B. REAL PROPERTY TAXATION
DEFINITION AND CHARACTERISTICS OF REAL
PROPERTY TAX (RPT)

Section 232. Power to Levy Real Property Tax. - A province or city
or a municipality within the Metropolitan Manila Area my levy
an annual ad valorem tax on real property such as land,
building, machinery, and other improvement not hereinafter
specifically exempted.
Definition
• Real property tax is a direct tax on the ownership
of lands and buildings or other improvements
thereon.
Characteristics
1. It is a direct tax on the ownership of real property
2. It is proportionate - % of the assessed value
3. It creates a single, indivisible obligation
4. It is an ad valorem tax
5. It is a local tax
Note: Municipalities outside MM and barangays do not have
the power to levy RPT.
TYPES OF RPT
Section 233. Rates of Levy. - A province or city or a municipality
within the Metropolitan Manila Area shall fix a uniform rate of
basic real property tax applicable to their respective localities as
follows:
(a) In the case of a province, at the rate not exceeding one
percent (1%) of the assessed value of real property; and
(b) In the case of a city or a municipality within the
Metropolitan Manila Area, at the rate not exceeding two
percent (2%) of the assessed value of real property.
Section 235. Additional Levy on Real Property for the Special
Education Fund. - A province or city, or a municipality within
the Metropolitan Manila Area, may levy and collect an annual
tax of one percent (1%) on the assessed value of real property
which shall be in addition to the basic real property tax. The
proceeds thereof shall exclusively accrue to the Special
Education Fund (SEF).
Section 236. Additional Ad Valorem Tax on Idle Lands. - A
province or city, or a municipality within the Metropolitan
Manila Area, may levy an annual tax on idle lands at the rate
not exceeding five percent (5%) of the assessed value of the
property which shall be in addition to the basic real property
tax.
Section 240. Special Levy by Local Government Units. - A province,
city or municipality may impose a special levy on the lands
comprised within its territorial jurisdiction specially benefited
by public works projects or improvements funded by the local
government unit concerned: Provided, however, That the
special levy shall not exceed sixty percent (60%) of the actual
cost of such projects and improvements, including the costs of
acquiring land and such other real property in connection
therewith: Provided, further, That the special levy shall not
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apply to lands exempt from basic real property tax and the
remainder of the land portions of which have been donated to
the local government unit concerned for the construction of
such projects or improvements.
1. Basic RPT – not exceeding 1% of assessed value
(AV) for provinces; not exceeding 2% of AV for
cities and municipalities (within MM) (Sec. 233)
2. Special Levies
a. Special Education Fund (SEF) – 1%
additional real estate tax (Sec. 235)
b. Additional ad valorem on idle lands – not
exceeding 5% of the AV (Sec. 236)
c. Special assessments (Sec. 240)
Special assessments
• Imposed on lands specially benefited by public
works, projects or improvments funded by the
LGU
• Shall not exceed 60% of the actual cost of such
projects and improvements including the cost of
acquiring the land
• Will not apply to:
o Lands exempt from RPT
o Remainder of the land portions donated
to the LGU for construction of said
projects (Sec. 240)
FUNDAMENTAL PRINCIPLES IN REAL
PROPERTY TAXATION
Section 198. Fundamental Principles. - The appraisal, assessment,
levy and collection of real property tax shall be guided by the
following fundamental principles:
(a) Real property shall be appraised at its current and fair
market value;
(b) Real property shall be classified for assessment purposes on
the basis of its actual use;
(c) Real property shall be assessed on the basis of a uniform
classification within each local government unit;
(d) The appraisal, assessment, levy and collection of real
property tax shall not be let to any private person; and
(e) The appraisal and assessment of real property shall be
equitable.
APPRAISAL AND ASSESSMENT OF RPT
Section 201. Appraisal of Real Property. - All real property,
whether taxable or exempt, shall be appraised at the current
and fair market value prevailing in the locality where the
property is situated. The Department of Finance shall
promulgate the necessary rules and regulations for the
classification, appraisal, and assessment of real property
pursuant to the provisions of this Code.
• Fair market value is the amount which the purchaser
willing but not compelled to buy would pay an

owner of the property, and the latter willing but
not compelled to sell would accept as the
consideration or price therefore. [Army and Navy
Club v. Trinidad]
• For assessment purposes, the actual use of the
property must be the basis. The term actual use
refers to the principal and predominant
utilization of the property by the person in
possession thereof. [Testate Estate of Lim v. City of
Manila]
EXEMPTION FROM RPT
Section 234. Exemptions from Real Property Tax. - The following
are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or
any of its political subdivisions except when the beneficial use
thereof has been granted, for consideration or otherwise, to a
taxable person;
(b) Charitable institutions, churches, parsonages or convents
appurtenant thereto, mosques, non-profit or religious
cemeteries and all lands, buildings, and improvements actually,
directly, and exclusively used for religious, charitable or
educational purposes;
(c) All machineries and equipment that are actually, directly and
exclusively used by local water districts and government owned
or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of
electric power;
(d) All real property owned by duly registered cooperatives as
provided for under R.A. No. 6938; and
(e) Machinery and equipment used for pollution control and
environmental protection.
Except as provided herein, any exemption from payment of
real property tax previously granted to, or presently enjoyed by,
all persons, whether natural or juridical, including all
government-owned or controlled corporations are hereby
withdrawn upon the effectivity of this Code.
• Properties of public domain intended for public
use are exempt from RPT. The Lucena Fishing
Port Complex, which is one of the major
infrastructure projects undertaken by the National
Government is devoted to public use and is a
property of public dominion being owned by the
Republic of the Philippines. It is exempt from
RPT except for the portions leased to private
parties. [Philippine Fisheries Development Authority v.
CBAA (2010)]
• The NPC cannot pass on its tax-exempt status to
its BOT partner, a private corporation. NPC, a
GOCC, is exempt from RPT only when it owns
and/or actually uses the machinery and equipment
for generation and transmission of electric power.
Under the BOT, it was BPPC, a non-government
entity, which owns, maintains and operates the
machinery and equipment. These are used to
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generate electricity which it sells to NPC. The
liability for payment of RPT is determined by law
and not by agreement of the parties. [NPC v.
CBAA (2009)]
DECLARATION OF REAL PROPERTY
Section 202. Declaration of real Property by the Owner or
Administrator. - It shall be the duty of all persons, natural or
juridical, owning or administering real property, including the
improvements therein, within a city or municipality, or their
duly authorized representative, to prepare, or cause to be
prepared, and file with the provincial, city or municipal
assessor, a sworn statement declaring the true value of their
property, whether previously declared or undeclared, taxable or
exempt, which shall be the current and fair market value of the
property, as determined by the declarant. Such declaration shall
contain a description of the property sufficient in detail to
enable the assessor or his deputy to identify the same for
assessment purposes. The sworn declaration of real property
herein referred to shall be filed with the assessor concerned
once every three (3) years during the period from January first
(1st) to June thirtieth (30th) commencing with the calendar year
1992.
Section 222. Assessment of Property Subject to Back Taxes. - Real
property declared for the first time shall be assessed for taxes
for the period during which it would have been liable but in no
case of more than ten (10) years prior to the date of initial
assessment: Provided, however, That such taxes shall be
computed on the basis of the applicable schedule of values in
force during the corresponding period.
If such taxes are paid on or before the end of the quarter
following the date the notice of assessment was received by the
owner or his representative, no interest for delinquency shall be
imposed thereon; otherwise, such taxes shall be subject to an
interest at the rate of two percent (2%) per month or a fraction
thereof from the date of the receipt of the assessment until
such taxes are fully paid.
Declaration by owner or administrator
• Sworn statement declaring the true value to be
filed with the assessor once every 3 years during
the period Jan. 1 to June 30 (Sec. 202)
Declaration covering newly acquired real property or improvements
• Sworn statement of true value to be filed within 60
days from acquisition; for improvements, upon
completion or occupation, whichever comes earlier
Declaration by assessor
• For failure of owner or administrator to file the
sworn statement, the assessor shall himself declare
the property in the name of the defaulting owner
or unknown owner, and shall assess the property
(no oath by the assessor is required)

• If property is declared for the first time, back taxes
shall be assessed for not more than 10 years prior
to the date of initial assessment (Sec. 222)
LISTING OF THE PROPERTY IN THE
ASSESSMENT ROLLS; PERSONS UPON WHOM
LISTED
Section 205. Listing of Real Property in the Assessment Rolls. -
(a) In every province and city, including the municipalities
within the Metropolitan Manila Area, there shall be prepared
and maintained by the provincial, city or municipal assessor an
assessment roll wherein shall be listed all real property, whether
taxable or exempt, located within the territorial jurisdiction of
the local government unit concerned. Real property shall be
listed, valued and assessed in the name of the owner or
administrator, or anyone having legal interest in the property.
(b) The undivided real property of a deceased person may be
listed, valued and assessed in the name of the estate or of the
heirs and devisees without designating them individually; and
undivided real property other than that owned by a deceased
may be listed, valued and assessed in the name of one or more
co-owners: Provided, however, That such heir, devisee, or co-
owner shall be liable severally and proportionately for all
obligations imposed by this Title and the payment of the real
property tax with respect to the undivided property.
(c) The real property of a corporation, partnership, or
association shall be listed, valued and assessed in the same
manner as that of an individual.
(d) Real property owned by the Republic of the Philippines, its
instrumentalities and political subdivisions, the beneficial use of
which has been granted, for consideration or otherwise, to a
taxable person, shall be listed, valued and assessed in the name
of the possessor, grantee or of the public entity if such
property has been acquired or held for resale or lease.
• Listing of all RP (taxable or exempt) within the
jurisdiction of the LGU
• All declarations shall be kept and filed under a
uniform classification system to be established by
the provincial/city/municipal assessor (Sec. 201)
Persons upon whom listed
• The real property shall be listed, valued, and
assessed in the name of the owner, administrator,
or anyone having legal interest in the property.
• For undivided real property, in the name of:
o Estate
o Heirs or devisees
o Co-owners (for those not owned by
deceased)
• Corporation, partnership and association
• If owned by the Republic of the Philippines, its
instrumentalities, political subdivision, where the
beneficial use is transferred to a taxable person –
in the name of the possessor
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PREPARATION OF SCHEDULES OF FAIR
MARKET VALUE (FMV)
Section 212. Preparation of Schedule of Fair Market Values. -
Before any general revision of property assessment is made
pursuant to the provisions of this Title, there shall be prepared
a schedule of fair market values by the provincial, city and
municipal assessor of the municipalities within the
Metropolitan Manila Area for the different classes of real
property situated in their respective local government units for
enactment by ordinance of the sanggunian concerned. The
schedule of fair market values shall be published in a
newspaper of general circulation in the province, city or
municipality concerned or in the absence thereof, shall be
posted in the provincial capitol, city or municipal hall and in
two other conspicuous public places therein.
When Before any general revision of property
assessment is made
By whom The provincial, city and municipal
assessors in MM
What The different classes of real property
situated in their respective LGUs
Purpose For enactment by ordinance of the
Sanggunian concerned
• Publication of the schedule is required (newspaper
or by posting)
Authority to take evidence
Section 213. Authority of Assessor to Take Evidence. - For the
purpose of obtaining information on which to base the market
value of any real property, the assessor of the province, city or
municipality or his deputy may summon the owners of the
properties to be affected or persons having legal interest
therein and witnesses, administer oaths, and take deposition
concerning the property, its ownership, amount, nature, and
value.
• The assessor or his deputy is authorized to obtain
information on which to base the MV of any
property within his jurisdiction. He may:
o Summon the pwners or persons having
legal interest and witnesses;
o Administer oaths; and
o Take deposition concerning the property,
its ownership, amount, nature, and value.
PROCEDURE FOR THE AMENDMENT OF FMV
Section 214. Amendment of Schedule of Fair Market Values. - The
provincial, city or municipal assessor may recommend to the
sanggunian concerned amendments to correct errors in
valuation in the schedule of fair market values. The sanggunian
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concerned shall, by ordinance, act upon the recommendation public services in the supply and
within ninety (90) days from receipt thereof. distribution of water and/or generation
and transmission of electric power.
• The sanggunian concerned may, by ordinance duly
enacted, amend the schedule of FMV to correct BASIS OF ASSESSMENT AND ASSESSMENT
erros in valuation. LEVELS
• Procedure:
1. The provincial, city or municipal assessor Section 217. Actual Use of Real Property as Basis for Assessment. -
recommends to the sanggunian Real property shall be classified, valued and assessed on the
concerned any amendment; basis of its actual use regardless of where located, whoever
2. The sanggunian shall, by ordinance, act owns it, and whoever uses it.
upon the recommendation within 90 days
Section 218. Assessment Levels. - The assessment levels to be
from receipt thereof.
applied to the fair market value of real property to determine
its assessed value shall be fixed by ordinances of the
CLASSES OF REAL PROPERTY FOR sangguniang panlalawigan, sangguniang panlungsod or
ASSESSMENT PURPOSES sangguniang bayan of a municipality within the Metropolitan
Manila Area, at the rates not exceeding the following:
Section 215. Classes of Real Property for Assessment Purposes. - For (a) On Lands:
purposes of assessment, real property shall be classified as xx
residential, agricultural, commercial, industrial, mineral, (b) On Buildings and Other Structures:
timberland or special. xx
The city or municipality within the Metropolitan Manila Area, (c) On Machineries
through their respective sanggunian, shall have the power to xx
classify lands as residential, agricultural, commercial, industrial, (d) On Special Classes.
mineral, timberland, or special in accordance with their zoning
ordinances. Basis of assessment
Section 216. Special Classes of Real Property. - All lands, buildings, • Real property shall be classified, valued and
and other improvements thereon actually, directly and assessed on the basis of its actual use regardless of
exclusively used for hospitals, cultural, or scientific purposes, where located, whoever owns it, and whoever uses
and those owned and used by local water districts, and it.
government-owned or controlled corporations rendering • Land is “actually used” for residential purposes
essential public services in the supply and distribution of water when work begins for the construction thereon of
and/or generation and transmission of electric power shall be a house intended for residential purposes. [City
classified as special. Assessor of Pasay v. BAA of Pasay City and Marble
Condominium]
Classes of real property • Actual use should not be construed as a criterion
1. Residential for the classification and valuation of real property
2. Agricultural but as a determining factor in applying the
3. Commercial appropriate percentage or level of assessment to
4. Industrial market value of property.
5. Mineral
6. Timberland Assessment of real property
7. Special • The rates to be fixed by the sanggunia concerned
should not exceed those prescribed in Sec. 218,
• The city or municipality within MM, through the LGC.
sanggunian, shall have the power to classify lands
in accordance with their zoning ordinances. On lands – proportionate rate
Residential 20%
Special classes of real property Agricultural 40%
• This pertains to all lands, buildings and Commercial 50%
improvements. Industrial 50%
1. Actually, directly and exclusively used for Mineral 50%
hospitals, cultural or scientific purposes; Timberland 20%
and On buildings and other structures – assessment level is
2. Those owned and used by local water based on a graduated FMV
districts and GOCCs rendering essential On machines Proportionate

Special classes Proportionate
Determination of AV and RPT
• Assessment level is a percentage to be applied to
the market value to determine the taxable or
assessed value of the property prescribed in the
ordinance.
• Determination of AV and RPT:
1. Take a schedule of FMV
2. Assessed value = FMV x Assessment
level
3. Tax = Assessed value x tax rate
GENERAL REVISION OF ASSESSMENT AND
PROPERTY CLASSIFICATION
Section 219. General Revision of Assessment and Property
Classification. - The provincial, city or municipal assessor shall
undertake a general revision of real property assessments
within two (2) years after the effectivity of this Code and every
three (3) years thereafter.
• A general revision of RP assessment is required by
law every 5 years (now 3 years pursuant to Sec.
219, LGC) to ensure that real properties are
assessed at their current and FMV [Sesbreno v.
CBAA] It is a matter of plain common sense that
a building with more floors has a higher market
value than one with fewer floors, provided that
both are of the same materials.
Purposes:
1. Equalizing and updating valuations
2. Brings to light or rediscover many properties that
had been “lost” from the tax roll
3. Enables the assessor to purge from his assessment
roll the double assessment and assessment of
properties that had been destroyed that has
accumulated through the years
STEPS FOR THE CONDUCT OF GENERAL
REVISION OF REAL PROPERTY ASSESSMENTS
1. The preparation of schedule of FMV
2. The enactment of ordinances
a. Levying an annual ad valorem tax on RP
and an additional tax accruing to the SEF
b. Providing the assessment levels to be
applied to the MVs of real properties
c. Providing necessary appropriation to
defray expenses incident to general
revision on real property assessment; and
d. Adopting the schedule of FMV prepared
by the assessors. [Lopez v. City of Manila
(1999)]
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VALUATION OF REAL PROPERTY
Section 220. Valuation of Real Property. - In cases where (a) real
property is declared and listed for taxation purposes for the
first time; (b) there is an ongoing general revision of property
classification and assessment; or (c) a request is made by the
person in whose name the property is declared, the provincial,
city or municipal assessor or his duly authorized deputy shall, in
accordance with the provisions of this Chapter, make a
classification, appraisal and assessment or taxpayer's valuation
thereon: Provided, however, That the assessment of real
property shall not be increased oftener than once every three
(3) years except in case of new improvements substantially
increasing the value of said property or of any change in its
actual use.
DATE OF EFFECTIVITY OF ASSESSMENT OR
REASSESSMENT
Section 221. Date of Effectivity of Assessment or Reassessment. - All
assessments or reassessments made after the first (1st) day of
January of any year shall take effect on the first (1st) day of
January of the succeeding year: Provided, however, That the
reassessment of real property due to its partial or total
destruction, or to a major change in its actual use, or to any
great and sudden inflation or deflation of real property values,
or to the gross illegality of the assessment when made or to any
other abnormal cause, shall be made within ninety (90) days
from the date any such cause or causes occurred, and shall take
effect at the beginning of the quarter next following the
reassessment.
General rule
• An assessment or reassessment made after the first
day of January of any year shall take effect on the
1st day of January of the succeeding year
Exceptions (in which case assessments or reassessments shall
take effect at the beginning of the quarter next following the
reassessment): if made due to:
• Its partial or total destruction
• Major change in its actual use
• Great and sudden inflation or deflation of real
property values
• Gross illegality of the assessment; and
• Any other abnormal cause.
ASSESSMENT OF PROPERTY SUBJECT TO BACK
TAXES
Section 222. Assessment of Property Subject to Back Taxes. - Real
property declared for the first time shall be assessed for taxes
for the period during which it would have been liable but in no
case of more than ten (10) years prior to the date of initial
assessment: Provided, however, That such taxes shall be
computed on the basis of the applicable schedule of values in
force during the corresponding period.

If such taxes are paid on or before the end of the quarter
following the date the notice of assessment was received by the
owner or his representative, no interest for delinquency shall be
imposed thereon; otherwise, such taxes shall be subject to an
interest at the rate of two percent (2%) per month or a fraction
thereof from the date of the receipt of the assessment until
such taxes are fully paid.
COLLECTION OF RPT
Section 246. Date of Accrual of Tax. - The real property tax for
any year shall accrue on the first day of January and from that
date it shall constitute a lien on the property which shall be
superior to any other lien, mortgage, or encumbrance of any
kind whatsoever, and shall be extinguished only upon the
payment of the delinquent tax.
Section 247. Collection of Tax. - The collection of the real
property tax with interest thereon and related expenses, and the
enforcement of the remedies provided for in this Title or any
applicable laws, shall be the responsibility of the city or
municipal treasurer concerned.
The city or municipal treasurer may deputize the barangay
treasurer to collect all taxes on real property located in the
barangay: Provided, That the barangay treasurer is properly
bonded for the purpose: Provided, further, That the premium
on the bond shall be paid by the city or municipal government
concerned.
Section 248. Assessor to Furnish Local Treasurer with Assessment
Roll. - The provincial, city or municipal assessor shall prepare
and submit to the treasurer of the local government unit, on or
before the thirty-first (31st) day of December each year, an
assessment roll containing a list of all persons whose real
properties have been newly assessed or reassessed and the
values of such properties.
Section 249. Notice of Time for Collection of Tax. - The city or
municipal treasurer shall, on or before the thirty-first (31st) day
of January each year, in the case of the basic real property tax
and the additional tax for the Special Education Fund (SEF) or
any other date to be prescribed by the sanggunian concerned in
the case of any other tax levied under this title, post the notice
of the dates when the tax may be paid without interest at a
conspicuous and publicly accessible place at the city or
municipal hall. Said notice shall likewise be published in a
newspaper of general circulation in the locality once a week for
two (2) consecutive weeks.
Section 250. Payment of Real Property Taxes in Installments. - The
owner of the real property or the person having legal interest
therein may pay the basic real property tax and the additional
tax for Special Education Fund (SEF) due thereon without
interest in four (4) equal installments; the first installment to be
due and payable on or before March Thirty-first (31st); the
second installment, on or before June Thirty (30); the third
installment, on or before September Thirty (30); and the last
installment on or before December Thirty-first (31st), except
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the special levy the payment of which shall be governed by
ordinance of the sanggunian concerned.
The date for the payment of any other tax imposed under this
Title without interest shall be prescribed by the sanggunian
concerned.
Payments of real property taxes shall first be applied to prior
years delinquencies, interests, and penalties, if any, and only
after said delinquencies are settled may tax payments be
credited for the current period.
Date of accrual of RPT
• On the 1st day of January of every year (Sec. 245).
From that date it shall constitute a lien on the
property which shall be superior to any other lien,
mortgage, or encumbrance of any kind
whatsoever, and shall be extinguished only upon
payment of the delinquent tax.
Collecting authority
• Responsibility of the city or municipality treasurer
concerned:
1. Collection of RPT with interest thereon
and related expenses; and
2. Enforcement of the remedies provided
by the LGC or any applicable laws.
• The city or municipal treasurer may deputize the
barangay treasurer to collect all taxes on RP
located in the barangay, provided that the barangay
treasurer is properly bonded for the purpose. The
premium on the bond shall be paid by city or
municipal government concerned.
Period to collect RPT
Basic RPT and any other tax 5 years from the date they
levied under the title on real became due
property taxation
When there is fraud or 10 years from discovery
intent to evade the payment
of taxes
Suspension of the period to collect
• The period of prescription within which to collect
shall be suspended for the time during which:
1. The local treasurer is legally prevented
from collecting the tax;
2. The owner of the property or the person
having legal interest therein requests for
reinvestigation and executes a waiver in
writing before the expiration of the
period within which to collect; and
3. The owner of the property or the person
having legal interest therein is out of the
country or otherwise cannot be located.
Special rules on payment
1. Payment of RPT in installments

a. Basic RPT and additional tax for SEF –
in 4 equal installments (on or before
March 31/June 30/September 30/
December 31)
b. Other special levies and any other RPT –
governed by ordinance
o Payment of RPT shall first be applied to
prior years’ delinquencies, interests and
penalties, if any, and only after said
delinquencies are settled may tax
payments be credited for the current
period.
2. Interests on unpaid RPT
o In case of failure to pay the basic RPT or
any other tax levied under this title upon
the expiration of the periods provided in
Sec. 250, or when due, as the case may
be, shall be subject the taxpayer to the
payment of interest at the rate of 2% per
month on the unpaid amount or a
fraction thereof, until the delinquent tax
shall have been fully paid. (Sec. 255)
o In no case shall the total interest on the
unpaid tax or portion thereof exceed 36
months.
Condonation of RPT
Section 276. Condonation or Reduction of Real Property Tax and
Interest. - In case of a general failure of crops or substantial
decrease in the price of agricultural or agribased products, or
calamity in any province, city or municipality, the sanggunian
concerned, by ordinance passed prior to the first (1st) day of
January of any year and upon recommendation of the Local
Disaster Coordinating Council, may condone or reduce, wholly
or partially, the taxes and interest thereon for the succeeding
year or years in the city or municipality affected by the calamity.
Section 277. Condonation or Reduction of Tax by the President of the
Philippines. - The President of the Philippines may, when public
interest so requires, condone or reduce the real property tax
and interest for any year in any province or city or a
municipality within the Metropolitan Manila Area.
TAXPAYER’S REMEDIES
Section 226. Local Board of Assessment Appeals. - Any owner or
person having legal interest in the property who is not satisfied
with the action of the provincial, city or municipal assessor in
the assessment of his property may, within sixty (60) days from
the date of receipt of the written notice of assessment, appeal
to the Board of Assessment Appeals of the provincial or city by
filing a petition under oath in the form prescribed for the
purpose, together with copies of the tax declarations and such
affidavits or documents submitted in support of the appeal.
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Section 252. Payment Under Protest. -
(a) No protest shall be entertained unless the taxpayer first pays
the tax. There shall be annotated on the tax receipts the words
"paid under protest". The protest in writing must be filed
within thirty (30) days from payment of the tax to the
provincial, city treasurer or municipal treasurer, in the case of a
municipality within Metropolitan Manila Area, who shall decide
the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest, shall be
held in trust by the treasurer concerned.
(c) In the event that the protest is finally decided in favor of the
taxpayer, the amount or portion of the tax protested shall be
refunded to the protestant, or applied as tax credit against his
existing or future tax liability.
(d) In the event that the protest is denied or upon the lapse of
the sixty day period prescribed in subparagraph (a), the
taxpayer may avail of the remedies as provided for in Chapter
3, Title II, Book II of this Code.
Section 253. Repayment of Excessive Collections. - When an
assessment of basic real property tax, or any other tax levied
under this Title, is found to be illegal or erroneous and the tax
is accordingly reduced or adjusted, the taxpayer may file a
written claim for refund or credit for taxes and interests with
the provincial or city treasurer within two (2) years from the
date the taxpayer is entitled to such reduction or adjustment.
The provincial or city treasurer shall decide the claim for tax
refund or credit within sixty (60) days from receipt thereof. In
case the claim for tax refund or credit is denied, the taxpayer
may avail of the remedies as provided in Chapter 3, Title II,
Book II of this Code.
Contesting an assessment of value of real property
1. Appeal to the Local Board of Assessment Appeals
(LBAA) (Sec. 226)
o Party to file: Any owner or person having
legal interest in the property who is not
satisfied with the action of the provincial,
city or municipal assessor in the
assessment of his property.
o Period to file: Within 60 days from the
date of receipt of the written notice of
assessment
o Jurisdiction: the Board of Assessment
Appeals of the Province or City
2. Appeal to the Central Board of Assessment
Appeals (CBAA)
o The owner of the property or the person
having legal interest therein who is not
satisfied with the decision of the Board
may, within 30 days after receipt of the
decision of said board, appeal to the
CBAA.
o The decision of the CBAA on property
valuation shall be final and executory.

Request for review with assessor
• An aggrieved taxpayer CANNOT file a request for
review or readjustment of the assessment of
property with the local assessor. To allow the
procedure would invite corruption in the system of
appraisal and assessment. It would conveniently
court a graft-prone situation where values of RPT
may be initially set unreasonably high, and then
subsequently reduced upon request of a property
owner. [Callanta v. Abellana (1998)]
Payment pending appeal
• An appeal on assessments of real property shall, in
no case, suspend the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor.
• The payment is without prejudice to subsequent
adjustment depending upon the final outcome of
the appeal.
Payment of RPT under protest
• File protest in writing with the local treasurer
within 30 days from payment of tax to the
provincial, city or municipal (if within MM)
treasurer, who shall decide the protest within 60
days from receipt.
• If protest is denied or upon the lapse of period for
treasurer to decide, the taxpayer may appeal to the
LBAA within 60 days.
• If not satisfied with the decision of the LBAA,
appeal to the CBAA within 30 days.
• In case of adverse decision of the CBAA, appeal to
the CTA en banc within 15 days.
• In case of adverse decision of the CTA en banc,
appeal by certiorari to the Supreme Court within
15 days.
Refund or credit of RPT (repayment of excessive collections)
• When an assessment is found to be illegal or
erroneous and the tax is accordingly reduced or
adjusted:
1. The taxpayer may file a written claim for refund or
credit for taxes and interests with the provincial or
city treasurer within two years from the date the
taxpayer is entitled to such reduction or
adjustment.
2. The provincial or city treasurer shall decide the
claim for tax refund or credit within 60 days from
receipt therefrom.
3. In case the claim for tax refund or credit is denied,
the taxpayer may appeal to the LBAA within 60
days.
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GOVERNMENT REMEDIES FOR COLLECTION
OF RPT
1. By administrative action through levy on real
property; or
2. By judicial action
Section 254. Notice of Delinquency in the Payment of the Real
Property Tax. -
(a) When the real property tax or any other tax imposed under
this Title becomes delinquent, the provincial, city or municipal
treasurer shall immediately cause a notice of the delinquency to
be posted at the main hall and in a publicly accessible and
conspicuous place in each barangay of the local government
unit concerned. The notice of delinquency shall also be
published once a week for two (2) consecutive weeks, in a
newspaper of general circulation in the province, city, or
municipality.
(b) Such notice shall specify the date upon which the tax
became delinquent and shall state that personal property may
be distrained to effect payment. It shall likewise state that any
time before the distraint of personal property, payment of the
tax with surcharges, interests and penalties may be made in
accordance with the next following Section, and unless the tax,
surcharges and penalties are paid before the expiration of the
year for which the tax is due except when the notice of
assessment or special levy is contested administratively or
judicially pursuant to the provisions of Chapter 3, Title II,
Book II of this Code, the delinquent real property will be sold
at public auction, and the title to the property will be vested in
the purchaser, subject, however, to the right of the delinquent
owner of the property or any person having legal interest
therein to redeem the property within one (1) year from the
date of sale.
Section 256. Remedies For The Collection Of Real Property Tax. -
For the collection of the basic real property tax and any other
tax levied under this Title, the local government unit concerned
may avail of the remedies by administrative action thru levy on
real property or by judicial action.
Section 257. Local Governments Lien. - The basic real property
tax and any other tax levied under this Title constitutes a lien
on the property subject to tax, superior to all liens, charges or
encumbrances in favor of any person, irrespective of the owner
or possessor thereof, enforceable by administrative or judicial
action, and may only be extinguished upon payment of the tax
and the related interests and expenses.
Section 258. Levy on Real Property. - After the expiration of the
time required to pay the basic real property tax or any other tax
levied under this Title, real property subject to such tax may be
levied upon through the issuance of a warrant on or before, or
simultaneously with, the institution of the civil action for the
collection of the delinquent tax. The provincial or city
treasurer, or a treasurer of a municipality within the
Metropolitan Manila Area, as the case may be, when issuing a
warrant of levy shall prepare a duly authenticated certificate
showing the name of the delinquent owner of the property or
person having legal interest therein, the description of the

property, the amount of the tax due and the interest thereon.
The warrant shall operate with the force of a legal execution
throughout the province, city or a municipality, within the
Metropolitan Manila Area. The warrant shall be mailed to or
served upon the delinquent owner of the real property or
person having legal interest therein, or in case he is out of the
country or cannot be located, the administrator or occupant of
the property. At the same time, written notice of the levy with
the attached warrant shall be mailed to or served upon the
assessor and the Registrar of Deeds of the province, city or
municipality within the Metropolitan Manila Area where the
property is located, who shall annotate the levy on the tax
declaration and certificate of title of the property, respectively.
The levying officer shall submit a report on the levy to the
sanggunian concerned within ten (10) days after receipt of the
warrant by the owner of the property or person having legal
interest therein
Notice of Delinquency
By whom Provincial, city or municipal treasurer
When Immediately upon delinquency
How 1. Post a notice of delinquency at
the main entrance of the
provincial capitol, or city or
municipal hall and in a publicly
accessible and conspicuous place
in each barangay of the LGU
2. The notice of delinquency shall
also be published once a week
for two consecutive weeks in a
newspaper of general circulation
in the province, city or
municipality
Contents:
1. The date upon which the tax became delinquent
2. That personal property may be distrained to effect
payment
3. That at any time before the distraint of personal
property, payment of the tax with surcharges,
interests and penalties may be made in accordance
with the provision on interest on unpaid RPT)
4. Unless the tax, surcharges and penalties are paid
before the expiration of the year for which the tax
is due (except when the notice of assessment or
special levy is contested administratively or
judicially), the delinquent RP will be sold at public
auction, and the title to the property will be vested
in the purchasers, subject, however, to the right of
redemption within one year from the date of sale.
Local government’s lien
Cf. Sec. 257
Excess in proceeds of sale
• The proceeds of the sale in excess of the
delinquent tax, the interest due thereon and the
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expenses of the sale shall be remitted to the owner
of real property or the person having legal interest
therein.
When LGU may purchase real property advertised for sale:
1. There is no bidder; or
2. The highest bid is for an amount insufficient to
pay the RPT, fees, charges, surcharges, interests or
penalties.
Civil action
• To be filed by the local treasurer within 5 years or
10 years as provided for in Sec. 270, LGC
Resale of real estate taken for taxes, fees or charges
• The sanggunian concerned may, by ordinance duly
approved, and upon notice of not less than 20
days, sell and dispose of RP acquired by the LGU
under Sec. 263, LGC.
• The process of the sale shall accrue to the general
fund of the LGU concerned.
IV. TARIFF AND CUSTOMS CODE OF 1978,
AS AMENDED
V. JUDICIAL REMEDIES (R.A. 1125, AS
AMENDED BY R.A. 9282, AND
IMPLEMENTED BY THE REVISED
RULES OF THE COURT OF TAX
APPEALS
JURISDICTION OF THE CTA
Sec. 7. Jurisdiction. - The CTA shall exercise:
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;
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.
b. Jurisdiction over cases involving criminal offenses as
herein provided:
1. Exclusive original jurisdiction over all criminal offenses
arising from violations of the National Internal Revenue Code
or Tariff and Customs Code and other laws administered by
the Bureau of Internal Revenue or the Bureau of Customs:
Provided, however, That offenses or felonies mentioned in this
paragraph where the principal amount o taxes and fees,
exclusive of charges and penalties, claimed is less than One
million pesos (P1,000,000.00) or where there is no specified
amount claimed shall be tried by the regular Courts and the
jurisdiction of the CTA shall be appellate. Any provision of law
or the Rules of Court to the contrary notwithstanding, the
criminal action and the corresponding civil action for the
recovery of civil liability for taxes and penalties shall at all times
be simultaneously instituted with, and jointly determined in the
same proceeding by the CTA, the filing of the criminal action
being deemed to necessarily carry with it the filing of the civil
action, and no right to reserve the filling of such civil action
separately from the criminal action will be recognized.
2. Exclusive appellate jurisdiction in criminal offenses:
a. Over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in tax cases originally decided by
them, in their respected territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the exercise of their
appellate jurisdiction over tax cases originally decided by the
Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts in their respective jurisdiction.
c. Jurisdiction over tax collection cases as herein provided:
1. Exclusive original jurisdiction in tax collection cases
involving final and executory assessments for taxes, fees,
charges and penalties: Provided, however, That collection cases
where the principal amount of taxes and fees, exclusive of
charges and penalties, claimed is less than One million pesos
(P1,000,000.00) shall be tried by the proper Municipal Trial
Court, Metropolitan Trial Court and Regional Trial Court.
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2. Exclusive appellate jurisdiction in tax collection cases:
"a. Over appeals from the judgments, resolutions or orders of
the Regional Trial Courts in tax collection cases originally
decided by them, in their respective territorial jurisdiction.
b. Over petitions for review of the judgments, resolutions or
orders of the Regional Trial Courts in the Exercise of their
appellate jurisdiction over tax collection cases originally decided
by the Metropolitan Trial Courts, Municipal Trial Courts and
Municipal Circuit Trial Courts, in their respective jurisdiction.
SEC. 11. Who May Appeal; Mode of Appeal; Effect of
Appeal. - Any party adversely affected by a decision, ruling or
inaction of the Commissioner of Internal Revenue, the
Commissioner of Customs, the Secretary of Finance, the
Secretary of Trade and Industry or the Secretary of Agriculture
or the Central Board of Assessment Appeals or the Regional
Trial Courts may file an appeal with the CTA within thirty (30)
days after the receipt of such decision or ruling or after the
expiration of the period fixed by law for action as referred to in
Section 7(a)(2) herein.
Appeal shall be made by filing a petition for review under a
procedure analogous to that provided for under Rule 42 of the
1997 Rules of Civil Procedure with the CTA within thirty (30)
days from the receipt of the decision or ruling or in the case of
inaction as herein provided, from the expiration of the period
fixed by law to act thereon. A Division of the CTA shall hear
the appeal: Provided, however, That with respect to decisions
or rulings of the Central Board of Assessment Appeals and the
Regional Trial Court in the exercise of its appellate jurisdiction
appeal shall be made by filing a petition for review under a
procedure analogous to that provided for under rule 43 of the
1997 Rules of Civil Procedure with the CTA, which shall hear
the case en banc.
All other cases involving rulings, orders or decisions filed with
the CTA as provided for in Section 7 shall be raffled to its
Divisions. A party adversely affected by a ruling, order or
decision of a Division of the CTA may file a motion for
reconsideration of new trial before the same Division of the
CTA within fifteens (15) days from notice thereof: Provide,
however, That in criminal cases, the general rule applicable in
regular Courts on matters of prosecution and appeal shall
likewise apply.
No appeal taken to the CTA from the decision of the
Commissioner of Internal Revenue or the Commissioner of
Customs or the Regional Trial Court, provincial, city or
municipal treasurer or the Secretary of Finance, the Secretary of
Trade and Industry and Secretary of Agriculture, as the case
may be shall suspend the payment, levy, distraint, and/or sale
of any property of the taxpayer for the satisfaction of his tax
liability as provided by existing law: Provided, however, That
when in the opinion of the Court the collection by the
aforementioned government agencies may jeopardize the
interest of the Government and/or the taxpayer the Court any
stage of the proceeding may suspend the said collection and
require the taxpayer either to deposit the amount claimed or to
file a surety bond for not more than double the amount with
the Court.
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In criminal and collection cases covered respectively by Section
7(b) and (c) of this Act, the Government may directly file the
said cases with the CTA covering amounts within its exclusive
and original jurisdiction.
Exclusive appellate jurisdiction over civil tax cases
1. Cases within the jurisdiction of the CTA en banc
a. Decisions, resolutions or orders of the
RTC in the exercise of its appellate
jurisdiction over
i. Local tax cases
ii. Tax collection cases
b. Decisions of the CBAA in the exercise of
its appellate jurisdiction over cases
involving assessment and taxation of real
property originally decided by the
provincial/city board of assessment
appeals
Exclusive original jurisdiction over criminal cases
2. Cases within the jurisdiction of CTA divisions, in
general
a. Decisions of the CIR
i. In cases involving disputed
assessments, refunds of internal
revenue taxes, fees or other
charges imposed in relation
thereto; or
ii. Other matters arising under the
NIR or other laws administered
by the BIR
b. Inaction by the CIR – involving the same
matters as above
c. Decisions, orders, resolutions of the RTC
in local taxes originally decided or
resolved by them in the exercise of their
original jurisdiction
d. 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
BOC
e. 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 Sec.
2315, TCC
f. Decisions of the DTI Secretary in case of
non-agricultural products, commodity or
article; and the Secretary of Agriculture in
the case of agricultural products,
97
A.Y. 2016-2017, 1ST SEM | DES SOKOKEN
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.
• Time of appeal: Within 30 days from receipt of
adverse decision by the Commissioner or within
30 days from lapse of period to act.
• An appeal cognizable by a division must be
decided thereat. Adverse decision will be subject of
MR or MNT before the same division within 15
days from notice of the adverse decision. Any
party adversely affected by a resolution of a
division on an MR or MNT may file a petition of
review with the CTA en banc. (Sec. 11 and 18,
CTA Act)
• Exclusive original jurisdiction over all criminal
cases where the principal amount involved of taxes
and fees, exclusive of charges and penalties
claimed, is NOT less than P1M arising from
violation of:
1. NIRC
2. TCC
3. Other laws administered by the BOC or BIR.
• Note: Regular courts shall have original jurisdiction
in offenses or penalties where:
1. The principal amount of taxes and fees
exclusive of charges and penalties claimed is
less than P1M, or
2. No specified amount is claimed (as to which
court shall exercise jurisdiction follow rules on
jurisdiction of criminal cases).
• All criminal actions before the court in division in
the exercise of its original jurisdiction shall be
instituted by the filing of an Information in the
name of the People of the Philippines.
• In criminal actions involving violations of the
NIRC and other laws enforced by the BIR, the
CIR must approve their filing.
• In criminal actions involving violations of the TCC
and other laws enforced by the BOC, the COC
must approve their filing.
• The institution of the criminal action shall
interrupt the running of the period of prescription.
• In cases within the jurisdiction of the court, the
criminal action and the corresponding civil action
for the recovery of civil liability for taxes and
penalties shall be deemed jointly instituted in the
same proceeding.
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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN

• The filing of the criminal action shall necessarily Collection of local taxes
carry with it the filing of the civil action. No right • Same rule as in internal revenue taxes
to reserve the filing of such civil action separately
from the criminal action shall be allowed or Prescriptive period to file action
recognized. • Within five years from the date taxes, fees or
charges become due.
Exclusive appellate jurisdiction in criminal cases
PROCEDURES FOR AN APPEAL
1. Appeals from the judgments, resolutions or orders Cf. Sec. 11, supra
of the RTC in tax cases originally decided by them
in their respective territorial jurisdiction; Who may file an appeal in civil cases
2. Petitions for review of the judgments, resolutions
or orders of the RTC in the exercise of their 1. Any party adversely affected by a decision or ruling
appellate jurisdiction over tax cases originally or inaction of:
decided by the MTCs or MCTCs. a. The CIR
b. The Commissioner of Customs (COC)
Exclusive original jurisdiction over tax collection cases c. Sec of Finance (SOF)
d. Sec of Trade and Industry (STI)
• Exclusive original jurisdiction in tax collection e. Sec of Agri (SA)
cases involving final and executory assessments for f. CBAA
taxes, fees, charges and penalties where the principal g. RTCs
amount involved of taxes and fees, exclusive of 2. Stockholders of a dissolved corporation
charges and penalties claimed, is NOT less than 3. Government
P1M
• If less than P1M, jurisdiction will be with the Modes of Appeal
proper MTC, MeTC or RTC.
1. By filing an petition for review under Rule 42 with
Exclusive appellate jurisdiction in tax collection cases respect to a decision, ruling or inaction of the:
a. CIR
1. Over appeals from the judgments, resolutions or b. COC
orders of the RTC in tax collection cases originally c. SOF
decided by them, in their respective territorial d. STI
jurisdiction; e. SA
2. Over petitions for review of the judgments, f. RTCs.
resolutions or orders of the RTC in the Exercise of
their appellate jurisdiction over tax collection cases o The appeal shall be heard by a division of
originally decided by the MeTC, MTC or MCTC, in the CTA.
their respective jurisdiction.
2. By filing a petition for review as provided under
JUDICIAL PROCEDURE FOR COLLECTION OF Rule 43 with respect to a decision, ruling or
CASES inaction of the court in division on an MR or
motion for new trial.
Collection of internal revenue taxes
1. Civil action o The court en banc shall act on the appeal.
a. By filing a civil case for collection of sum
of money with the proper regular court; 3. By filing a petition for review under Rule 43 with
and respect to a decision or ruling of:
b. By filing an answer to the petition for a. The CBAA; and
review filed by the taxpayer to the CTA. b. The RTC in the exercise of its appellate
jurisdiction.
2. Criminal action, on any of the following grounds
a. Attempt to evade or defeat tax o The appeal shall be heard by the CTA en
b. Failure to file return, supply correct and banc.
accurate information, pay tax, withhold
and remit tax, refund excess taxes Suspension of collection of tax
withheld on compensation
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A.Y. 2016-2017, 1ST SEM | DES SOKOKEN

• General rule: Tax collection not suspended
pending appeal.
• Exception: The CTA is empowered to suspend
the collection of internal revenue taxes and
customs duties or grant injunctions.
• Requisites:
a. That the collection of tax may
jeopardize the interest of the
government and/or the taxpayer
b. That the taxpayer is willing to
deposit the amount equal to the
taxes assessed or willing to file a
bond amounting to not more than
twice the value of the tax being
assessed
c. That that CTA may issue an
injunction order only in the exercise
of its appellate jurisdiction
d. That the appeal is not frivolous or
dilatory.
Injunction by the CTA
• The no-injunction-rule does not apply to the CTA.
Sec. 11 of RA 1125 gives the CTA authority to
order the suspension of tax collection when in its
view, such collection would work to the serious
prejudice of the government or the taxpayer.
• The ancillary remedy is available only when there is
a pending appeal over which the CTA has
jurisdiction.
Appeal to the CTA en banc
• Any party adversely affected by a resolution of a
division of the CTA on an MR or MNT may file a
petition for review with the CTA en banc.
Petition for review on certiorari to the Supreme Court
• Any party adversely affected by a decision or ruling
of the CTA en banc may file with the SC a verified
petition on certiorari pursuant to Rule 45, ROC.
• If such party has filed an MR or MNT, the period
to appeal shall run from the party’s receipt of a
copy of the resolution dening the MR or MNT.
Appeal and period to appeal
1. Notice of appeal within 15 days – appeal from
criminal cases decided by the RTC in the exercise
of its original jurisdiction. The CTA in division
shall act on the appeal.
2. Petition for review under Rule 43, ROC within 15
days
a. Appeal from criminal cases decided by
the CTA in division
b. Appeal from criminal cases decided by
the RTC in the exercise of its appellate
jurisdiction.
The CTA en banc shall act on the appeal.
Solicitor General as counsel for the People and government officials

Taking of evidence • The Solicitor General shall represent the People of

the Philippines and Government officials sued in
• The court may receive evidence in the following their official capacity in all cases brought to the
cases: court in the exercise of its appellate jurisdiction.
1. In all cases falling within the original
jurisdiction of the court in division pursuant
to Sec. 3, Rule 4 of these Rules; and
2. In appeals in both civil and criminal cases
where the court grants a new trial pursuant to
Sec. 2, Rule 53 and Sec. 12, Rule 124 of the
ROC.

Motion for new trial

• Any aggrieved party may seek a reconsideration or

new trial of any decision, resolution or order of the
court. He shall file an MR or MNT within 15 days
from the date he received notice of the decision,
resolution or order of the court in question.
(RCTA, Rule 13, Sec. 1A) The filing of an MR or
MNT shall suspend the running of the period
within which an appeal may be perfected. (RCTA,
Rule 13, Sec. 4A)