UP LAW BOC TAXATION 1 TAXATION LAW

TAXATION LAW
TAXATION LAW 1
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I. General Principles of
Taxation
DEFINITION AND CONCEPT
TAXATION
Taxation
is a mode by which governments make
exactions for revenue in order to support their
existence and carry out their legitimate
objectives.
Taxes
are 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 all public
needs.
The power of taxation proceeds upon the
theory that the existence of government is a
necessity; that it cannot continue without
means to pay its expenses; and that for those
means it has the right to compel all citizens
and property within its limits to contribute.
NATURE OF THE POWER OF TAXATION
(1) Inherent in sovereignty
(2) Essentially a legislative function
(3) Subject to constitutional and inherent
limitations
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SCOPE OF TAXATION
Subject to constitutional and inherent
restrictions, the power of taxation is regarded
as supreme, unlimited and comprehensive.
OF The principal check on its abuse rests only on
the responsibility of the members of the
legislature to their constituents.
EXTENT OF THE LEGISLATIVE POWER TO
TAX
Subject to constitutional and inherent
restrictions, the legislature has discretion to
determine the incidence of the power to tax.
ESSENTIAL CHARACTERISTICS OF
TAX
(1) an enforced contribution
(2) generally payable in the form of money
(3) proportionate in character or is laid by
some rule of apportionment which is
usually based on ability to pay;
(4) levied on persons, property, rights, acts,
privileges, or transactions.
(5) levied by the State which has jurisdiction or
control over the subject to be taxed.
(6) levied by the law-making body of the
State; and;
(7) levied for public purpose.
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POWER OF TAXATION COMPARED WITH OTHER POWERS

Taxation Police Power Eminent Domain

1. As to concept Power to enforce Power to make and Power to take private
contribution to raise implement laws for the property for public use
government funds general welfare with just compensation
2. As to scope Plenary, comprehensive Broader in application. Merely a power to take
and supreme General power to make private property for
and implement laws. public use
3. As to authority Exercised only by Exercised only by May be granted to public
government or its government or its service or public utility
political subdivisions political subdivisions companies
4. As to purpose Money is taken to Property is taken or Private property is taken
support the government destroyed to promote for public use
general welfare
5. As to necessity The power to make tax Can be expressly Can be expressly
of delegation
laws cannot be delegated to the local delegated to the local
delegated government units by the government units by the
law making body law making body
6. As to person
Operates on a Operates on a Operates on the
affected
community or a class of community or a class of particular private
individual individual property of an individual
7. As to benefits Continuous protection Healthy economic Market value of the
and organized society standard of society property expropriated
8. As to amount of Generally no limit Cost of regulation, No imposition
imposition
license and other
necessary expenses
9. As to Inseparable for the Protection, safety and Common necessities and
importance
existence of a nation – it welfare of society interest of the
supports police power community transcend
and eminent domain individual rights in
property
10. As to Subject to Constitutional Relatively free from Superior to and may
relationship to
Constitution
and Inherent limitations. Constitutional override Constitutional
Inferior to non- limitations. impairment provision
impairment clause. Superior to non- because the welfare of
impairment clause. the State is superior to
any private contract
11. As to limitation Constraints by Limited by the demand Bounded by public
Constitutional and for public interest and purpose and just
Inherent limitations due process compensation
[Valencia and Roxas, Income Taxation 6th Edition (2013-2014), Valencia Educational Supply, pp. 9-10]
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PURPOSE OF TAXATION
1. Revenue-raising
Primary purpose of taxation is to provide funds
or property with which to promote the general
welfare and protection it its citizens.
2. Non-revenue/Special or Regulatory
Taxation is often employed as a device for
regulation by means of which certain effects or
conditions envisioned by governments may be
achieved. These regulatory purposes are also
known as Sumptuary.
PRINCIPLES OF SOUND TAX SYSTEM
(1) fiscal adequacy
(2) administrative feasibility
(3) theoretical justice or equality
Note: The non-observance of the above
principles will not necessarily render the tax
imposed invalid except to the extent those
specific constitutional limitations are violated.
(De Leon)
THEORY AND BASIS OF TAXATION
Lifeblood Theory
Taxes are the lifeblood of the government and
their prompt and certain availability is an
imperious need. [CIR v. Pineda]
Necessity Theory
The power of taxation proceeds upon theory
that the existence of government is a necessity;
that is cannot continue without means to pay
its expenses; and that for those means it has
the right to compel all citizens and property
within its limits to contribute.
Benefits-Protection Theory (Symbiotic
Relationship)
This principle serves as the basis of taxation
and is founded on the reciprocal duties of
protection and support between the State and
its inhabitants.
TAXATION LAW
Jurisdiction Over Subject and Objects
The limited powers of sovereignty are confined
to objects within the respective spheres of
governmental control. These objects are the
proper subjects or objects of taxation and none
else.
DOCTRINES IN TAXATION
Prospectivity of Tax Laws
General rule - Tax laws are prospective in
operation. Reason: Nature and amount of the
tax could not be foreseen and understood by
the taxpayer at the time the transaction.
Exception - Tax laws may be applied
retroactively provided it is expressly declared
or clearly the legislative intent.(e.g increase
taxes on income already earned)
when retroactive application would be so
harsh and oppressive [Republic v. Fernandez,
G.R. No. L-9141. September 25, 1956].
Exception to the exception - Collection of
interest in tax cases is not penal in nature; it is
but a just compensation to the State. The
constitutional prohibition against ex post facto
laws is not applicable to the collection of
interest on back taxes. [Central Azucarera
v.CTA]
Non-retroactivity of Rulings (sec. 246)
General rule - Any revocation, modification or
reversal of rules and regulations promulgated
in accordance with Sections 244 and 245 of
the Tax Code and rulings or circulars
promulgated by the CIR, that is prejudicial to
the taxpayer, shall NOT be given retroactive
effect.
Exceptions:
(1) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by BIR;
(2) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; OR
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(3) Where the taxpayer acted in bad faith. (Sec.
246, NIRC)
Imprescriptibility
Unless otherwise provided by the tax itself,
taxes are imprescriptible. [CIR v. Ayala
Securities Corporation]
Double Taxation
Means taxing twice the same taxpayer for the
same tax period upon the same thing or
activity, when it should be taxed but once, for
the same purpose and with the same kind of
character of tax.
Constitutionality of Double Taxation
There is no constitutional prohibition against
double taxation in the Philippines. It is
something not favored, but is permissible,
provided some other constitutional
requirement is not thereby violated. [Villanueva
v. City of Iloilo, G.R. No. L-26521, December 28,
1968]
Double taxation in its narrow sense is
undoubtedly unconstitutional but that in the
broader sense is not necessarily so. [De Leon,
citing 26 R.C.L 264-265].Where double
taxation (in its narrow sense) occurs, the
taxpayer may seek relief under the uniformity
rule or the equal protection guarantee. [De
Leon, citing 84 C.J.S.138].
ESCAPE FROM TAXATION
Shifting of tax burden
Shifting - the transfer of the burden of a tax by
the original payer or the one on whom the tax
was assessed or imposed to someone else.
What is transferred is not the payment of the
tax but the burden of the tax.
All indirect taxes may be shifted; direct taxes
cannot be shifted.
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is
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TAXATION LAW
concerned, the taxpayer, the subject of tax, is
the person who must pay the tax to the
government.
Incidence of taxation is that point on which the
tax burden finally rests or settles down. It takes
place when shifting has been effected from the
statutory taxpayer to another.
Tax Avoidance (Tax Minimization)
The exploitation by the taxpayer of legally
permissible alternative tax rates or methods of
assessing taxable property or income in order
to avoid or reduce tax liability. It is politely
called “tax minimization” and is not
punishable by law.
Transformation
Transformation – method of escape in taxation
whereby the manufacturer or producer upon
whom the tax has been imposed pays the tax
and endeavors to recoup himself by improving
his process of production thereby turning out
his units of products at a lower cost. The
taxpayer escapes by a transformation of the
tax into a gain through the medium of
production.
Tax Evasion (Tax Dodging)
Tax Evasion - is the use by the taxpayer of
illegal or fraudulent means to defeat or lessen
the payment of a tax. It is also known as “tax
dodging.” It is punishable by law.
Elements of Tax Evasion
(1) The end to be achieved.
(2) An accompanying state of mind described
as being “evil,” “in bad faith,” “willful” or
“deliberate and not accidental.”
(3) A course of action (or failure of action)
which is unlawful.
EXEMPTION FROM TAXATION
Nature of tax exemption
(1) Mere personal privilege- cannot be
assigned or transferred without the
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consent of the Legislature. The legislative
consent to the transfer may be given either
in the original act granting the exemption
or in a subsequent law
(2) General rule: revocable by the government.
Exception: if founded on a contract which is
protected from impairment. But the
contract must contain the essential
elements of other contracts. An exemption
provided for in a franchise, however, may
be repealed or amended pursuant to the
Constitution (see Sec. 11, Art. XII). A
legislative franchise is in the nature of a
contract.
(3) Implies a waiver on the part of the
government of its right to collect taxes due
to it, and, in this sense, is prejudicial
thereto. Hence, it exists only by virtue of an
express grant and must be strictly
construed.
(4) Not necessarily discriminatory, provided it
has reasonable foundation or rational
basis. Where, however, no valid distinction
exists, the exemption may be challenged
as violative of the equal protection
REVOCATION OF TAX EXEMPTION
General Rule - revocable by the government.
Exception - Contractual tax exemptions may
not be unilaterally so revoked by the taxing
authority without thereby violating the non-
impairment clause of the Constitution.
COMPENSATION AND SET-OFF
General Rule - Internal revenue taxes cannot
be the subject of set-off or compensation
[Republic v. Mambulao Lumber, G.R. No. L-
17725, February 28, 1962].
Exception - If the claims against the
government have been recognized and an
amount has already been appropriated for that
purpose. Where both claims have already
become due and demandable as well as fully
liquidated, compensation takes place by
operation of law under Art. 1200 in relation to
TAXATION 1 TAXATION LAW
Articles 1279 and 1290 of the NCC, and both
debts are extinguished to the concurrent
amount.[Domingo v. Garlitos, G.R. No. L-18994,
June 29, 1963]
COMPROMISE
(a) A contract whereby the parties, by making
reciprocal concessions avoid litigation or
put an end to one already commenced.
(Art. 2028, Civil Code). It involves a
reduction of the taxpayer’s liability.
(b) Requisites of a tax compromise:
(1) The taxpayer must have a tax liability.
(2) There must be an offer (by the taxpayer
or Commissioner) of an amount to be
paid by the taxpayer.
(3) There must be acceptance (by the
Commissioner or the taxpayer, as the
case may be) of the offer in settlement
of the original claim.
TAX AMNESTY
A tax amnesty partakes of an absolute
forgiveness or waiver by the Government of its
right to collect what otherwise would be due it,
and in this sense, prejudicial thereto,
particularly to give tax evaders, who wish to
relent and are willing to reform a chance to do
so and become a part of the new society with a
clean slate.[Republic v. IAC (1991)]
Tax Amnesty is immunity from all criminal and
civil obligations arising from non-payment of
taxes. It is a general pardon given to all
taxpayers. It applies to past tax periods, hence
of retroactive application. [People v. Castañeda,
G.R. No. L-46881, September 15, 1988].
Tax Exemption is an immunity from all civil
liability only. It is an immunity or privilege, a
freedom from a charge or burden of which
others are subjected. [Greenfield v. Meer, 77 Phil.
394 (1946)]. It is generally prospective in
application. [Dimaampao, 2005, p. 111]
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CONSTRUCTION AND INTERPRETATION
OF:
Tax Laws
General Rule - Tax laws are construed strictly
against the government and liberally in favor
of the taxpayer. [Manila Railroad Co. v. Coll. of
Customs, 52 Phil. 950 (1929)].
Exceptions
(1) The rule of strict construction as against
the government is not applicable where
the language of the statute is plain and
there is no doubt as to the legislative intent.
(see 51 Am.Jur.368). In such case, the
words employed are to be given their
ordinary meaning. Ex. Word “individual”
was changed by the law to “person”. This
clearly indicates that the tax applies to
both natural and juridical persons, unless
otherwise expressly provided.
(2) The rule does not apply where the taxpayer
claims exemption from the tax.
Tax Exemption and Exclusion
General Rule - In the construction of tax
statutes, exemptions are not favored and are
construed strictissimi juris against the taxpayer.
[Republic Flour Mills v. Comm. & CTA, 31 SCRA
520 (1970)].
Exceptions:
(a) When the law itself expressly provides for a
liberal construction, that is, in case of
doubt, it shall be resolved in favor of
exemption; and
(b) When the exemption is in favor of the
government itself or its agencies, or of
religious, charitable, and educational
institutions because the general rule is that
they are exempt from tax.
(c) When the exemption is granted under
special circumstances to special classes of
persons.
(d) If there is an express mention or if the
taxpayer falls within the purview of the
exemption by clear legislative intent, the
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TAXATION LAW
rule on strict construction does not apply.
[Comm. V. Arnoldus Carpentry Shop, Inc.,
159 SCRA 19 (1988)].
Tax Rules and Regulations
The Secretary of Finance, upon
recommendation of the CIR, shall promulgate
all needful rules and regulations for the
effective enforcement of the provisions of the
NIRC. (Sec. 244)
The power to interpret the provisions of the Tax
Code and other tax laws is under the exclusive
and original jurisdiction of the Commissioner
of Internal Revenue subject to review by the
Secretary of Finance (Sec. 4, par.1, NIRC).
Decisions of the Supreme Court and Court of
Tax Appeals
Decisions of the Supreme Court applying or
interpreting existing tax laws are binding on all
subordinate courts and have the force and
effect of law. As provided for in Article 8 of the
Civil Code, they “form part of the law of the
land”. They constitute evidence of what the
law means. (People v. Licera, 65 SCRA 270
[1975]).
Penal Provisions Of Tax Laws
Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the
language of a rule, however beneficent its
intention, beyond the fair and ordinary
meaning of its language.
Non-Retroactive Application Of Tax Laws To
Taxpayers
General rule - Tax laws are prospective in
operation. The reason is that the nature and
amount of the tax could not be foreseen and
understood by the taxpayer at the time the
transaction which the law seeks to tax was
completed.
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Exception - Tax laws may be applied
retroactively provided it is expressly declared
or clearly the legislative intent. (Lorenzo v.
Posadas, 64 Phil. 353 [1937]).
Exception to the Exception - a tax law should
not be given retroactive application when it
would be so harsh and oppressive for in such
case, the constitutional limitation of due
process would be violated (Republic v.
Fernandez,[1956]).
SCOPE AND LIMITATION OF
TAXATION
Inherent Limitations
1. Public Purpose
The proceeds of the tax must be used (a) for
the support of the State or (b) for some
recognized objects of government or directly to
promote the welfare of the community.
2. Inherently Legislative
Stated in another way, taxation may
exceptionally be delegated, subject to such
well-settled limitations as –
(1) The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
(2) The delegation is effected either by the
Constitution or by validly enacted
legislative measures or statute; and
(3) The delegated levy power, except when
the delegation is by an express provision
of the Constitution itself, should only be in
favor of the local legislative body of the
local or municipal government concerned.
[Vitug and Acosta]
General Rule - Delegata potestas non potest
delegari. The power to tax is exclusively vested
in the legislative body and it may not be re-
delegated.
Exceptions
(1) Delegation to local governments - Under
the new Constitution, however, LGUs are
TAXATION 1 TAXATION LAW
now expressly given the power to create its
own sources of revenue and to levy taxes,
fees and charges, subject to such
guidelines and limitations as the Congress
may provide which must be consistent with
the basic policy of local autonomy. [Art X,
Sec 5, 1987 Constitution]
(2) Delegation to the President
(a) to enter into Executive agreements,
and
(b) to ratify treaties which grant tax
exemption subject to Senate
concurrence.
(c) The Congress may, by law, authorize
the President to fix within specified
limits, and subject to such limitations
and restrictions as it may impose, tariff
rates, import and export quotas,
tonnage and wharfage dues, and other
duties or imposts within the framework
of the national development program
of the Government. [Art. 6, Sec. 28 (2),
1987 Consti]
(3) Delegation to administrative agencies -
Limited to the administrative
implementation that calls for some degree
of discretionary powers under sufficient
standards expressed by law or implied
from the policy and purposes of the Act.
3. Territorial
Rule - A state may not tax property lying
outside its borders or lay an excise or privilege
tax upon the exercise or enjoyment of a right or
privilege derived from the laws of another state
and therein exercise and enjoyed. (51 Am.Jur.
87-88).
4. International Comity
Comity - respect accorded by nations to each
other because they are sovereign equals. Thus,
the property or income of a foreign state or
government may not be the subject of taxation
by another state.
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Intangible Gen Rule: Domicile of the

Exemption of Government Entities, Agencies, personal owner. Mobilia sequuntur
and Instrumentalities property personam (movables follow
(a) If the taxing authority is the National (e.g., credits, the person)
Government: bills
General Rule - Agencies and receivables, Exceptions:
instrumentalities of the government bank (1) When property has
are exempt from tax. deposits, acquired a business situs
Exception - When it chooses to tax bonds, in another jurisdiction; or
itself. Nothing can prevent Congress promissory (2) When the law provides for
from decreeing that even notes, the situs of the subject of
instrumentalities or agencies of the mortgage tax (e.g., Sec 104, NIRC)
government performing governmental loans,
functions may be subject to tax. judgments
(Mactan Cebu Airport v Marcos, 1996) and
corporate
(b) If the taxing authority is the local stocks)
government unit: Excise Tax
RA 7160 expressly prohibits LGUs from Income Source of the income,
levying tax on the National nationality or residence of
Government, its agencies and taxpayer (Sec. 23, NIRC)
instrumentalities and other LGUs. Donor’s Tax Location of property;
nationality or residence of
(c) Situs of Taxation taxpayer
Within the territorial jurisdiction, the Estate Location of property;
taxing authority may determine the nationality or residence of
situs. Situs of taxation literally means taxpayer
the place of taxation. The basic rule is
VAT Where transaction is made
that the state where the subject to be Others
taxed has a situs may rightfully levy Poll, Residence of taxpayer,
and collect the tax; and the situs is Capitation or regardless of the source of
necessarily in the state which has Community income or location of the
jurisdiction or which exercises Tax property of the taxpayer
dominion over the subject in question.

Kind of Tax Situs

Property Tax
Real property Where it is located
(lexreisitae)
Tangible Where property is physically
Personal located although the owner
property resides in another jurisdiction.

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CONSTITUTIONAL LIMITATIONS for interns, resident doctors

(1) Prohibition against imprisonment for non- and other members of the
payment of poll tax (Art III, Sec 20, 1987 hospital staff, and
Constitution) recreational facilities for
student nurses, interns and
(2) Uniformity and equality of taxation (Art VI, residents, such as athletic
Sec 28(1), 1987 Constitution) fields. [Abra Valley College
v. Aquino]
(3) Taxation does not require identity or
equality under all circumstances, or negate Prohibition against taxation of non-stock, non-
the authority to classify the objects of profit educational institutions (ART XIV, SEC 4,
taxation 1987 CONSTITUTION)
This provision covers only non-stock, non-profit
(4) Grant by Congress of authority to the educational institutions
President to impose tariff rates Delegation
of Tariff powers to the President under the Lands, buildings, and improvements actually,
flexible tariff clause [Art VI, Sec 28(2), 1987 directly and exclusively used for educational
Constitution], which authorizes the purposes are exempt from property tax (Sec.
President to modify import duties. (Sec. 401, 28[3], Art. VI, 1987 Constitution), whether the
Tariff and Customs Code) educational institution is proprietary or non-
profit.
(5) Prohibition against taxation of religious,
Art. VI, sec. 28, par. 3 Art. XIV, sec. 4, par. 3
charitable entities, and educational entities
Charitable institutions, Non-stock, non-
(Art VI, Sec 28(3), 1987 Constitution) The tax
churches and profit educational
exemption under this constitutional
parsonages or institutions.
provision covers property taxes only and
convents appurtenant
not other taxes (Lladoc v. Commissioner, 14
thereto, mosques, non-
SCRA 292 [1965]).
profit cemeteries, and
all lands, buildings,
Test of Use of the property, and not
and improvements,
Exemption the ownership
actually, directly, and
Actual, direct and exclusive
exclusively used for
Nature of Use use for religious, charitable or
religious, charitable, or
educational purposes.
educational purposes.
Real property taxes on
Property taxes Income, property,
facilities which are
and donor’s taxes
(1) actual,
and custom duties.
(2) incidental to, or
(3) reasonably necessary for
Scope of (6) Majority vote of Congress for grant of tax
the accomplishment of
Exemption exemption (Art VI, Sec 28, 1987 Constitution)
said purposes such as in
the case of hospitals, a
Exemptions may be created by:
school for training nurses,
(1) the Constitution or
a nurses’ home, property to
(2) statute subject to constitutional limitations
provide housing facilities

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Note:
(1) The LGU shall have the authority to grant
local tax exemption privileges. (Sec. 192,
LGC)
(2) The President may, when public interest so
requires, condone or reduce real property
taxes and interest. (Sec. 277, LGC)
(7) Prohibition on use of tax levied for special
purpose
All money collected on any tax levied for a
special purpose shall be treated as a special
fund and paid out for such purpose only.
(8) President’s veto power on appropriation,
revenue, tariff bills (Art VI, Sec 27(2), 1987
Constitution)
(9) Non-impairment of jurisdiction of the
Supreme Court (Art VIII, Sec 2; Art VIII, Sec
5(2,B); Art VI, Sec 30, 1987 Constitution)
(10) Grant of power to the local government
units to create its own sources of revenue [Art X,
Sec 5, 1987 Constitution]
(11) Flexible tariff clause
Delegation of Tariff powers to the President
under the flexible tariff clause [Art VI, Sec
28(2), 1987 Constitution]
Flexible tariff clause: the authority given to the
President, upon the recommendation of NEDA,
to adjust the tariff rates under Sec. 401 of the
Code in the interest of national economy,
general welfare and/or national security.
(12) Exemption from real property taxes (Art VI,
Sec 28(3), 1987 Constitution)
(13) No appropriation or use of public money for
religious purposes (Art VI, Sec 29, 1987
Constitution)
PROVISIONS INDIRECTLY AFFECTING TAXATION
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(1) Due process (Art III, Sec 1, 1987 Constitution)
(2) Equal protection (Art III, Sec 1, 1987
Constitution)
(3) Religious freedom (Art III, Sec 5, 1987
Constitution )
The Constitution, however, does not prohibit
imposing a generally applicable tax on the sale
of religious materials by a religious
organization. (Tolentino v. Secretary of Finance,
235 SCRA 630 [1994])
(4)Non-impairment of obligations of contracts
(ART III, SEC 10, 1987 CONSTITUTION)
The Contract Clause has never been thought as
a limitation on the exercise of the State's
power of taxation save only where a tax
exemption has been granted for a valid
consideration. [Tolentino v. Secretary of
Finance]
STAGES OR PROCESS OF TAXATION
The exercise of taxation involves three stages,
namely:
(1) Levy Or Imposition – This process involves
the passage of tax laws or ordinances
through the legislature.
(2) Assessment And Collection – This process
involves the act of administration and
implementation of tax laws by the executive
through its administrative agencies such as
the Bureau of Internal Revenue or Bureau of
Customs.
(3) Payment – this process involves the act of
compliance by the taxpayer in contributing
his share to pay the expenses of the
government.
(4) Refund – A claim for refund must first be
filed with the Commissioner of Internal
Revenue.
REQUISITES OF A VALID TAX LAW
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(1) for a public purpose Taxes License and

(2) rule of taxation should be uniform Regulatory Fee
(3) the person or property taxed is within the Imposed under the Levied under the
jurisdiction of the taxing authority taxing power of the police power of the
(4) assessment and collection is in consonance state for purposes of state.
with the due process clause revenue.
(5) The tax must not infringe on the inherent Forced contributions Exacted primarily to
and constitutional limitations of the power for the purpose of regulate certain
of taxation maintaining businesses or
government occupations.
TAX AS DISTINGUISHED FROM functions.
OTHER FORMS OF EXACTIONS Generally, unlimited Should not
Tariff as to amount unreasonably exceed
the expenses of
Taxes Tariff issuing the license
and of supervision.
All embracing term to A kind of tax imposed Imposed on persons, Imposed only on the
include various kinds on articles which are property and to right to exercise a
of enforced traded internationally exercise a privilege. privilege
contributions upon Failure to pay does Failure to pay makes
persons for the not necessarily make the act or business
attainment of public the act or business illegal.
purposes illegal.

Toll Penalty for non-

payment: surcharges
Taxes Toll or imprisonment
(except poll tax).
Paid for the support Paid for the use of
Special Assessment
of the government another’s property.
Demand of Demand of
Taxes Special Assessment
sovereignty proprietorship
Generally, no limit on Amount paid
Levied not only on Levied only on land.
the amount collected depends upon the
land.
as long as it is not cost of construction
Imposed regardless Imposed because of
excessive, or maintenance of the
of public an increase in value
unreasonable or public improvement
improvements of land benefited by
confiscatory used.
public improvement.
Imposed only by the Imposed by the
Contribution of a Contribution of a
government government or by
taxpayer for the person for the
private individuals or
support of the construction of a
entities.
government. public improvement
License Fee It has general Exceptional both as
application both as to to time and locality.

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acts deemed injurious

Taxes Special Assessment Generally intended to Designed to regulate
raise revenue conduct
time and place. May be imposed only May be imposed by
by the government the government or
private individuals or
Debt entities
Cannot be a subject Can be a subject of
Taxes Debt of set off or set off or
compensation compensation (see
Based on laws Generally based on Art. 1279, Civil Code)
contract, express or
implied. KINDS OF TAXES
Generally cannot be Assignable As To Object
assigned
(1) Personal, Poll or Capitation Tax – tax of a
Generally paid in May be paid in kind. fixed amount imposed on persons residing
money within a specified territory, whether citizens
Cannot be a subject Can be a subject of or not, without regard to their property or
of set off or set off or the occupation or business in which they
compensation compensation (see may be engaged (e.g. community (formerly
Art. 1279, Civil Code) residence) tax).
A person cannot be Imprisonment is a (2) Property Tax – tax imposed on property, real
imprisoned for non- sanction for non- or personal, in proportion to its value or in
payment of debt payment of tax, accordance with some other reasonable
(except when it arises except poll tax. method of apportionment (e.g., real estate
from a crime), tax).
Governed by the Governed by the (3) Privilege/Excise Tax – any tax which does
special prescriptive ordinary periods of not fall within the classification of a poll tax
periods provided for prescription. or a property tax. Thus, it is said that an
in the NIRC. excise tax is a charge imposed upon the
Does not draw Draws interest when performance of an act, the enjoyment of a
interest except only it is so stipulated or privilege, or the engaging in an occupation,
when delinquent where there is profession, or business. (e.g., income tax,
default. value added tax, estate tax, donor’s tax).
Imposed only by Can be imposed by
public authority private individual As To Burden Or Incidence
(1) Direct Taxes – taxes which are demanded
from persons who also shoulder them; taxes
Penalty for which the taxpayer is directly or
primarily liable, or which he cannot shift to
Taxes Penalty another (eg. Income tax, estate tax, donor’s
tax, community tax)
Violation of tax laws Any sanction imposed (2) Indirect Taxes – taxes which are demanded
may give rise to as a punishment for from one person in the expectation and
imposition of penalty. violation of law or

15
UP LAW BOC TAXATION 1
intention that he shall indemnify himself at
the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes
levied upon transactions or activities before
the articles subject matter thereof, reach
the consumers who ultimately pay for them
not as taxes but as part of the purchase
price. (e.g., VAT, percentage tax; excise
taxes on specified goods; customs duties).
As To Tax Rates
(1) Specific Tax – a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement
(e.g., taxes on distilled spirits, wines, and
fermented liquors; cigars and cigarettes)
(2) Ad Valorem Tax – a tax of a fixed proportion
of the value of the property with respect to
which the tax is assessed (e.g. real estate
tax, excise tax on automobiles, non-
essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
(3) Mixed
As To Purposes
(1) General or Fiscal Tax –levied for the general
or ordinary purposes of the Government
(e.g. income tax, value added tax, and
almost all taxes).
(2) Special/Regulatory/ Sumptuary Tax –levied
for special purposes (e.g. protective tariffs
or customs duties on imported goods to
enable similar products manufactured
locally to compete with such imports in the
domestic market).
16
TAXATION LAW
As To Scope (Or Authority Imposing The
Tax)
(1) National – taxes imposed by the national
government (e.g. national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
(2) Municipal or Local – taxes imposed by local
governments (e.g. business taxes that may
be imposed under the Local Government
Code; professional tax).
As To Graduation
(1) Proportionate – The rate of tax is based on a
fixed percentage of the amount of the
property, receipts or other basis to be taxed.
Example: real estate tax, value added tax,
and other percentage taxes.
(2) Progressive – The rate of tax increases as
the tax base or bracket increases.
Example: income tax, estate tax, donor’s tax.
(3) Digressive – A fixed rate is imposed on a
certain amount and diminishes gradually on
sums below it. The tax rate in this case is
arbitrary because the increase in tax rate is
not proportionate to the increase of tax
base.
(4) Regressive – The rate of tax decreases as the
tax base or bracket increases. There is no
regressive tax in the Philippines.
Regressive/Progressive System Of Taxation
(1) A regressive tax, must not be confused
with regressive system of taxation.
(2) A progressive tax is also different from
a progressive system of taxation.
UP LAW BOC TAXATION 1 TAXATION LAW

II. National Internal subjected to one set of graduated tax rates or

normal corporate income tax. With respect to
Revenue Code of 1997 as such income the computation is global.
For those other income not mentioned above,
amended (NIRC) they remain subject to different sets of tax
rates and covered by different returns.
Income Tax is defined as a tax on all yearly
Note: The Philippines, under EO 37 (1986) and
profits arising from property, professions,
RA 8424 (1998), follows a semi-schedular and
trades, or offices, or as a tax on the person’s
semi-global tax system.
income, emoluments, profits and the like
(Fisher v. Trinidad, 43 Phil. 981).
FEATURES OF THE PHILIPPINE
INCOME TAX SYSTEMS INCOME TAX LAW
1. DIRECT TAX The tax burden is borne by
the income recipient upon whom the
Global Tax System
tax is imposed.
Under a global tax system, it did not matter
2. PROGRESSIVE The tax rate increases as
whether the income received by the taxpayer is
the tax base increases. It is founded on
classified as compensation income, business or
the ability to pay principle and is
professional income, passive investment
consistent with Sec. 28, Art. VI, 1987
income, capital gain, or other income. All items
Constitution.
of gross income, deductions, and personal and
3. COMPREHENSIVE The Philippines has
additional exemptions, if any, are reported in
adopted the most comprehensive
one income tax return, and one set of tax rates
system of imposing income tax by
are applied on the tax base.
adopting the citizenship principle, the
residence principle, and the source
Schedular Tax System
principle.
Different types of incomes are subject to
4. SEMI-SCHEDULAR OR SEMI-GLOBAL TAX
different sets of graduated or flat income tax
SYSTEM The Philippines follows the
rates. The applicable tax rate(s) will depend on
semi-schedular or semi-global system
the classification of the taxable income and the
of income taxation
basis could be gross income or net income.
5. NATIONAL TAX It is imposed and
Separate income tax returns (or other types of
collected by the National Government
return applicable) are filed by the recipient of
throughout the country.
income for the particular types of income
6. EXCISE TAX It is imposed on the right or
received.
privilege of a person to receive or earn
income. It is not a personal tax or a
Semi-Schedular Or Semi-Global Tax property tax.
System
All compensation income, business or CRITERIA IN IMPOSING PHILIPPINE
professional income, capital gain and passive
INCOME TAX
income not subject to final tax, and other
income are added together to arrive at the Citizenship or Nationality Principle
gross income, and after deducting the sum of A citizen of the Philippines is subject to
allowable deductions, the taxable income is Philippine income tax

17
UP LAW BOC TAXATION 1
(a) on his worldwide income, if he resides in the
Philippines; or
(b) only on his income from sources within the
Philippines, if he qualifies as a nonresident
citizen.
Residence Principle
A resident alien is liable to pay Philippine
income tax on his income from sources within
the Philippines but is exempt from tax on his
income from sources outside the Philippines.
Source of Income Principle
An alien is subject to Philippine income tax
because he derives income from sources within
the Philippines. Thus, a non-resident alien or
non-resident foreign corporation is liable to
pay Philippine income tax on income from
sources within the Philippines, such as
dividend interest, rent, or royalty, despite the
fact that he has not set foot in the Philippines.
TYPES OF PHILIPPINE INCOME TAX
(1) Graduated income tax on individuals
(2) Normal corporate income tax on
corporations
(3) Minimum corporate income tax on
corporations
(4) Special income tax on certain corporations
(5) Capital gains tax on sale or exchange of
shares of stock of a domestic corp.
classified as capital assets
(6) Capital gains tax on sale or exchange of
real property classified as capital asset
(7) Final withholding tax on certain passive
investment income paid to residents
(8) Final withholding tax on income payments
made to non-residents
(9) Fringe benefits tax on fringe benefits of
supervisory or managerial employees
(10) Branch profit remittance tax
(11) Tax on improperly accumulated earnings
of corporations
18
TAXATION LAW
TAXABLE PERIOD
The accounting periods used in determining
the taxable income of taxpayers are:
(a) Calendar Year - Accounting period of 12
months ending on the last day of December
(b) Fiscal Year - Accounting period of 12 months
ending on the last day of any month other
than December (Sec. 22(Q), NIRC).
(c) Short Period- Accounting period which
starts after the first month of the tax year or
ends before the last month of the tax year
(less than 12 months).
Instances Whereby Short Accounting
Period Arises
(a) When a corporation is newly organized.
(b) When a corporation is dissolved.
(c) When a corporation changes accounting
period.
(d) When the taxpayer dies.
When Calendar Year Shall Be Used In
Computing Taxable Income:
(a) If the taxpayer's annual accounting period is
other than a fiscal year; or
(b) If the taxpayer has no annual accounting
period; or
(c) If the taxpayer does not keep books of
accounts; or
(d) If the taxpayer is an individual (Sec. 43,
NIRC).
UP LAW BOC TAXATION 1 TAXATION LAW

KINDS OF TAXPAYERS Estates and

Taxpayer- any person subject to tax imposed Trusts
by Title II of the Tax Code (Sec. 22(N), NIRC). General Business Partnership
Partnerships
Person- means an individual, a trust, estate or General Professional Partnership
corporation (Sec. 22(A), NIRC). Co-
ownerships
For income tax purposes, taxpayers are
classified generally as follows: Individual Taxpayers
(4) Individuals; Citizens
(5) Corporations; (2) Resident Citizens (RC)
(6) Partnerships; and (3) Non-resident Citizens (NRC)
(7) Estates and Trusts. (a) Citizen of the Philippines who
establishes to the satisfaction of the
Commissioner the fact of his physical
Primary presence abroad with a definite intention
Sub-Classification(s)
Classification to reside therein.
Citizens Residents citizens (b) Citizen who leaves the Philippines during
of the the taxable year to reside abroad, either
Non-resident
Philippin as an immigrant or for employment on a
citizens
es permanent basis.
Residents (c) Citizen of the Philippines who works and
Engaged derives income from abroad and whose
in Trade employment thereat requires him to be
or physically present abroad most of the
Business time during the taxable year.
in the (d) Citizen previously considered as non-
Philippine resident citizen and who arrives in the
Non- s Philippines at any time during the
Individuals Aliens
residen Not taxable year to reside permanently in the
ts Engaged Philippines  Treated as NRC with
in Trade respect to his income derived from
or sources abroad until the date of his
Business arrival in the Philippines
in the
Philippine Aliens
s (1) Resident Alien - An alien actually present in
Special the Philippines who is not a mere transient
Classes of Minimum Wage or sojourner is a resident for income tax
Individual Earner purposes.
s
Domestic Corporations No/Indefinite Intention = RESIDENT
Resident Definite Intention = TRANSIENT:
Corporations Foreign Corporations Exception: Definite Intention but such cannot
Corporations Non-resident be promptly accomplished, then he becomes
Corporations a resident.

19
UP LAW BOC TAXATION 1
(2) Non-resident Alien - Engaged in trade or
business within the Philippines - If the
aggregate period of his stay in the
Philippines is more than 180 days during
any calendar year.
Not engaged in trade or business within the
Philippines - If the aggregate period of his
stay in the Philippines does not exceed 180
days.
Special class of individual employees
Minimum Wage Earner
(a) A worker in the private sector paid the
statutory minimum wage;
(b) An employee in the public sector with
compensation income of not more than the
statutory minimum wage in the non-
agricultural sector where he/she is assigned.
Corporations
Includes all types of corporations, partnerships
(no matter how created or organized), joint
stock companies, joint accounts, associations,
or insurance companies, whether or not
registered with the SEC.
Excludes general professional partnerships
(GPP), joint venture or consortium formed for
the purpose of undertaking construction
projects, joint venture or consortium engaging
in petroleum, coal, geothermal and other
energy operations pursuant to an operating or
consortium agreement under a service contract
with the government.
(1) Domestic corporations – A corporation
created and organized under its laws (the
law of incorporation test).
(2) Foreign corporations – A corporation which
is not domestic.
(a) Resident foreign corporations – Foreign
20
TAXATION LAW
corporation engaged in trade or business
within the Philippines.
Doing business – The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions normally
incident to, and in progressive prosecution of
commercial gain or for the purpose and
object of the business organization. (RA 7042,
Foreign Investments Act)
In order that a foreign corporation may be
regarded as doing business within a State,
there must be continuity of conduct and
intention to establish a continuous business,
such as the appointment of a local agent,
and not one of a temporary character (CIR v.
BOAC)
(b) Non-resident foreign corporations –
Foreign corporation not engaged in trade or
business within the Philippines
(3) Joint venture and consortium – Essential
factors of a joint venture or consortium:
(a) Each party must make a contribution,
not necessarily of capital but by way of
services, skill, knowledge, material or
money;
(b) Profits must be shared among the
parties;
(c) There must be a joint proprietary interest
and right of mutual control over the
subject matter of the enterprise;
(d) There is a single business transaction.
Partnership
The Tax Code mandates that every other type
of business partnership is subject to income
tax in the same manner and at the same rate
as an ordinary corporation.
General Professional Partnerships (GPP)
UP LAW BOC TAXATION 1
A general professional partnership 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
engaging in any trade or business.
Not considered as a taxable entity for income
tax purposes. The partners themselves are
liable, not the partnership, are liable for the
payment of income tax in their individual
capacities.
Estates and Trusts
Taxable estates and trusts are taxed in the
same manner and on the same basis as an
individual. EXCEPT for the exemption: 20,000
for estates and trusts, 50,000 for individuals.
Co-ownership
For income tax purposes, the co-owners in a
co-ownership report their share of the income
from the property owned in common by them
in their individual tax returns for the year and
the co-ownership is not considered as a
separate taxable entity or a corporation.
21
TAXATION LAW
INCOME TAXATION
Income Tax is defined as a tax on all yearly
profits arising from property, professions,
trades, or offices, or as a tax on the person’s
income, emoluments, profits and the like
(Fisher v. Trinidad).
General Principles
(1) A resident citizen of the Philippines is
taxable on all income derived from sources
within and without the Philippines;
(2) A nonresident citizen is taxable only on
income derived from sources within the
Philippines;
(3) 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 shall be treated as an
overseas contract worker if he is a:
(1) citizen of the Philippines; and
(2) receives compensation for services rendered
abroad as a member of the complement of
a vessel engaged exclusively in
international trade
(1) An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
(2) A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
(3) 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. (Sec. 23)
Taxpayer Within Without
Resident Citizen  
Non-resident Citizen and  X
OCW
UP LAW BOC TAXATION 1 TAXATION LAW

Resident and Non-resident  X (1) Actual receipt – Income is actually reduced

Alien to possession. The realization of gain may
Domestic Corporation   take the form of actual receipt of cash.
Foreign Corporation  X (2) Constructive receipt – An income is
considered constructively received when it is
INCOME credited to the account of, or segregated in
favour of a person. Examples of
Income means all wealth which flows to the
constructive receipt of income are:
taxpayer other than a mere return of capital. It
(a) Interest credited on savings bank deposit
includes gain derived from the sale or other
(b) Matured interest coupons not yet
disposition of capital assets. Income is a gain
collected by the taxpayer
derived from labor or capital, or both labor and
(c) Dividends applied by the corporation
capital; and includes the gain derived from the
against the indebtedness of a
sale or exchange of capital assets.
stockholder
(d) Share in the profit of a partner in a
When Income is Taxable
general professional partnership,
although not yet distributed, is regarded
Existence of taxable income
as constructively received; or
(1) There is INCOME, gain or profit
(e) Intended payment deposited in court
(2) RECEIVED or REALIZED during the taxable
(consignation).
year
(3) NOT EXEMPT from income tax
Recognition of Income. Methods of accounting
in reporting income and expenses
When is there INCOME?
When there is a FLOW of wealth other than
Cash method vis-à-vis Accrual method – Cash
mere return of capital during the taxable
method generally reports income upon cash
period.
collection and reports expenses upon payment.
If earned from rendering of services, income is
Income v. Capital (Madrigal v. Rafferty)
to be reported in the year when collected,
whether earned or unearned. (Sec. 108, NIRC).
Income Capital

Accrual method generally reports income when

Denotes a flow of Fund or property
earned and reports expense when incurred. If
wealth during a existing at one
earned from sale of goods, income is to be
definite period of distinct point in time.
reported in the year of sale, irrespective of
time.
collection. (Sec. 106, NIRC).
Service of wealth Wealth itself
Subject to tax Return of capital is Income realized pertains to the accrual basis of
not subject to tax accounting, when recognition of income in the
Fruit Tree books is when it is realized and expenses are
recognized when incurred. It is the right to
Realization of Income receive and not the actual receipt that
Actual vis-à-vis Constructive receipt determines the inclusion of the amount in
gross income

22
UP LAW BOC TAXATION 1 TAXATION LAW

Examples: entire purchase price has not been actually

(1) interest or rent income earned but not yet received in the year of sale.
received (c) The obligations of the purchaser received by
(2) rent expense accrued but not yet paid the vendor are to be considered as
(3) wages due to workers but remaining unpaid equivalent of cash.

Installment method vis-à-vis Deferred method

vis-à-vis Percentage of completion method (in Personal Property Real Property
long- term contracts)
Installment Method is a special method of Dealer
accounting whereby income on installment Dealer in personal Installment
sales of property during the year is allowed to property who method; Provided,
be reported in installments in proportion to the regularly sells in initial payments do
installment payments actually received in that installment plan: not exceed 25% of
year, which the gross profit realized or to be Installment method selling price
realized when payment is completed, bears to
the total contract price (Sec. 49, NIRC). *held as ordinary If exceeds 25%--
assetregardless of Deferred payment
Income may be reported on the installment amount of method
basis in the following cases: percentage of initial
(1) Sales of personal property by a dealer payments *held as inventory
(2) Sales of real property (inventory) and casual Casual Sale
sales of personalty Installment
(3) Sales of real property considered as capital method; Provided:
asset by individuals
(1) Selling price
Change from accrual to installment basis exceeds
A taxpayer entitled to the benefits of a dealer Php1,000
in personal property may elect for any taxable (2) Initial
year to report his taxable income on the payments do not
installment basis. In computing his income for exceed 25% of
the year of change or any subsequent year, selling price
amounts actually received during any such
year on account of sales or other dispositions If either of 2 or both
of property made in any prior year shall not be conditions not
excluded. [see Sec. 49(D), NIRC]. met—Deferred
payment method
Deferred Payment
(a) If the initial payments exceed 25% of the *personal property
selling price, the gain realized may be not considered
reported on a deferred payment method. inventory
(b) The taxable gain or income returnable Sale by Individuals
during the year of sale is the difference Installment
between the selling or contract price and method; Provided,
the cost of the property, even though the initial payments do

23
UP LAW BOC TAXATION 1
not exceed 25% of
selling price
(2)
*held as capital
asset
Percentage Of Completion (In Long-Term
Contracts)
Income from long-term construction contracts
refers to the earnings derived from
construction of a building, installation or other (3)
construction contract usually covering a period
in excess of one year. When income is derived
from long-term construction contracts, it is
generally reported on the basis of percentage
of completion made every year that will be (4)
evidence by the certificates of engineers or
architects. The reportable income is calculated
by deducting from the contract price the actual
cost of construction.
In recognizing realized revenue for long-term (5)
construction contracts, accountants usually
follow two methods:
(a) Completed contract method – requires
recognition of revenue only when the
contract is finally completed; and
(b) Percentage of completion method – requires
recognition of income based on the
progress of work.
Long-term contracts are no longer allowed
to be reported based on the completed
contract method basis beginning January 1,
1998 pursuant to RA 8424; hence, all long-
term contracts must be reported using the
percentage of completion method.
Tests in determining whether income is earned
for tax purposes
(1) Realization test – no taxable income until
there is a separation from capital of
something of exchangeable value, thereby
supplying the realization or transmutation
24
TAXATION LAW
which would result in the receipt of income
(Eisner v Macomber).
Claim of right doctrine (or Doctrine of
Ownership, command, or control) – a
taxable gain is conditioned upon the
presence of a claim of right to the alleged
gain and the absence of a definite
unconditional obligation to return or repay
that which would otherwise constitute a
gain..
Economic benefit test, Doctrine of
Proprietary Interest – any economic benefit
to the employee that increases his net
worth, whatever may have been the mode
by which it is effected, is taxable.
Severance Test - Under the doctrine of
severance test of income, in order that
income may exist, is necessary that there
be a separation from capital of something
of exchangeable value. The income
required a realization of gain.
All Events Test - Under the accrual method
of accounting, expenses are deductible in
the taxable year in which: (1) all events
have occurred which determine the
liability; and (2) the amount of liability can
be determined with reasonable accuracy.
UP LAW BOC
GROSS INCOME
Gross Income means the pertinent items of
income referred to in Section 32(A) of the Tax
Code. It includes all income derived from
whatever source (unless exempt from tax by
law), including, but not limited to, the
following items
(1) Gross income derived from the conduct of
Trade or business or the exercise of a
profession
(2) Rents
(3) Interests
(4) Prizes and winnings
(5) Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items
(6) Annuities
(7) Royalties
(8) Dividends
(9) Gains derived from dealings in property
(10) Pensions
(11) Partner’s distributive share from the net
income of the general professional
partnership (GPP) [Sec 32A, NIRC]
Concept of Income from Whatever Source
Derived
“Income derived from whatever source” means
inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources (i.e. gambling, extortion, smuggling,
etc.)
Gross Income vis-à-vis Net Income vis-à-
vis Taxable Income
(a) Gross Income - means income, gain or profit
subject to tax.
(b) Net Income– means gross income less
statutory deductions and/or exemptions
(Sec. 31, NIRC)
TAXATION 1 TAXATION LAW
(c) Taxable income – means the pertinent items
of gross income specified in the Tax Code,
less the deductions and/or personal and
additional exemptions, if any, authorized for
such types of income by the Tax Code or
other special laws (Sec. 31, NIRC). It is
synonymous to the term “net income”
[Valencia and Roxas]
SOURCES OF INCOME SUBJECT TO TAX
Compensation Income
Income arising from an employer-employee
(ER-EE) relationship. It means all
remuneration for services performed by an EE
for his ER, including the cash value of all
remuneration paid in any medium other than
cash [Sec. 78(A)], unless specifically excluded
by the Tax Code.
General Rule - every form of compensation
income is taxable regardless of how it is
earned, by whom it is paid, the label by which
it is designated, the basis upon which it is
determined, or the form in which it is received.
The basis upon which remuneration is paid is
immaterial. It may be paid on the basis of piece
of work, percentage of profits, hourly, weekly,
monthly, or annually.
Exception - The term wages does NOT include
remuneration paid:
(a) For agricultural labor paid entirely in
products of the farm where the labor is
performed, or
(b) For domestic service in a private home, or
(c) For casual labor not in the course of the
employer's trade or business, or
(d) For services by a citizen or resident of the
Philippines for a foreign government or an
int’l organization. [Sec. 78(A)]
Note: Compensation income including
overtime pay, holiday pay, night shift
differential pay, and hazard pay, earned by
MINIMUM WAGE EARNERS (MWE) who has no
other returnable income are NOT taxable and
25
UP LAW BOC TAXATION 1 TAXATION LAW

not subject to withholding tax on wages [RA the collection of compensation income of EEs,
9504] the State requires the ER to withhold the tax
upon payment of the compensation income.
Forms Of Compensation And How They Are
Assessed Fringe Benefits
(a) Cash – If compensation is paid in cash, the Persons liable: The Employer (as a withholding
full amount received is the measure of the agent), whether individual, professional
income subject to tax. partnership or a corporation, regardless of
whether the corporation is taxable or not, or
(b) Medium other than money - If services are the government and its instrumentalities, is
paid for in a medium other than money the liable to remit the fringe benefit tax to the BIR
fair market value (FMV) of the thing taken in once fringe benefit is given to a managerial or
payment is the amount to be included as supervisory employee.
compensation subject to tax.
If the services are rendered at a stipulated The fringe benefit tax (FBT) is a final tax on the
price, in the absence of evidence to the employee’s income to be withheld by the
contrary, such price will be presumed to be employer. The withholding and remittance of
the FMV of the remuneration received. FBT shall be made on a calendar quarterly
basis.
(c) Living quarters or meals -
General Rule - The value to the employee of Tax Rate and Tax Base
the living quarters and meals given by the (a) Tax base is based on the grossed-up
employer shall be added to his monetary value (GMV) of fringe benefits.
compensation subject to withholding. (b) Rate is generally 32%
Exception - If living quarters/meals are (c) GMV is determined by dividing the actual
furnished to an employee for the monetary value of the fringe benefit by 68%
convenience of the employer the value [100% - tax rate of 32%].
needed NOT be included as part of
compensation income. Special Cases:
Recepient Of Fb Tax Rate Tax Base
(d) Facilities and privileges of a relatively small 25% FBT Monetary
value - Facilities and privileges otherwise on the value of FB
known as “de minimis benefits” furnished NRA-NETB
GMV of divided by
or offered by an employer to his employees FB 75%
generally, are NOT considered as Alien individual
compensation subject to income tax and employed by
therefore withholding tax if such facilities regional or area HQs
are offered or furnished by the employer of MNCs or by ROHs
merely as means of promoting the health, 15% FBT Monetary
of MNCs
goodwill, contentment, or efficiency of his on the value of FB
Alien individual
employees. GMV of divided by
employed by OBUs
FB 85%
of a foreign bank
Withholding Tax on Compensation Income established in
The income recipient (i.e., EE) is the person Philippines
liable to pay the tax on income, yet to improve Alien individual

26
UP LAW BOC TAXATION 1 TAXATION LAW

employed by a (c) Benefits given to the rank-and-file

foreign service employees, whether granted under a
contractor or collective bargaining agreement or not;
subcontractor and
engaged in (d) Fringe benefits granted for the
petroleum convenience of the employer;
operations in Phils. (e) De minimis benefits
Any of their Filipino De minimis benefits (exempt from income tax as
individual employees well as withholding tax on compensation
employed and income of both managerial and rank and file
occupying the same EEs) [Revenue Regulation No. 5-2011]:
position as those by (4) Monetized unused vacation leave credits of
alien employees private employees not exceeding ten (10)
above days during the year;
Subject (5) Monetized value of vacation and sick leave
to credits paid to government officials and
normal employees;
rate of Monetary (6) Medical cash allowance to dependents of
FBT or value of FB employees, not exceeding P750 per
Employees in special
special divided by employee per semester or P125 per month;
economic zones
rates of 85% or (7) Rice subsidy of P1,500 or one (1) sack of 50
25% or 75% kg. rice per month amounting to not more
15% as than P1,500;
provided (8) Uniform and Clothing allowance not
above exceeding P5,000 per annum (RR 8-2012)
(9) Actual medical assistance, e.g. medical
Taxable And Non-Taxable Fringe Benefits allowance to cover medical and healthcare
Fringe Benefits NOT subject to Tax needs, annual medical/executive check-up,
(1) Fringe benefits not considered as gross maternity assistance, and routine
income – consultations, not exceeding P10,000.00
(a) if it is required or necessary to the per annum;
business of employer (10) Laundry allowance not exceeding P300
(b) if it is for the convenience or advantage per month;
of employer (11) Employees achievement awards, e.g., for
(2) Fringe Benefit that is not taxable under Sec. length of service or safety achievement,
32 (B) – Exclusions from Gross Income which must be in the form of a tangible
(3) Fringe benefits not subject to Fringe Benefit personal property other than cash or gift
Tax: certificate, with an annual monetary value
(a) Fringe Benefits which are authorized and not exceeding P10,000 received by the
exempted from income tax under the employee under an established written plan
Code or under special laws; which does not discriminate in favor of
(b) Contributions of the employer for the highly paid employees;
benefit of the employee for retirement, (12) Gifts given during Christmas and major
insurance and hospitalization benefit anniversary celebrations not exceeding
plans; P5,000 per employee per annum; and

27
UP LAW BOC TAXATION 1 TAXATION LAW

(13) Daily meal allowance for overtime work

and night/graveyard shift not exceeding Ordinary Assets Capital Assets
twenty-five percent (25%) of the basic
minimum wage on a per region basis; which would his trade or business
properly be which is not an
Professional Income included in the ordinary asset.
Refers to fees received by a professional from inventory of the Generally, they
the practice of his profession, provided that taxpayer if on hand include:
there is NO employer-employee relationship at the close of the (1) stocks and
between him and his clients. taxable year. securities held by
(2) Property held by taxpayers other
Income from Business the taxpayer than dealers in
(a) Any income derived from doing business primarily for sale to securities
(b) Doing business: The term implies a customers in the (2) real property not
continuity of commercial dealings and ordinary course of used in trade or
arrangements, and contemplates, to that his trade or business, such as
extent, the performance of acts or works or business. residential house
the exercise of some of the functions (3) Property used in and lot, idle or
normally incident to, and in progressive the trade or vacant land or
prosecution of, the purpose and object of its business of a building
organization. character which is (3)investment
subject to the property, such as
Income from Dealings in Property allowance for interest in a
Dealings in property such as sales or depreciation, or partnership, stock
exchanges may result in gain or loss. The kind (4) Real property used investment
of property involved (i.e., whether the property in the trade or (4)Personal or non-
is a capital asset or an ordinary asset) business of the business
determines the tax implication and income tax taxpayer, including properties, such
treatment, as follows: property held for as family car,
rent. home appliances,
Net Capital jewelry.
Taxable Ordinary Gains (other
Net = Net + than those
Income Income subject to final Ordinary Asset Capital Asset
CGT)
Gain from sale, exchange or other disposition
Types of Properties Ordinary Gain (part of
Capital Gain
Capital v. Ordinary Asset Gross Income)
Loss from sale, exchange, or other disposition
Ordinary Loss (part of
Ordinary Assets Capital Assets Allowable Deductions Capital Loss
from Gross Income)
(1)Stock in trade of the Property held by the Excess of Gains over Losses
taxpayer or other taxpayer, whether or Part of Gross Income Net Capital Gain
property of a kind not connected with Excess of Losses over Gains

28
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Part of Allowable
Deductions from Net Capital Loss
Gross Income
Types of Gains from dealings in property
(1) Ordinary income vis-à-vis Capital gain. –
If the asset involved is classified as ordinary,
the entire amount of the gain from the
transaction shall be included in the
computation of gross income [Sec 32(A)], and
the entire amount of the loss shall be
deductible from gross income. [Sec 34(D)]. (See
Allowable Deductions from Gross Income -
Losses)
If the asset involved is a capital asset, the rules
on capital gains and losses apply in the
determination of the amount to be included in
gross income. (See Capital Gains and Losses).
These rules do not apply to:
(a) real property with a capital gains tax (final
tax), or
(b) shares of stock of a domestic corporation
with a capital gains tax (final tax).
(c) Also, sale of shares of stock of a domestic
corporation, held as capital assets, through the
stock exchange by either individual or
corporate taxpayers, is subject to ½ of 1%
percentage tax based on gross selling price.
The tax rules for the gains or losses from sales
or exchanges of capital assets over ordinary
assets are as follows:
(1) Net capital gain is added to ordinary gain
but net capital loss is not deductible from
ordinary gain.
(2) Net ordinary loss is deductible from
ordinary gain.
(3) Capital losses are deductible only to the
extent of the capital gain.
(4) There is a net capital loss carry-over on the
net capital asset’s loss in a taxable year
which may be deducted as a short-term
TAXATION 1 TAXATION LAW
capital loss from the net capital gain of the
subsequent taxable year; provided that the
following conditions shall be observed:
(5) The taxpayer is other than a corporation;
(6) The amount of loss does not exceed the
income before exemptions at the year when
the loss was sustained; and
(7) The holding period should not exceed 12
months. (Valencia)
When a capital gain or capital loss is sustained
by a corporation, the following rules shall be
observed:
(2) There is no holding period; hence, there is
no net capital loss carry-over.
(3) Capital gains and losses are recognized to
the extent of their full amount.
(4) Capital losses are deductible only to the
extent of capital gains.
(5) Net capital losses are not deductible from
ordinary gain or income but ordinary losses
are deductible from net capital gains.
(2) Actual gain vis-à-vis Presumed gain
Presumed Gain: In the sale of real property
located in the Philippines, classified as capital
asset, the tax base is the gross selling price or
fair market value, whichever is higher. The law
presumes that the seller makes a gain from
such sale.
Actual Gain: The tax base in the sale of real
property classified as an ordinary asset is the
actual gain. If the seller incurs a loss from the
sale, such loss may be deducted from his gross
income during the taxable year. The ordinary
gain shall be added to the operating income
and the net taxable income shall be subject to
the graduated rates from 5% to 32% (if an
individual) or to 30% corporate tax or to 2%
MCIT (if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
29
UP LAW BOC TAXATION 1
Less: Basis or Adjusted Basis
NET GAIN (LOSS)
Note: Amount realized from sale or other
disposition of property = sum of money
received + fair market value of the property
(other than money) received
Note: When a taxpayer sells a real or personal
property, he should deduct its cost from its
selling price to measure the gain or loss from
the sales transaction (Sec. 40, NIRC).
(3) Long term capital gain vis-à-vis Short term
capital gain
Long-term capital gain: Capital asset is held for
more than twelve month before it is sold. Only
50% of the gain is recognized.
Short-term capital Gain: Capital asset is held
for less than 12 months. 100% of the gain is
subject to tax.
(4) Net Capital Gain vis-à-vis Net Capital Loss
Net Capital Gain is the excess of the gains over
the losses on sales or exchange of capital
assets during the taxable year.
Net Capital Loss means the excess of the losses
over the gains on sales or exchanges of capital
assets during the taxable year. [Sec. 39A,
NIRC]
(5) Computation of the amount of Gain or Loss
For income tax purposes the following rules
should be observed regarding the cost and
expenses of the capital assets:
(1) the costs and expenses of the acquisition
are to be capitalized, and
(2) the expenses of disposition are to be
treated as reduction from the selling price.
(Valencia)
30
TAXATION LAW
(1) Cost or basis of the property sold: In
computing the gain or loss from the sale or
other disposition of property, the BASIS shall
be as follows:
(a) Property acquired by purchase – its
acquisition cost, i.e., the purchase price plus
expenses of acquisition.
(b) Property which should be included in the
inventory – its latest inventory value [RR-2
sec 136]
(c) Property acquired by devise, bequest or
inheritance – its fair market price or value as
of the date of acquisition (inheritance)
(d) Property acquired by gift or 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
(e) Property acquired for less than an adequate
consideration in money’s worth – the amount
paid by the transferee for the property
(6) Cost or basis of the property exchanged in
corporate reorganizations: Sales or
exchanges resulting in non-recognition of
gains or losses:
Exchange Solely in Kind -
(1) If in pursuance of a plan of merger or
consolidation, exchanges:
(a) Between the corporations which are
parties to the merger or consolidation
(property solely for stocks);
(b) Between a stockholder of a corporation
party to a merger or consolidation and
the other corporation, which is a party to
the merger or consolidation (stock in a
corporation solely for the stock of
another corporation);
(c) Between a security holder of a
corporation party to a merger or
consolidation and the other corporation,
which is a party to the merger or
UP LAW BOC TAXATION 1
consolidation (securities solely for
securities)
(2) Transfer to a controlled corporation – a
person transfers his property to a
corporation in exchange for stocks in such a
corporation, resulting in acquisition of
corporate control by said person, alone or
together with others not exceeding four (4).
Exchange Not Solely in Kind -Gain, but not the
loss, shall be recognized if, in connection with
an exchange described in the above
exceptions:
(a) 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 the fair market
value of such other property received.
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
(Sec. 40 (C) (3) (a), NIRC).
(b) 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
31
TAXATION LAW
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.
The gain shall be recognized 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 (Sec. 40 (C) (3) (b), NIRC).
If an individual, stockholder, security holder or
corporation receives on the exchange not only
stock or securities but also money and/ or
property (boot), the gain but not the loss shall
be recognized, in an amount not exceeding the
sum of the money and fair market value of the
property received.
If the money or other property received has the
effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the
stockholder 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.
SUBSTITUTED BASIS OF STOCK OR
SECURITIES RECEIVED BY TRANSFEROR
UPON THE EXCHANGE:
Original basis (cost) of the property, stock or
securities exchanged/transferred
LESS: (a) money received, if any; and
(b) FMV of the other property received.
Balance
ADD: (a) the amount treated as dividend of the
shareholder; and
UP LAW BOC
(b) the amount of any gain that was recognized
on the exchange.
Basis (Cost) of the stock received
Notes:
(a) The property received as “boot” shall have
as basis its FMV
(b) If as part of the consideration to the
transferor, the transferee of property
assumes a liability of the transferor or
acquires from the latter property subject to
a liability, such assumption or acquisition
(in the amount of liability), shall be treated
as money received by the transferor on the
exchange
(c) If the transferor receives several kinds of
stocks or securities, the Commissioner is
authorized to allocate the basis among the
several classes of stocks or securities
received.
SUBSTITUTED BASIS OF PROPERTY
TRANSFERRED:
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
[Sec. 40 (C)(5), NIRC].
Recognition of gain or loss in exchange of
property:
General rule: Upon the sale or exchange of
property, the ENTIRE amount of the gain or
loss shall be recognized.
Exceptions: No gain or loss shall be
recognized:
(1) 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,
TAXATION 1 TAXATION LAW
which is a party to the merger or
consolidation;
(b) A shareholder exchanges stock in a
corporation, which is a party to a 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 another corporation, a party to the
merger or consolidation.
(2) 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
4 persons, gains control of the corporation.
- Stocks issued for services shall not be
considered as issued in property.
(7) Income tax treatment of capital loss
(a) Capital loss limitation rule (applicable to
both corporations and individuals)
General Rule: Losses from sales or exchanges
of capital assets shall be allowed only to the
extent of the gains from such sales or
exchanges (Sec. 39(C), NIRC).
Exception for Banks and Trust Companies: 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, 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 (Sec. 39(C),
NIRC).
32
UP LAW BOC TAXATION 1
(b) Net loss carry-over rule (applicable only to
individuals)
If an individual sustains in any taxable year a
net capital loss, such loss (in an amount not in
excess of the net income for the 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 12 months (Sec. 39(D),
NIRC).
(8) Dealings in real property situated in the
Philippines
Persons Liable and Transactions Affected
(a) Individual taxpayers, estates and trusts
(1) Sale or exchange or other disposition of
real property considered as capital assets.
(2) Includes "pacto de retro sale" and other
conditional sale.
(b) Domestic Corporation
Sale or exchange or disposition of lands
and/or building which are not actually used
in business and are treated as capital asset.
Rate and Basis of Tax
A final withholding tax of 6% is based on the
gross selling price or fair market value or zonal
value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
(9) Dealings in shares of stock of Philippine
corporations
Persons Liable to the Tax
(a) Individual taxpayer, whether citizen or alien;
(b) Corporate taxpayer, whether domestic or
foreign; and
(c) Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable
(a) Dealers in securities
33
TAXATION LAW
(b) Investor in shares of stock in a mutual fund
company
(c) All other persons who are specifically
exempt from national internal revenue
taxes under existing investment incentives
and other special laws.
Shares listed and traded through the stock
exchange other than sale by a dealer in securities.
–
(1) ½ of 1% of the gross selling price of the
stock or gross value in money of the shares
of stock sold, bartered, exchanged or
otherwise disposed which shall be assumed
and paid by the seller or transferor through
the remittance of the stock transaction tax
by the seller or transferor’s broker.
(2) Note: In the nature of percentage tax and
not income tax; exempt from income tax per
Section 127 (d):
“Any gain derived from the sale, barter,
exchange or other disposition of share of
stock under this section shall be exempt
from taxes imposed in Sections 24(C),
27(D)(2), 28(A)(8)(c), and 28(B)(5)(c) of this
Code and from the regular individual or
corporate income tax.”
(3) Note: Percentage tax under Sec. 127 is NOT
DEDUCTIBLE for income tax purposes.
Shares not listed and traded through the stock
exchange
Net capital gains derived during the taxable
year from sale, exchange, or transfer shall be
taxed as follows (on a per transaction basis):
Amount of Capital Gain
1. Not over P 100,000 = Tax Rate of 5%
2. On any amount in excess of P 100,000 =
10%
(10) Sale of principal residence
Principal residence: the family home of the
individual taxpayer (RR 14-2000)
UP LAW BOC TAXATION 1
Disposition of principal residence (capital
asset) is exempt from Capital Gains Tax,
provided:
(a) Sale or disposition of the old principal
residence;
(b) By natural persons - citizens or aliens
provided that they are residents taxable
under Sec. 24 of the Code (does not include
an estate or a trust);
(c) The proceeds of which is fully utilized in (a)
acquiring or (b) constructing a new principal
residence within eighteen (18) months from
date of sale or disposition;
(d) Notify the Commissioner within thirty (30)
days from the date of sale or disposition
through a prescribed return of his intention
to avail the tax exemption;
(e) Can only be availed of onlyonce every ten
(10) years;
(f) The historical cost or adjusted basis of his
old principal residence shall be carried over
to the cost basis of his new principal
residence
(g) If there is no full utilization, the portion of
the gains presumed to have been realized
shall be subject to capital gains tax.
(h) Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
34
TAXATION LAW
Passive Investment Income
Under Sec 24(B), a final tax is imposed upon
gross passive income of citizen and resident
aliens. An income is considered passive if the
taxpayer merely waits for it to be realized.
(a) Interest Income
(b) Dividend Income
1. Cash dividend
2. Stock dividend
Stock dividend is generally exempt from
income tax, EXCEPT:
(a) If a corporation cancels or redeems
stock issued as a dividend at such time
and in such manner as to make the
distribution and cancellation or
redemption, in whole or in part,
essentially equivalent to the
distribution of a taxable dividend, the
amount so distributed in redemption or
cancellation of the stock shall be
considered as taxable income to the
extent that it represents a distribution
of earnings or profits (Sec. 73(B), NIRC);
or
(b) Where there is an option that some
stockholders could take cash or
property dividends instead of stock
dividends; some stockholders
exercised the option to take cash of
property dividends; and the exercise of
option resulted in a change of the
stockholders’ proportionate share in
the outstanding share of the
corporation.
3. Property dividend
4. Liquidating dividend
The difference between the cost or other basis
of the stock and the amount received in
liquidation of the stock is a capital gain or a
capital loss.
UP LAW BOC TAXATION 1 TAXATION LAW

Aircraft, 7.5% 25%

machineries and
other Equipment
Other assets 30% 25%

(2) Lease of real property

Lessor Tax Rate

Citizen
Resident Alien Net taxable income
Non-resident alien shall be subject to the
engaged in trade or graduated income tax
business in the rates
Philippines
Non-resident alienRental income from
not engaged in trade real property located
(c) Royalty Income or business in the in the Philippines
Royalty is a valuable property that can be Philippines shall be subject to
developed and sold on a regular basis for a 25% final
consideration; in which case, any gain withholding tax
derived therefrom is considered as an unless a lower rate is
active business income subject to the imposed pursuant to
normal corporate tax. an effective tax treaty
Domestic Corporation Net taxable income
(d) Rental Income Resident Foreign shall be subject to
Refers to earnings derived from leasing Corporation 30% corporate
real estate as well as personal property. income tax or its
Aside from the regular amount of payment gross income will be
for using the property, it also includes all subject to 2% MCIT
other obligations assumed to be paid by Non-resident Foreign Gross rental income
the lessee to the third party in behalf of the Corporation from real property
lessor (e.g., interest, taxes, loans, located in the
insurance premiums, etc.) [RR 19-86] Philippines shall be
subject to 30%
(1) Lease of personal property corporate income tax,
Rental income on the lease of personal such tax to be
property located in the Philippines and withheld and
paid to a non-resident taxpayer shall be remitted by the lessee
taxed as follows: in the Philippines

Non- Non- (3) Tax treatment of:

Resident Resident
Corporation Alien a. Leasehold improvements by lessee
Vessel 4.5% 25%

35
UP LAW BOC TAXATION 1
Rent Income from leasehold
improvements:
i. Outright method- lessor shall report as
income FMV of the buildings or
improvements subject to the lease in
the year of completion.
ii. Spread-out method- lessor shall
spread over the remaining term of the
lease the estimated depreciated (book)
value of such buildings or
improvements at the termination of the
lease, and reports as income for each
remaining term of the lease an aliquot
part thereof. estimated BV at the
end of the lease contract/ remaining
lease term = Income per year
VAT added to rental/paid by the lessee
If the lessee is VAT-registered, treat VAT paid
as input VAT;
If the lessee is not VAT-registered OR not
liable to VAT, treat VAT paid as additional rent
expense deductible from gross income.
Advance Rental/ Long Term Lease
Pre-paid rent must be reported in full in the
year of receipt, regardless of the accounting
method used by the lessor.
Annuities, Proceeds from life insurance or other
types of insurance
The annuity payments represent a part that is
taxable and not taxable. If part of annuity
payment represents interest, then it is a
taxable income. If the annuity is a return of
premium, it is not taxable.
Prizes and awards
Contest prizes and awards received are
generally taxable. Such payment constitutes
gain derived from labor.
The EXCEPTIONS are as follows:
(1) Prizes and awards made primarily in
recognition of religious, charitable,
36
TAXATION LAW
scientific, educational, artistic, literary or
civic achievements are EXCLUSIONS from
gross income if:
(a) The recipient was selected without any
action on his part to enter a contest or
proceedings; and
(b) The recipient is not required to render
substantial future services as a condition
to receiving the prize or award.
(2) Prizes and awards granted to athletes in
local and international sports competitions
and tournaments held in the Philippines
and abroad and sanctioned by their
national associations shall be EXEMPT from
income tax.
Pensions, retirement benefit, or separation pay
(1) paid for past employment services
rendered.
(2) a stated allowance paid regularly to a
person on his retirement or to his
dependents on his death, in consideration
of past services, meritorious work, age, loss
or injury. It is generally taxable unless the
law states otherwise. [VALENCIA, Income
Taxation 5th ed. (200/’’9)]
Income from any source whatever
Inclusion of all income not expressly exempted
within the class of taxable income under the
laws irrespective of the voluntary or involuntary
action of the taxpayer in producing the gains,
and whether derived from legal or illegal
sources
Tax Benefit Rule
This is a general principle in taxation which
states that is a taxpayer deducted an item on
his income tax return and enjoyed a tax benefit
(reduced his income tax) thereby, and in a
subsequent year recovers all or part of that
item, he will recognize gross income in the year
the deducted item is recovered.
UP LAW BOC TAXATION 1 TAXATION LAW

 Recovery of accounts previously written-

off Income Situs
Bad debts claimed as a deduction in the
preceding year(s) but subsequently Interest Residence of the debtor
recovered shall be included as part of the Dividends Where incorporated
taxpayer’s gross income in the year of such If Domestic: Philippines
recovery to the extent of the income tax If Foreign: Look at 3 year
benefit of said deduction. There is an average of gross income. If
income tax benefit when the deduction of 50% or more, Philippines.
the bad debt in the prior year resulted in Services Place of performance
lesser income and hence tax savings for the Rentals Location of the property
company. (Sec. 4, RR 5-99) Royalties Place of exercise
Sale of Real Location of realty
 Receipt of tax refunds or credit Property
General rule: a refund of a tax related to Sale of (a) Tangible
the business or the practice of profession, Personal (1) Purchase and sale:
is taxable income (e.g., refund of fringe Location of Sale
benefit tax) in the year of receipt to the (2) Manufactured w/in and
extent of the income tax benefit of said sold w/o: Partly w/in
deduction (i.e., the tax benefit rule and partly w/o
applies). (3) Manufactured w/o and
sold w/in: Partly w/in
Exceptions: However, the following tax and partly w/o
refunds are not to be included in the
computation of gross income: (b) Intangible
(1) Philippine income tax, except the fringe General rule: Place of Sale
benefit tax Exception: Shares of stock of
(2) Income tax imposed by authority of any domestic corporations: Place
foreign country, if the taxpayer claimed a of incorporation
credit for such tax in the year it was paid or Shares of Place of incorporation
incurred. Stock of
(3) Estate and donor’s taxes Domestic
(4) Taxes assessed against local benefits of a Corporation
kind tending to increase the value of the
property assessed (Special assessments)
(5) Value Added Tax
(6) Fines and penalties due to late payment of
tax
(7) Final taxes
(8) Capital Gains Tax

SITUS OF INCOME TAXATION

Income Situs

37
UP LAW BOC TAXATION 1
exclusions from gross income
Exclusions from gross income refer to income
received or earned but is not taxable as income
because it is exempted by law or by treaty.
Such tax-free income is not to be included in
the income tax return unless information
regarding it is specifically called for. Receipts
which are not in fact income are, of course,
excluded from gross income.
Taxpayers who may avail of the exclusions
Exclusion Taxpayer
Return of capital All taxpayers since
there is no income.
Already subject to All taxpayers unless
internal revenue tax provided that income
is to be included.
Express exclusion As expressly provided.
Exclusions Under the Constitution
(a) Income derived by the government or its
political subdivisions from the exercise of
any essential governmental function
(b) Also, all assets and revenues of a non-
stock, non-profit private educational
institution used directly, actually and
exclusively for private educational
purposes shall be exempt from taxation.
Exclusions Under the Tax Code (Sec. 32, NIRC)
(a) Proceeds of life insurance policies.
General rule: The proceeds paid to his
estate or to any beneficiary (but not a
transferee for a valuable consideration),
directly or in trust, upon the death of the
insured, are excluded from the gross
income of the beneficiary.
However, if such amounts are held by the
insurer under an agreement to pay interest
thereon, the interest payments received by
38
TAXATION LAW
the insured shall be included in gross
income. The interest income shall be taxed
at the graduated income tax rates.
(b) Return of premium paid.
General rule: 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 is a return of capital and not
income.
Exception: If the amounts received by the
insured (when added to the amounts
already received before the taxable year
under such contract) exceed the aggregate
premiums or considerations paid (whether
or not paid during the taxable year), then
the excess shall be included in gross income.
(c) Amounts received under life insurance,
endowment or annuity contracts.
Amounts received (other than amounts
paid by reason of the death of the insured
and interest payments on such amounts)
under a life insurance, endowment or
annuity contracts are excluded from gross
income,
But if such amounts (when added to
amounts already received before the
taxable year under such contract) exceed
the aggregate premiums of considerations
paid (whether or not paid during the
taxable year), then the excess shall be
included in gross income.
However, in the case of a transfer for
valuable consideration, by assignment or
otherwise, of a life insurance, endowment ,
or annuity contract, or any interest therein,
only the actual value of such consideration
and the amount of the premiums and other
UP LAW BOC TAXATION 1 TAXATION LAW

sums subsequently paid by the transferee moral damages for taxable damages
are exempt from taxation. out-of-court above
settlement,
(d) Value of property acquired by gift, including attorney’s
bequest, devise or descent. fees
Gifts, bequests and devises (which are (4) Alienation of (4) Any damages as
subject to estate or gift taxes) are excluded affection, or breach compensation for
from gross income, BUT not the income of promise to marry unrealized income
from such property. (5) Any amount
received as a return
If the amount received is on account of of capital or
services rendered, whether constituting a reimbursement of
demandable debt or not, or the use or expenses
opportunity to use of capital, the receipt is
income (Pirovano v. Commissioner G.R. No. (f) Income exempt under tax treaty.
L-19865, July 31, 1965). Income of any kind, to the extent required
by any treaty obligation binding upon the
(e) Amount received through accident or Government of the Philippines.
health insurance (Compensation for
damages). (g) Retirement benefits, pensions,
As a rule, amounts received through gratuities, etc.
accident or health insurance or under These are
workmen’s compensation acts, as (1) Retirement benefits under RA 7641, RA
compensation for personal injuries or 4917, and Section 60(B) of the NIRC
sickness, plus the amount of any damages (2) Terminal pay
received, whether by suit or agreement, on (3) Retirement Benefits from foreign
account of such injuries or sickness are government agencies
excluded from gross income. (4) Veterans benefits
(5) Benefits under the Social Security Act
Examples of nontaxable and taxable (6) GSIS benefits
damages recoveries are:
Retirement benefits received under RA
Nontaxable – Taxable – 7641(The Retirement Pay Law) and those
compensation for compensation for received by officials and employees of
damages on account of damages on account private firms under a reasonable private
of benefit plan (RPBP) maintained by the
(1) Personal (physical) (1) Actual damages employer under RA 4917 (now Section
injuries or sickness for loss of 32(B)(6)(a) of NIRC) are excluded from gross
anticipated profits income subject to income tax.
(2) Any other (2) .Moral and
damages recovered exemplary
on account of damages awarded RA 7641 RPBP
personal injuries or as a result of
sickness break of contract Retiring employee Retiring official or
(3) Exemplary and (3) Interest for non- must be in the service employee must have

39
UP LAW BOC TAXATION 1 TAXATION LAW

of same employer been in the service of retiring government employees is

CONTINUOUSLY for the same employer considered not part of the gross salary, and
at least five (5) years forat least ten (10) is exempt from taxes. The government
years. recognizes that for most public servants,
Retiring employee Retiring official or retirement pay is always less than
must be at least sixty employee must be at generous if not meager and scrimpy.
(60) years oldbut not least fifty (50) years Terminal leave payments are given not
more than 65 years of old at the time of only at the same time but also for the same
age at the time of retirement policy considerations governing retirement
retirement benefits. (Commissioner v. Castaneda, 203
Availed of only once, Retiring employee SCRA 72).
and only when there shall not have
is no RPBP previously availed of Retirement BENEFITS from foreign
the privilege under a government agencies
retirement benefit The social security benefits, retirement
plan of the same or gratuities, pensions and other similar
another employer benefits received by resident or non-
resident citizens or aliens who come to
reside permanently in the Philippines from
Plan must be foreign government agencies and other
reasonable. Its institutions, private or public;
implementation must
be fair and equitable Payments of VETERANS benefits under
for the benefit of all U.S. Veterans Administration
employees (e.g. from Payments of benefits due or to become due
president to laborer) to any person residing in the Philippines
Plan must be under the laws of the United States
approved by BIR administered by the United States
Veterans Administration

Terminal pay/Separation pay Social Security Act benefits

Any amount received by an 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, other
physical disability or for any cause beyond
the control of the employee. The phrase
“for any cause beyond the control of the said
official or employee” means that the
separation of the employee must be
involuntary and not initiated by him.
Payments of benefits received under the
Social Security Act of 1954 (RA 8282), as
amended, e.g., Maternity Benefits
GSIS benefits
Benefits received from GSIS under the
GSIS Act of 1937, as amended, and the
retirement gratuity received by
government officials and employees are
not taxable. [Sec. 32B6., NIRC; Sec. B1, RR
2-98]

The “terminal leave pay” (amount paid for (h) Winnings, prizes and award, including
the commutation of leave credits) of those in sports competitions.

40
UP LAW BOC
(a) All prizes and awards granted to
athletes:
(1) in local and international sports
competitions and tournaments
whether held in the Philippines or
abroad, AND
(2) sanctioned by their national sports
associations
shall not be included in gross
income and shall be tax exempt.
[Sec. 32 B7d, NIRC]
(b) Prizes and awards made primarily in
recognition of charitable, literary,
educational, artistic, religious, scientific,
or civic achievement are not taxable,
provided:
(1) Recipient was selected without any
action on his part to enter the
contest or proceeding; and
(2) Recipient is not required to render
substantial future services as a
condition to receiving the prize or
award
TAXATION 1 TAXATION LAW
deductions from gross income
Deductions are items or amounts which the law
allows to be deducted from the gross of
income of a taxpayer in order to arrive at
taxable income.
Deductions are in the nature of an exemption
from taxation; they are strictly construed
against the claimant, who must point to a
specific provision allowing them and who has
the burden of proving that they falls within the
purview of such provision. Thus, all deductions
must be substantiated, except when the law
dispenses with the records, documents or
receipts to support the deductions.
Types of deductions
There are three (3) types of deductions from
gross income:
(a) itemized deductions in Section 34(A) to (J)
and (M) available to all kinds of taxpayers
engaged in trade or business or practice of
profession in the Philippines;
(b) optional standard deduction in Section 34(L)
available only to individual taxpayers
deriving business, professional, capital
gains and passive income not subject to
final tax, or other income; and
(c) the special deductions in Sections 37 and 38
of the NIRC, and in special laws like the BOI
law (E.O. 226).
Return of capital (cost of sales or services)
Income tax is levied by law only on income;
hence, the amount representing return of
capital should be deducted from proceeds
from sales of assets and should not be subject
to income tax.
Costs of goods purchased for resale, with
proper adjustment for opening and closing
inventories, are deducted from gross sales in
computing gross income (Sec. 65, Rev. Reg. 2)
Itemized deductions
41
UP LAW BOC TAXATION 1
These are enumerated in Section 34 of the
NIRC.
(1) Expenses
Business expenses deductible from gross
income include the ordinary and necessary
expenditures directly connected with or
pertaining to the taxpayer’s trade or business.
The cost of goods purchased for resale, with
proper adjustment for opening and closing
inventories, is deducted from gross sales in
computing gross income.
Requisites for deductibility of business
expenses.—
(a) Ordinary AND necessary;
(b) Paid or incurred during the taxable year;
(c) Others: (not in the SC syllabus)
(1) Paid or incurred in carrying on or which
are directly attributable to the
development, management, operation
and/or conduct of the trade, business or
exercise of profession;
(2) Substantiated by adequate proof –
documented by official receipts or
adequate records, which reflect the
amount of expense deducted and the
connection or relation of the expense to
the business/trade of the taxpayer);
(3) Legitimately paid (not a BRIBE, kickback,
or otherwise contrary to law, morals,
public policy);
(4) If subject to withholding tax, the tax
required to be withheld on the expense
paid or payable is shown to have been
properly withheld and remitted to the
BIR on time;
(5) Amount must be reasonable.
(2) Interest
Requisites for deductibility.—
(1) There is an indebtedness.
(2) The indebtedness is that of the taxpayer
(3) The indebtedness is connected with the
taxpayer‘s trade, profession, or business.
42
TAXATION LAW
(4) The interest must be legally due.
(5) The interest must be stipulated in writing.
(6) The taxpayer is LIABLE to pay interest on
the indebtedness.
(7) The indebtedness must have been paid or
accrued during the taxable year.
(8) The interest payment arrangement must
not be between related taxpayers
(9) The interest must not be incurred to
finance petroleum operations.
(10) In case of interest incurred to acquire
property used in trade, business or exercise
of profession, the same was not treated as
a capital expenditure,
Limitation: The taxpayer's allowable deduction
for interest expense shall be reduced by an
amount equal to 33% of the interest income
subjected to final tax (see chapter on taxation
of passive income for interest income); effective
January 1, 2009.
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.
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,
UP LAW BOC
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:
(1) Either one is a personal holding company
of a foreign personal holding company
with respect to the taxable year
preceding the date of the sale of
exchange; and
(2) More than 50% of the outstanding stock
of each is owned, directly or indirectly, by
or for the same individual; or
(d) Between parties to a trust-
(1) Grantor and Fiduciary; or
(2) Fiduciary of a trust and fiduciary of
another trust if the same person is a
grantor with respect to each trust; or
(3) Fiduciary and Beneficiary
Interest subject to special rules.—
1. Interest paid in advance
(a) 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.
(b) But the deduction shall be allowed in the
year the indebtedness is paid
2. Interest periodically amortized - 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
3. Interest expense incurred to acquire property
for use in trade/business/profession - At the
option of the taxpayer, interest expense on a
capital expenditure may be allowed as:
(1) A deduction in full in the year when
incurred;
TAXATION 1 TAXATION LAW
(2) A capital expenditure for which the taxpayer
may claim only as a deduction the periodic
amortization of such expenditure.
Reduction of interest expense/interest arbitrage
The taxpayer's allowable deduction for interest
expense shall be reduced by an amount equal
to 33% of the interest income subjected to final
tax; effective January 1, 2009. (RA 9337)
(3) Taxes
Taxes Proper: Refers to national and local
taxes;
Requisites for deductibility.—
Such tax must be:
(a) Paid or incurred within the taxable year;
(b) Paid or incurred in connection with the
taxpayer‘s trade, profession or business;
(c) Imposed directly on the taxpayer.
(d) Not specifically excluded by law from being
deducted from the taxpayer‘s gross income.
Non-deductible taxes.—
(1) Philippine income tax, except Fringe Benefit
Taxes;
(2) Income tax imposed by authority of any
foreign country, if taxpayer avails of the
Foreign Tax Credit (FTC)
(a) Exception to exception: When the
taxpayer does NOT signify his desire to
avail of the tax credit for taxes of foreign
countries, the amount may be allowed as
a deduction from gross income of citizens
and domestic corporations subject to the
limitations set forth by law.
(3) Estate and donor‘s taxes
(4) Percentage tax on stock transaction;
(5) Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed (Special Assessments)
(6) Value Added Tax
(7) Fines and penalties
(8) Final taxes
(9) Capital Gains Tax
43
UP LAW BOC TAXATION 1 TAXATION LAW

(10) Import duties

(11) Business taxes Limitations on Tax Credit.—
(12) Occupation taxes (1) [Per Country Limit]The amount of tax credit
(13) Privilege and license taxes shall not exceed the same proportion of the
(14) Excise taxes tax against which such credit is taken, which
(15) Documentary stamp taxes the taxpayer's taxable income from sources
(16) Automobile registration fees within such country bears to his entire
(17) Real property taxes taxable income for the same taxable year;
(18) Electric energy consumption tax under BP and
36 (2) [Worldwide Limit]The total amount of the
credit shall not exceed the same proportion
Special Rules: of the tax against which such credit is taken,
1. Treatments of surcharges/interests/fines for which the taxpayer's taxable income from
delinquency.— The amount of deductible sources without the Philippines taxable
taxes is limited to the basic tax and shall not bears to his entire taxable income for the
include the amount for any surcharge or same taxable year.
penalty on delinquent taxes. However,
interest on delinquent taxes, although not Formula:
deductible as tax, can be deducted as Limit #1
interest expense at its full amount. (CIR v Taxable Limit on
Palanca, 18 SCRA 496). Income Per amount
2. Treatment of special assessment.—Special Foreign of tax
Phil.
assessments and other taxes assessed Country x = credit
Income Tax
against local benefits of a kind tending to Worldwide (Per
increase the value of the property assessed Taxable Country
are non-deductible from gross income. Income Limit)
3. Tax credit - amount allowed by law to reduce
the Philippine income tax due, subject to Limit #2
limitations, on account of taxes paid or Taxable Limit on
accrued to a foreign country Income For amount
all Foreign of tax
The following may claim tax credits: Phil.
Countries x = credit
(1) Resident citizens Income Tax
Worldwide (World
(2) Domestic corporations, which include all Taxable Wide
partnerships except general professional Income Limit)
partnerships
(3) Members of general professional Note: Computation of FTC: Limit #2 applies
partnerships where taxes are paid to two or more foreign
(4) Beneficiaries of estates or trusts countries. Allowable tax credit is the lower
between the tax credit computed under Limit
The following may NOT claim tax credits: #1 and that computed under Limit#2.
(1) Non-resident citizens
(2) Aliens, whether resident or non-resident FTC Limitations – lowest of the 3:
(3) Foreign corporations, whether resident on (1) Actual FTC
non-resident (2) For taxes paid to one foreign country

44
UP LAW BOC TAXATION 1
(3) For taxes paid to 2 or more foreign countries
(4) Losses
Requisites for deductibility.—
(1) Loss must be that of the taxpayer (e.g.,
losses of the parent corp. cannot be
deducted by its subsidiary);
(2) Actually sustained and charged off within
the taxable year;
(3) Incurred in trade, business or profession;
(4) 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;
(5) Sustained in a closed and completed
transaction;
(6) Not compensated for by insurance or other
form of indemnity;
(7) Not claimed as a deduction for estate tax
purposes;
(8) In case of casualty loss, filing of notice of
loss with the BIR within 45 days from the
date of the event that gave rise to the
casualty; and
(9) The taxpayer must prove the elements of
the loss claimed, such as the actual nature
and occurrence of the event and amount of
the loss.
No loss is recognized in the following.—
(1) Merger, consolidation, or control securities
(where no gains are recognized either);
(2) Exchanges not solely in kind;
(3) Related taxpayers (see above – (c) Interest
expense incurred to acquire property for use
in trade/business/profession)
(4) Wash sales;
(5) Illegal transactions
Other types of losses.—
a. Capital losses - Incurred in the sale or
exchange of capital assets (allowable
only to the extent of capital gains,
45
TAXATION LAW
except for banks and trust companies
under conditions in Sec. 39 of NIRC
where loss from such sale is not
subject to the foregoing limitation);
b. Securities becoming worthless - Loss in
shrinkage in value of stock through
fluctuation in the market is not
deductible from gross income.
Exception: If the stock of the corporation
becomes worthless, the cost or other basis may
be deducted by its owner in the taxable year in
which the stock became worthless, provided a
satisfactory showing of its worthlessness be
made, as in the case of bad debts.
c. Losses on wash sales of stocks or
securities
Wash Sale - a sale or other disposition of stock
or securities where substantially identical
securities (substantially the same as those
disposed of) are acquired or purchased (or
there was an option to acquire, and the
acquisition or option should be by purchase or
exchange upon which gain or loss is
recognized under the income tax law) within a
61-day period, beginning 30 days before the
sale and ending 30 days after the sale
General rule: Not deductible from gross income
Exception: If by a dealer in securities in the
course of ordinary business, it is deductible.
d. Wagering losses - Losses from
wagering (gambling) are deductible
only to the extent of gains from such
transactions. A wager is made when
the outcome depends upon CHANCE.
e. NOLCO (Net Operating Loss Carry Over)
Requisites for NOLCO:
UP LAW BOC TAXATION 1
(1) The taxpayer was not exempt from income
tax the year the loss was incurred;
(2) There has been no substantial change in the
ownership of the business or enterprise
wherein:
(a) AT LEAST 75% of nominal value of
outstanding issued shares is held by or
on behalf of the same persons; or
(b) AT LEAST 75% of the paid up capital of
the corporation is held by or on behalf of
the same persons.
Taxpayers Entitled to NOLCO
(1) Individuals engaged in trade or business or
in the exercise of his profession (including
estates and trusts);
Note:An individual who avails of 40% OSD
shall not simultaneously claim deduction of
NOLCO. However, the three-year
reglementary period shall continue to run
during such period notwithstanding the fact
that the aforesaid taxpayer availed of OSD
during the said period.
(2) Domestic and resident foreign corporations
subject to the normal income tax (e.g.,
manufacturers and traders) or preferential
tax rates under the Code (e.g., private
educational institutions, hospitals, and
regional operating headquarters) or under
special laws (e.g., PEZA-registered
companies)
Note: Domestic and resident foreign
corporations taxed during the taxable year
with Minimum Corporate
Income Tax cannot enjoy the benefit of
NOLCO. However, the three-year period for
the expiry of he NOLCO is not interrupted by
the fact that the corporation is subject to
MCIT during such three-year period.
Other Losses:
(1) Abandonment losses in petroleum operation
and producing well.
46
TAXATION LAW
(2) Losses due to voluntary removal of building
incident to renewal or replacements are
deductible from gross income.
(3) Loss of useful value of capital assets due to
charges in business conditions is deductible
only to the extent of actual loss sustained
(after adjustment for improvement,
depreciation and salvage value)
(4) Losses from sales or exchanges of property
between related taxpayers are not
recognized, but the gains are taxable.
(5) Losses of farmers incurred in the operation
of farm business are deductible.
(5) Bad debts
Requisites for deductibility.—
(1) Valid and legally demandable debt due to
the taxpayer
(2) Debt is connected with the taxpayer's trade,
business or practice of profession;
(3) Debt was not sustained in a transaction
entered into between related parties;
(4) Actually ascertained to be worthless and
uncollectible as of the end of the taxable
year (taxpayer had determined with
reasonably degree of certainty that the
claim could not be collected despite the fact
that the creditor took reasonable steps to
collect); and
(5) Actually charged off the books of accounts
of the taxpayer as of the end of the taxable
year
General rule: Taxpayer must ascertain and
demonstrate with reasonable certainty the
uncollectibility of debt
Exceptions:
(1) Banks as creditors – BSP Monetary Board
shall ascertain the worthlessness and
uncollectibility of the debt and shall
approve the writing off
(2) Receivables from an insurance or surety
company (as debtor) may be written off as
bad debts only when such company is
UP LAW BOC
declared closed due to insolvency or similar
reason
(6) Depreciation
Requisites for Deductibility. –
1. It must be reasonable.
2. It must be charged off during the year.
3. The asset must be used in profession, trade
or business.
4. The asset must have a limited useful life.
5. The depreciable asset must be located in
the Philippines if the taxpayer is a
nonresident alien or a foreign corporation.
[Valencia and Roxas]
(7) Charitable and other contributions
Requisites for deductibility.—
(1) Actually PAID or made to the ENTITIES or
institutions specified by law;
(2) Made within the TAXABLE year.
(3) It must be EVIDENCED by adequate receipts
or records.
(4) For Contributions Other than Money: The
amount shall be BASED on the acquisition
cost of the property (i.e., not the fair market
value at the time of the contribution).
(5) For Contributions subject to the statutory
limitation: It must NOT EXCEED 10%
(individual) or 5% (corporation) of the
taxpayer‘s taxable income before charitable
contributions
Contributions Deductible in Full:
(a) Donations to the Government of the
Philippines, or to any of its agencies, or
political subdivisions, including fully owned
government corporations –
(1) Exclusively to finance, provide for, or to be
used in undertaking priority activities in
(a) Education
(b) Health
(c) Youth and sports development
(d) Human settlements
(e) Science and culture, and
(f) Economic development
TAXATION 1 TAXATION LAW
(2) in accordance with a National Priority
Plan determined by NEDA (otherwise,
subject to statutory limit)
(b) Donations to Certain Foreign Institutions or
International Organizations which are fully
deductible 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 Non-government
Organizations subject to conditions set forth
in RR No. 13-98 – NGO means a non-stock
non-profit domestic corporation or
organization:
(1) Organized and operated exclusively for:
(a) scientific,
(b) research,
(c) educational,
(d) character-building and youth and
sports development,
(e) health,
(f) social welfare,
(g) cultural or
(h) charitable purposes, or
(i) a combination thereof,
(2) No part of the net income of which
inures to the benefit of any private
individual
(3) Directly utilizes contributions for the
active conduct of the activities
constituting the purpose or function for
which it is organized, not later than 15th
day of the month following the close of
its taxable year in which contributions
are received, unless an extended period
is granted by the Secretary of Finance,
upon recommendation of the CIR
(4) Administrative expense ,on an annual
basis, must not exceed 30% of total
expenses for the taxable year
(5) Upon dissolution, its assets would be
distributed to another accredited NGO
organized for a similar purpose or
47
UP LAW BOC
purposes, OR to the State for public
purpose, OR would be distributed by a
competent court of justice to another
accredited NGO 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.
Contributions subject to the Statutory Limit
(a) Government or any of its agencies or
political subdivisions exclusively for public
purposes (contributions for non-priority
activities)
(b) Accredited domestic corporation or
associations organized exclusively for
(1) religious
(2) charitable
(3) scientific
(4) youth and sports development
(5) cultural
(6) educational purposes or
(7) rehabilitation of veterans
(c) Social welfare institutions
(d) Non-government organizations: No part of
the net income of which inures to the
benefit of any private stockholder or
individual
Statutory Limit:
(a) 10% in the case of an individual (individual
donor), and
(b) 5% in the case of a corporation (corporate
donor),
of the taxpayer's/donor’s income derived from
trade, business or profession computed before
the deduction for contributions and donations
(8) Contributions to pension trusts
Contribution to a pension trust may be claimed
as deduction as follows:
(1) Amount contributed for the present/normal
service cost – 100% deductible
(2) Amount contributed for the past service cost
– 1/10 of the amount contributed is
TAXATION 1 TAXATION LAW
deductible in year the contribution is made,
the remaining balance will be amortized
equally over nine consecutive years
Requisites for deductibility of payments to
pension trusts.—
(1) There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
(2) The pension plan is reasonable and
actuarially sound;
(3) It must be funded by the employer;
(4) The amount contributed must no longer be
subject to the employer’s control or
disposition; and
(5) The payment has not theretofore been
allowed before as a deduction.
Deductions under special laws.
(1) Special deductions for productivity bonus
and manpower training under the
Productivity Incentives Act of 1990
(2) Deductions for training expenses of
qualified jewelry enterprises (Jewelry
Industry Development Act of 1998)
(3) Deductions under the Adopt-a-School Act of
1998
(4) Deductions under the Expanded Senior
Citizens Act of 2003. (Domondon)
Optional standard deduction.
Individuals, except non-resident aliens
(1) May be taken by an individual in lieu of
itemized deductions except those earning
purely compensation income.
(2) If an individual opted to use OSD, he is no
longer allowed to deduct cost of sales or
cost of services.
(3) Amount: 40% of gross sales or gross
receipts(under RA 9504, effective July 6,
2008)
Requisites:
48
UP LAW BOC TAXATION 1
(1) Taxpayer is a citizen or resident alien;
(2) Taxpayer’s income is not entirely from
compensation;
(3) Taxpayer signifies in his return his
intention to elect this deduction;
otherwise he is considered as having
availed of the itemized deductions.
(4) Election is irrevocable for the year in
which made; however, he can change to
itemized deductions in succeeding years.
Corporations, except non-resident foreign
corporations
The option to elect Optional Standard
Deduction granted is now granted to
corporations (domestic and resident foreign
corporations) by virtue of RA 9504.
(1) The OSD is 40% of its gross income.
(2) The domestic and resident foreign
corporation shall keep such records
pertaining to his gross income as defined
in Section 32 of the NIRC during the
taxable year, as may be required by the
rules and regulations promulgated by the
Secretary of Finance upon
recommendation of the CIR.
(3) Corporations availing of OSD are still
required to submit their financial
statements when they file their annual ITR
and to keep such records pertaining to its
gross income. (RR 2-2010).
Partnerships
(1) General Co-Partnership
For purposes of taxation, the Code
considers general co-partnerships as
corporations. Hence, rules on OSD for
corporations are applicable to general co-
partnerships.
(2) General Professional Partnerships (GPP)
b. If the GPP availed of itemized
deductions, the partners are not
allowed to claim the OSD from their
share in the net income because the
49
TAXATION LAW
OSD is a proxy for all the items of
deductions allowed in arriving at
taxable income. This means that the
OSD is in lieu of the items of
deductions claimed by the GPP and the
items of deduction claimed by the
partners.
c. If the GPP avails of OSD in computing
its net income, the partners comprising
it can no longer claim further
deduction from their share in the said
net income.
d. The type of deduction chosen by the
GPP must be the same type of
deduction that can be availed of by the
partners. (RR 2-2010)
PERSONAL AND ADDITIONAL EXEMPTION (R.A. NO.
9504, MINIMUM WAGE EARNER LAW).—
Basic personal exemptions
Basic personal exemption is Fifty thousand
pesos (P50,000) for each individual taxpayer,
regardless of status, i.e., whether single,
married or head of the family.
But note Sec 35(A) of NIRC - In the case of
married individuals where only one of the
spouses is deriving gross income, only such
spouse shall be allowed the personal
exemption.
Additional exemptions for taxpayer with
dependents
(a) An individual, whether single or married,
shall be allowed an additional exemption of
P25,000 for each qualified dependent child
(QDC), provided that the total number of
dependents for which additional
exemptions may be claimed shall not
exceed 4 dependents (depends on the
number of qualified dependent children)
(b) Married Individuals: Additional exemptions
for QDC are claimed by only one spouse.
UP LAW BOC
(c) Who is a dependent for purposes of
additional exemptions?
(1) A taxpayer’s child, whether legitimate,
illegitimate or legally adopted child
(2) chiefly dependent for support upon on
the taxpayer
(3) living with the taxpayer
(4) not more than 21 years old, unmarried
and not gainfully employed or
(5) regardless of age, is incapable of self-
support because of mental or physical
defect. (Sec 35 B, NIRC)
(d) Who may claim personal exemptions?
(1) Citizens (whether resident or non-
resident) and resident aliens
(2) Non-resident aliens engaged in trade or
business are entitled personal exemptions
subject to reciprocity. (See below)
Status-at-the-end-of-the-year rule
Change of Status[Sec 35(C), NIRC]
(1) If taxpayer marries during taxable year,
taxpayer may claim the corresponding BPE
in full for such year (i.e., no need to pro-rate
the exemption).
(2) If taxpayer should have additional
dependent(s) during taxable year, taxpayer
may claim corresponding AE in full for such
year.
(3) If taxpayer dies during taxable year, his
estate may claim BPE and AE as if he died at
the close of such year.
(4) If during the taxable year
(a) spouse dies or
(b) any of the dependents dies or marries,
turns 21 years old or becomes gainfully
employed, taxpayer may still claim same
exemptions as if the spouse or any of the
dependents died, or married, turned 21
years old or became gainfully employed
at the close of such year.
Exemptions claimed by non-resident aliens
TAXATION 1 TAXATION LAW
Non-resident aliens engaged in trade or
business are entitled personal exemptions
subject to reciprocity.
It means that NRAETB shall be allowed a
personal exemption only if the income tax law
in his country grants allowance for personal
exemptions to the citizens and residents of the
Philippines as stipulated in the reciprocity tax
treaty with the Philippine Government.
Limit of PE Allowed to NRAETB: An amount
equal to the exemptions allowed by the non-
resident alien’s country to Filipino citizens not
residing therein but deriving income therefrom,
but not to exceed the amount fixed by NIRC.[In
other words, whichever is lower]
Items not deductible
General rule: In determining deductions, one of
the general rules (see above) is that deductions
must be paid or incurred in connection with the
taxpayer’s trade, business or profession.
Capital expenditures (e.g. acquisition cost of a
building) are also not deductible, because
these are not expenses, but form part of assets.
In computing taxable net income, no deduction
shall be allowed in respect to:
(1) Personal, living or family expenses (note:
they are not deductible from compensation
and business/professional income under
Section 24(A), NIRC)
(2) Any amount paid out for new buildings or
for permanent improvements (capital
expenditures), or betterments made to
increase the value of any property or estate
(3) Any amount expended in restoring property
(major repairs) or in making good the
exhaustion thereof for which an allowance
[for depreciation or depletion] is or has
been made
(4) Premiums paid on any life insurance policy
covering the life of any officer, employee, or
any person financially interested in the trade
or business carried on by the taxpayer,
50
UP LAW BOC TAXATION 1 TAXATION LAW

individual or corporate, when the taxpayer exempt corporations

is directly or indirectly a beneficiary under These are:
such policy (1) Proprietary Educational Institutions and
(5) Interest expense and bad debts between hospitals
related parties (See Sec. 36(B), NIRC). (2) Government owned and controlled
(6) Losses from sales or exchanges of property corporations
between related taxpayers. (3) Others
(7) Non-deductible interest – should the
taxpayer elect to deduct interest payments Proprietary Educational Institutions and
against its gross income, he cannot at the hospitals
same time capitalize such interest and By way of exception, proprietary educational
claim depreciation on the undepreciated institutions and hospitals are liable for net
cost which includes the interest. (PICOP v. income at a rate of only ten percent (10%).
Commissioner, G.R. No. 106949-50, Dec. 1,
1995) Government owned and controlled corporations
(8) Non –deductible taxes All corporations, agencies, or instrumentalities
(9) Non-deductible losses owned or controlled by the Government are
(10) Losses on Wash Sales (except if by dealer in subject to income tax, except:
securities in ordinary course of (1) GSIS
(2) SSS
(3) PHIC
(4) Local water districts (LWDs)
(5) PCSO

Others
The following organizations shall not be taxed
in respect to income received by them as such:
(1) Labor,agricultural or horticultural
organization not organized principally for
profit
(2) Mutual savings bank not having a capital
stock represented by shares, and
cooperative bank without capital stock
organized and operated for mutual
purposes and without profit
(3) A Beneficiary society, order or association,
operating for the exclusive benefit of the
members such as a fraternal organization
operating under the lodge system, or
mutual aid association or a non-stock
corporation organized by employees
providing for the payment of life, sickness,
accident, or other benefits exclusively to the
members of such society, order, or

51
UP LAW BOC TAXATION 1
association, or non-stock corporation or
their dependents
(4) CEMETERY company owned and operated
exclusively for the benefit of its members
(5) Non-stock corporation or association
organized and operated exclusively for
Religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset
shall belong to or inure to the benefit of any
member, organizer, officer or any specific
person
(6) Business league chamber of commerce, or
board of trade, not organized for profit and
no part of the net income of which inures to
the benefit of any private stock-holder, or
individual
(7) Civic league or organization not organized
for profit but operated exclusively for the
promotion of social welfare
(8) A non-stock and non-profit Educational
institution
(9) Government Educational institution
(10) Farmers' or other mutual typhoon or fire
insurance company, mutual ditch or
irrigation company, mutual or cooperative
telephone company, or like organization of a
purely local character, the income of which
consists solely of assessments, dues, and
fees collected from members for the sole
purpose of meeting its expenses and
(11) Farmers', fruit growers', or like association
organized and operated as a Sales agent
for the purpose of marketing the products
of its members and turning back to them
the proceeds of sales, less the necessary
selling expenses on the basis of the
quantity of produce finished by them;
Note:
(a) Notwithstanding the exemptions,
income of whatever kind and character
of the enumerated organizations from
any of their properties, real or personal,
or from any of their activities conducted
52
TAXATION LAW
for profit regardless of the disposition
made of such income, shall be subject to
tax.
(b) RA 9178 Act to Promote the
Establishment of Barangay Micro
Business Enterprises (BMBEs)
implemented by DO 17-04, April 20,
2004
(1) BMBEs shall be exempt from income
tax for income arising from the
operations of the enterprise.
(2) BMBE is any business entity or
enterprise engaged in the production,
processing or manufacturing of
products or commodities, including
agro-processing trading and services,
whose total assets including those
arising from loans but exclusive of
land on which the particular business
entity’s office, plant and equipment
are situated, shall not be more than
P3M.
(c) Recreational Clubs - RMC 35-2012
(August 3, 2012) clarifies taxability of
clubs organized exclusively for pleasure,
recreation and other non-profit
purposes (recreational clubs). Income
from whatever sources including but not
limited to membership fees, assessment
dues, rental income, and service fees are
subject to income tax and VAT.
UP LAW BOC TAXATION 1 TAXATION LAW

Taxation of resident citizens, non-resident citizens and resident aliens

Summary Table for Taxation of Individuals (all individual taxpayers, including non-resident aliens)

Classification Taxable Income Basic Personal Additional Tax Rates

Exemption Personal
Exemption
Resident Citizen Income from Allowed Allowed 5%-32%
sources within and
outside the
Philippines
Non-Resident Citizen Income from Allowed Allowed 5%-32%
sources within the
Philippines
Resident Alien Income from Allowed Allowed 5%-32%
sources within the
Philippines
Non-resident Alien Income from
Lower amount No specific 5%-32%
Engaged in Trade or sources within the between PE provision
Business Philippines allowed to Filipinos
in the foreign
country where he
resides vs. PE in the
Philippines
Non-resident Alien Income from Not allowed Not allowed 25%
Not Engaged in Trade sources within the
or Business Philippines

General rule that resident citizens are taxable on
income from all sources within and without the
Philippines
General rule: A Filipino resident citizen is
taxable on income from all sources (within and
without the Philippines)
Exception: A non-resident citizen is taxable
only on income derived from sources within the
Philippines.
A non-resident citizen is a Filipino citizen who:
(1) Establishes to the satisfaction of the CIR
the fact of his physical presence abroad
with a definite intention to reside therein
(2) Leaves the Philippines during the taxable
year to reside abroad (as immigrant or
for employment on a permanent basis)
(3) Works and derives income from abroad
and whose employment requires him to
be present abroad most of the time
during the taxable year
(4) Has been previously considered as a non-
resident and arrives in the Philippines at
any time during the taxable year to
reside here permanently (only with
respect to his income from sources
abroad until the date of his arrival in the
country)

53
UP LAW BOC
Taxation on Compensation Income
Income arising from an ER-EE relationship.
Inclusions
(1) Monetary compensation– If compensation
is paid in cash, the full amount received is
the measure of the income subject to tax.
(a) Regular salary/wage
(b) Separation pay - taxable if voluntarily
availed of. It shall not be taxable if
involuntary
(c) Retirement benefit not otherwise exempt
General rule: retirement pay is taxable
Exceptions:
(a) SSS or GSIS retirement pays.
(b) Retirement pay (R.A. 7641) due to old
age provided the following
requirements are met:
(i) The retirement program is
approved by the BIR
Commissioner;
(ii) It must be a reasonable benefit
plan. (fair and equitable)
(iii) The retiree should have been
employed for 10 years in the said
company;
(iv) The retiree should have been 50
years old or above at the time of
retirement; and
(v) It should have been availed of for
the first time.
(d) Bonuses, 13th month pay, and other
benefits not exempt .
(e) Directors’ fees
Fees – received by an employee for the
services rendered to the employer
including a director’s fee of the
company, fees paid to the public
officials such as clerks of court or
sheriffs for services rendered in the
performance of their official duty over
and above their regular salaries.
(2) Nonmonetary compensation - If services are
paid for in a medium other than money, the
TAXATION 1 TAXATION LAW
fair market value of the thing taken in
payment is the measure of the income
subject to tax.
(a) Fringe benefit not subject to tax
If the recipient of the fringe benefits is a
rank and file employee, and the said
fringe benefit is not tax-exempt, then the
value of such fringe benefit shall be
considered as part of the compensation
income of such employee subject to tax
payable by the employee. (Domondon)
Exclusions
(1) Fringe benefit subject to tax
Convenience of the ER Rule
If meals, living quarters, and other facilities
and privileges are furnished to an employee
for the convenience of the employer, and
incidental to the requirement of the
employee’s work or position, the value of
that privilege need not be included as
compensation (Henderson v. Collector (1961)).
(2) De minimis benefits - These are exempt from
fringe benefit tax and compensation income
tax.
(3) Bonuses, 13th month pay and other benefits
and payments specifically excluded from
taxable compensation income
(a) Gross benefits received by employees of
public and private entities provided that
the total exclusion shall not exceed
P82,000 (amounts in excess are
considered compensation income) (R.A.
10653)
Deductions
(1) Personal exemptions and additional
exemptions
(2) Health and hospitalization insurance
(a) Premium Paid on Health or
Hospitalization Insurance [Sec.34 (M)]
(b) Amount of premium paid on health
and/or hospitalization by an individual
54
UP LAW BOC TAXATION 1 TAXATION LAW

taxpayer (head of family or married), for taxation of business income/income from

himself and members of his family
during the taxable year.
Requisites for Deductibility
(1) Insurance must have actually been taken
(2) The amount of premium deductible does
not exceed P2,400 per family or P200 per
month whichever is lower during the
taxable year.
(3) That said family has a gross income of not
more than P250,000 for the calendar year.
(4) In case of married individual, only the
spouse claiming additional exemption
shall be entitled to this deduction.
Note: The spouse claiming the additional
exemptions for qualified dependent children
shall be the same spouse to claim the
deductions for premium payments.
The following may avail of the deduction
(a) Individual taxpayers earning purely
compensation income during the year.
(b) Individual taxpayer earning business
income or in practice of his profession.
practice of profession
All income obtained from doing business
and/or engaging in the practice of a profession
shall be included in the computation of taxable
income.
taxation of passive income
Passive income subject to final tax
“Final tax” means tax withheld from source,
and the amount received by the income earner
is net of the tax already. The tax withheld by
the income payor is remitted by him to the BIR.
The income having been tax-paid already, it
need not be included in the income tax return
at the end of the year. These passive income
items are as follows:
(1) Interest income
(2) Royalties
(3) Dividends from domestic corporations
(4) Prizes and other winnings

Taxation of compensation income of a minimum

wage earner

The minimum wage shall be exempt from the

payment of income tax on their taxable income:
Provided, further, That the holiday pay,
overtime pay, night shift differential pay and
hazard pay received by such minimum wage
earners shall likewise be exempt from income
tax

55
UP LAW BOC TAXATION 1 TAXATION LAW

Summary Table of Rates

(Includes NRAETB and NRANETB)
Section 24(B). Final Tax Rates on Certain Passive Income from Philippine sources

(1) INTEREST, ROYALTIES, PRIZES AND OTHER Citizens, NRAETB NRANETB

WINNINGS Residents
(a) Interest from any currency bank deposit 20% 20% 25%
(b) Yield or any other monetary benefit from deposit substitute 20% 20% 25%
(c) Yield or any other monetary benefit from trust funds and 20% 20% 25%
similar arrangements
(d) Royalties, in general (other than royalties described in 20% 20% 25%
letter “e”)
(e) Royalties on books as well as other literary works and 10% 10% 25%
musical compositions
(f) Prizes exceeding P10,000 20% 20% 25%
(g) Other winnings (other than Philippine Charity Sweepstakes 20% 20% 25%
and Lotto winnings)
(h) Interest incomes received from a depositary bank under 7 1/2% Exempt Exempt
expanded foreign currency deposit system Note: NRC
– Exempt
(RR 1-
2011)
(i) Interest income from long-term deposit or investment Exempt Exempt 25%
evidenced by certificates prescribed by BSP. If
preterminatedbefore fifth year, a final tax shall be imposed
based on remaining maturity:
(a) 4 years to less than 5 years 5% 5% 25%
(b) 3 years to less than 4 years 12% 12% 25%
(c) Less than 3 years
20% 20% 25%
(2) CASH AND/OR PROPERTY DIVIDENDS Citizens, NRAETB NRANETB
Residents
(a) Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock co.,
insurance or mutual fund companies and regional
operating headquarters of multinational companies
(beginning January 1, 2000) 10% 20% 25%
(b) Share of an individual in the distributable net income after
tax of a PARTNERSHIP (other than a general professional
partnership) (beginning January 1, 2000) 10% 20% 25%
(c) 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 a co-venturer (beginning January 1, 2000)
10% 20% 25%

56
UP LAW BOC TAXATION 1
Passive income not subject to tax
(1) 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 BSP shall be
exempt from tax
But should the holder of the certificate pre-
terminate the deposit or investment before
the 5th year, a final tax shall be imposed on
the entire income and shall be deducted
and withheld by the depository bank from
the proceeds of the long-term deposit or
investment certificate based on the
remaining maturity thereof:
(a) Four (4) years to less than five (5) years -
5%;
(b) Three (3) years to less than four (4) years
- 12%; and
(c) Less than three (3) years - 20%.
(2) Any income of nonresidents, whether
individuals or corporations, from
transactions with depository banks under
the expanded system shall be exempt from
income tax.
57
TAXATION LAW
taxation of capital gains
Income from sale of shares of stock of a
Philippine corporation
1. Shares traded and listed in the stock exchange
– exempt
The transaction is exempt from income tax
regardless of the nature of business of the
seller or transferor. However, it is subject to
the one-half of one percent (1/2 of 1%) stock
transaction tax imposed under Sec. 127(A) of
the Tax Code based on the gross selling
price or gross value in money of the shares
of stock sold or transferred.
2. Shares not listed and traded in the stock
exchange – subject to final tax. On sale, barter,
exchange or other disposition of shares of
stockof a domestic corporation not listed and
traded through a local stock exchange, held as a
capital asset:
On the net capital gain:
(1) Not over P100,000 = Final Tax of 5%
(2) On any amount in excess of P100,000 =
plus Final Tax of 10% on the excess
Income from the sale of real property situated in
the Philippines
What property covered
Property located in the PH classified as capital
assets
What transactions covered
Sales, exchanges, or other disposition of real
property (classified as capital assets), including
pacto de retro sales and other forms of
conditional sales of the following: citizens,
resident aliens, NRAETB, NRANETB, domestic
corporations.
Tax rate
UP LAW BOC TAXATION 1 TAXATION LAW

General rule: 6% of—whichever is higher

(a) Gross selling price, or
(b) Fair market value (determined in Determination of whether short- or long-
accordance with Sec. 6(E)). term: If held for <12 mos, then short-term.
Otherwise, long-term.
Except
(1) In case of sales made to the government, any (2) At 30% corporate income tax, if the seller is a
of its political subdivisions or agencies, or to corporation.
GOCCs, it can be taxed either:
(a) Under Sec. 24(C)(1) – 6% CGT, or Summary Tables of Rates
(b) Under Sec. 24(A), at the option of the (Tables include NRAETB and NRANETB)
taxpayer.
(2) In case of the sale of or disposition of their Section 24(C).Capital Gains Tax from Sale of
principal residence by natural persons Shares of Stock of a domestic corporation NOT
(a) Tax treatment: Exempt from capital TRADED in the Stock Exchange
gains tax (CGT). If there is no full RES/CIT NRAETB NRANETB
utilization of the proceeds of sale or Tax base:
disposition, the portion of the gain Net Capital
presumed to have been realized from Gain
the sale or disposition shall be subject Tax rate: 5% 5% 5%
to CGT. Not over 10% 10% 10%
(b) How taxable portion and tax P100,000
determined:
Amount in
[𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 𝑜𝑟 𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒 (𝑤ℎ𝑖𝑐ℎ𝑒𝑣𝑒𝑟 excess of
𝐴𝑚𝑜𝑢𝑛𝑡 𝑢𝑛𝑢𝑡𝑖𝑙𝑖𝑧𝑒𝑑 P100,000
↑)] × [ ]
𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
Section 24(D).Capital Gains Tax from Sale of
Real Property Classified as Capital Asset
Income from the sale, exchange, or other RES/CIT NRAETB NRANETB
disposition of other capital assets Tax base:
Other properties shall be subject to income Gross
tax— selling price
(1) At the graduated income tax rates, if the or current
seller is an individual; fair market
(a) Long-term capital gains: only 50% is value,
recognized. whichever
(b) Short-term capital asset transactions: is higher
100% subject to tax. (Sec. 39(B)) Tax rate: 6% 6% 6%

58
UP LAW BOC TAXATION 1 TAXATION LAW

Resident Non-Resident
CITIZEN ALIEN CITIZEN NRAETB NRANETB
Category of Income Within the Within the Within the Within the
All sources Philippine Philippine Philippine Philippine
s s s s
(1) Compensation / Business / GIW –
Profession 25%
Based on Taxable (i.e, Net) Income
(2) Prizes of P10,000 or less Schedular Income Tax Rates (Sec. 24, NIRC) Not
(i.e, 5% to 32%) Applicabl
e
(3) Interest from any currency bank
deposit , etc., Royalties (other
than from books, literary works
Gross Income Within the Philippines (GIW) – 20%
and musical compositions),
Final Withholding Tax
Winnings / Prizes (except prizes
P10,000 and below)

(4) Royalties from books, literary

works, musical compositions GIW – 10% Final Withholding Tax

(5) Interest from long-term deposit or EXEMPT; However:

investment certificates, which In case of pre-termination, with remaining
have a maturity of 5 years or more maturity of: 25%
4 years to less than 5 years – 5% on entire
income
3 years to less than 4 years – 12% on entire
income
less than 3 years – 20% on entire income
(6) Cash / Property Dividends from a
domestic corporation, etc., OR
share in the distributable net
GIW –
income after tax of a partnership GIW – 10% Final Withholding Tax
20%
(except a general professional
partnership), etc.

(7) Interest (Expanded Foreign

GIW – 7.5% Final
Currency Deposit System) EXEMPT
Withholding Tax

(8) Winnings on Philippine

Sweepstakes / Lotto EXEMPT

(9) Capital Gains on Sale of Shares of Net Capital Gains within:

Domestic Corp. (not traded in a Not Over P100,000 – 5% Final Tax

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Resident Non-Resident
CITIZEN ALIEN CITIZEN NRAETB NRANETB
Category of Income Within the Within the Within the Within the
All sources Philippine Philippine Philippine Philippine
s s s s
domestic stock exchange) Amount in Excess of P100,000 – plus 10% Final Tax on the
excess
(10) Capital Gains on Sale of Real
Gross Selling Price or FMV, whichever is higher –
Property in the Philippines
6% Final Withholding Tax

(11) Sale of Shares of Domestic

½ of 1% of the Selling Price (Stock Transaction Tax)
Corp. (traded in a domestic stock
Note: Stock Transaction Tax is not an income tax, but a
exchange)
business (percentage) tax
(12) Sale of Real Property located
Abroad Schedular Income Tax Rates (Sec. 24, NIRC)
(13) Sale of Shares of Foreign Corp (i.e, 5% to 32%)
(14) Passive Income from Abroad

Computations insurance premium

Pure Compensation Income Taxable Compensation Income Xx
ADD: Gross Business Income &/or
Gross Compensation Income xx Income from Practice of Xx
Less: Personal & Additional Profession
Exemptions Less: Allowable Deduction (itemized
and hospitalization/health xx or optional deduction) Xx
insurance premium Taxable Income Xx
Taxable Income xx x Rate
x Rate Income Tax Xx
Income Tax xx Less: Creditable Withholding Tax on
Less: Creditable Withholding Tax on Compensation Income/Other
Compensation Income xx Allowable Tax Credit Xx
Tax Payable xx Tax Payable Xx

Mixed-Income (i.e., compensation income and Pure Business/Professional Income

business income/income from the practice of
profession) Gross Business Income &/
or Income from Practice of Xx
Gross Compensation Income Xx Profession
Less: Personal & Additional Less: (a) Allowable Deduction
Exemptions (itemized or optional xx
and hospitalization/health Xx deduction)

60
UP LAW BOC TAXATION 1 TAXATION LAW

(b) Personal & Additional an association, a joint account, or a joint

Exemptions xx
and hospitalization/health
insurance premium
Total Taxable Income Xx
x Rate
Income Tax Xx
Less: Creditable Withholding Tax on
Compensation Income/Other
Allowable Tax Credit Xx
Tax Payable Xx
Taxation of non-resident aliens
engaged in trade or business
(See above summary tables)
general rules
(a) Subject to an income tax in the same
manner as an individual citizen and a
resident alien individual on taxable income
from all sources within the Philippines
(b) Nonresident alien doing business in the
Philippines: a non-resident alien individual
who shall come to the Philippines and stay
therein for an aggregate period of more
than 180 days during any calendar year
cash and/or property dividends
The following shall be subject to an income tax
of twenty percent (20%) on the total amount
thereof:
(a) Cash and/or property dividends from:
(1) A domestic corporation;
(2) A joint stock company;
(3) An insurance or mutual fund company;
(4) A regional operating headquarter of
multinational company;
(5) 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;
(6) The share of a nonresident alien
individual in the net income after tax of
venture taxable as a corporation of which
he is a member or a co-venturer;
(b) Interests
(c) Royalties (in any form); and
(d) Prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which
shall be subject to graduated tax) and other
winnings (except Philippine Charity
Sweepstakes and Lotto winnings);
Except:
(1) The following Royalties shall be subject to a
final tax of ten percent (10%) on the total
amount thereof:
(a) On books as well as other literary works;
and
(b) On musical compositions
(2) Cinematographic films and similar works
shall be subject to twenty-five percent
(25%) of the gross income
(3) 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
But 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:
(a) Four (4) years to less than five (5) years -
5%;
(b) Three (3) years to less than four (4) years -
12%; and
(c) Less than three (3) years - 20%.
capital gains

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UP LAW BOC TAXATION 1
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 similar tax prescribed on citizens and
resident aliens.
(a) Sale, barter or exchange of Shares of stock
in domestic corporation not traded –
(1) Net over P100,000 – 5% of net capital
gains realized
(2) On any amount in excess of P100,000
– 10% of net capital gains realized
(b) Sale, barter or exchange of real properties
– 6% of gross selling price or current FMV
whichever is higher
non-resident aliens not engaged in
trade or business
(1) Alien individuals employed by:
(a) Regional or Area Headquarters (RAHQ)
and Regional Operating Headquarters
(ROHQ) established in the Philippines by
multinational companies
Multinational company, defined 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
(b) Offshore Banking Units established in the
Philippines
(2) Alien individuals who are permanent
residents of a foreign country but who are
employed and assigned in the Philippines by
a foreign service contractor or by a foreign
service subcontractor engaged in petroleum
operations in the Philippines
Tax Rate and Base - 15% of gross income
received as salaries, wages, annuities,
compensation, remuneration and other
emoluments, such as honoraria and
allowances.
62
TAXATION LAW
The same tax treatment shall apply to
Filipinos employed and occupying the same
positions as those of aliens employed by
these multinational companies, offshore
banking units and petroleum service
contractors and subcontractors.
Individual taxpayers exempt from
income tax
Individual Taxpayers exempt from income tax
are:
(1) Senior Citizens
(2) Minimum wage earners
(3) Exemptions granted under international
agreements
senior citizens
Who covered: any resident citizen—
(a) At least 60 years old, and
(b) Who are considered minimum wage earners
under RA 9504. (Sec. 4 (b) RA 7432, as
amended by RA 9994) and/or the
aggregate amount of gross income earned
by the senior citizen during the taxable year
does not exceed the amount of his personal
exemptions (BPE and APE).
minimum wage earners
Rule: they shall be exempt from payment of
income tax on their taxable income
Limit: however, if he receives “other benefits”
in excess of the allowable statutory amount of
P30,000, then he shall be taxable on the
exceeds benefits as well as his salaries, wages,
and allowances, just like an employee
receiving compensation income beyond the
statutory minimum wage.
exemptions granted under international
agreements (sec. 32(b))
See RMC No, 31-2013, April 12, 2013 – taxation
of compensation income of Philippine
UP LAW BOC TAXATION 1 TAXATION LAW

nationals and alien individuals employed by Taxation of Domestic Corporations

foreign governments/embassies/diplomatic
missions and international organizations TAX PAYABLE
situated in the Philippines Taxes payable are:
(1) Regular tax
(2) Minimum Corporate Income Tax

Regular Tax
Normal Corporate Income Tax Rate: 30%of
Taxable Income (effective January 1, 2009)

Gross Income XXX

Less: Allowable Deductions XXX
Taxable Income XXX

Minimum corporate income tax (MCIT)

(a) applies to domestic corporations and RFCs
whenever such corporations have zero or
negative taxable income or whenever the
MCIT is greater than the normal income tax
due from such corporations.
(b) Imposed upon any domestic corporation
beginning the fourth taxable year in which
such corporation commenced its business
operations. For purposes of the MCIT, the
taxable year in which business operations
commenced shall be the year when the
corporation registers with the BIR (not in
which the corporation started commercial
operations).
(c) Tax rate: 2% of the Gross Income

Who are covered by MCIT?

The MCIT covers domestic and resident foreign
corporations which are subject to the regular
income tax. The term “regular income tax”
refers to the regular income tax rates under the
Tax Code. Thus, corporations which are subject
to a special corporate tax system do not fall
within the coverage of the MCIT.

Items allowed to be credited against quarterly

MCIT due: (a) CWT, (b) Quarterly income tax
payments under the normal income tax; and
(c) MCIT paid in the previous taxable quarter(s).

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UP LAW BOC
Excess MCIT from the previous taxable year/s
shall not be allowed to be credited against the
quarterly MCIT tax due.
Annual Income Tax Computation.—
The final comparison between the normal
income tax payable and the MCIT shall be
made at the end of the taxable year. The
payable or excess payment in the Annual
Income Tax Return shall be computed taking
into consideration corporate income tax
payment made at the time of filing of quarterly
corporate income tax returns whether this be
MCIT or normal income tax.
In the computation of annual income tax due,
if the normal income tax due is higher than the
computed annual MCIT, the following shall be
allowed to be credited against the annual
income tax: (a) quarterly MCIT payments, (b)
quarterly normal income tax payments, (c)
excess MCIT in the prior year/s (subject to the
prescriptive period allowed for its creditability),
(d) CWTs in the current year, (d) excess CWTs
in the prior year.
If in the computation of annual income tax due,
the computed annual MCIT due is higher than
the annual normal income tax due, the
following may be credited against the annual
income tax: (a) quarterly MCIT payments of
current taxable quarter, (b) quarterly normal
income tax payments in current year, (c) CWTs
in the current year, (d) excess CWTs in the prior
year.
Manner of Filing and Payment.—
The MCIT shall be paid in the same manner
prescribed for the payment of the normal
corporate income tax which is on a quarterly
and on a yearly basis.
Carry forward of excess minimum tax
TAXATION 1 TAXATION LAW
Any excess of the minimum corporate income
tax over the normal income tax shall be carried
forward on an annual basis. The excess can be
credited against the normal income tax in the
nextthree (3) succeeding taxable years. [Sec.
27(E)(2)] In the year to which carried forward,
the normal tax should be higher than the MCIT.
Relief from the MCIT under certain conditions
(Sec. 27 (E ), NIRC)
The Secretary of Finance, upon the
recommendation of the Commissioner, may
suspend the imposition of the MCIT upon
submission of proof by the applicant-
corporation that the corporation sustained
substantial losses on account of the following
(LMB):
(1) Prolonged labor dispute (losses from a strike
staged by employees that lasts for more
than 6 months and caused the temporary
shutdown of operations), or
(2) Force majeure (acts of God and other
calamity; includes armed conflicts like war
or insurgency), or
(3) Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).
Optional Gross Income Tax (OGIT).—
Section 27 (A) of the NIRC provides for an
optional gross income tax of 15% based on
gross income. The President, upon the
recommendation of the Secretary of Finance,
may, effective January 1, 2000, allow domestic
corporations the option to be taxed at fifteen
percent (15%) of gross income as defined
therein.
Note: At present, the OGIT has not been
implemented in the Philippines.
Corporations exempt from the MCIT:
( BIPTENG)
64
UP LAW BOC TAXATION 1 TAXATION LAW

(1) Banks and other non-bank financial (b) But by virtue of RA 9504, it now also
intermediaries; applies to corporations, except non-resident
(2) Insurance companies; foreign corporation.
(3) Publicly-held corporations; (c) Moreover, the rate was increased from 10%
(4) Taxable partnerships; to 40%.
(5) General professional partnerships;
(6) Non- taxable joint ventures; and
(7) Enterprises that are registered:
(a) with the Philippine Economic Zone
Authority (PEZA) under R.A. 7916;
(b) pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227;
and
(c) under special economic zones declared by
law which enjoy payment of special tax
rate on their registered operations or
activities in lieu of other taxes, national or
local.

Applicability of the MCIT where a corporation is

governed both under the regular tax system
and a special income tax system
For corporations whose operations or activities
are partly covered by the regular income tax
and partly covered under special income tax
system, the MCIT shall apply on operations by
the regular income tax system

allowable deductions
Itemized deductions
(1) Bad debts
(2) Expenses
(3) Losses
(4) Taxes
(5) Depreciation
(6) Interest
(7) Depletion of oil and gas wells and mines
(8) Charitable and other contributions
(9) Research and development
(10) Pension trusts

Optional standard deduction

(a) Before RA 9504, effective July 6, 2009,
OSD only applied to individuals except non-
resident aliens.

65
UP LAW BOC
taxation of passive income
Passive income subject to tax
Passive income subject to tax:
(1) Interest from deposits and yield or any other
monetary benefit from deposit substitutes
and from trust funds and similar
arrangements and royalties – 20%
(2) Capital gains from the sale of shares of
stock not traded in the stock exchange of a
domestic corporation held as capital asset
On the net capital gain:
First P100,000: Final Tax of 5%
On any amount in excess of P100,000: plus
10% Final tax on the excess
(3) Income derived from depository bank under
the expanded foreign currency deposit
system – 7.5%
(4) Capital gains realized from 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 On the gross selling price,
or the current fair market value at the time
of the sale, whichever is higher, a final tax of
6%
Inter-corporate dividends
Dividends received from another domestic
corporation - exempt
Passive income not subject to tax
(a) Income derived by a depository bank under
the expanded foreign currency deposit
system from foreign currency transactions
with nonresidents, offshore banking units in
the Philippines, 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
TAXATION 1 TAXATION LAW
expanded foreign currency deposit system
shall be exempt from
incomeexemptfromincome tax
Except: net income from transactions
specified by the Secretary of Finance upon
recommendation by the Monetary Board
BUT: Interest income from foreign currency
loans granted by such depository banks
under said expanded foreign currency
deposit system to residents, other than
offshore banking units in the Philippines,
shall be subject to a final tax at the rate of
10%.
(b) Any income of nonresidents, whether
individuals or corporations, from
transactions with depository banks under
the expanded system shall be exempt
fromexemptfrom income tax.
taxation of capital gains
Income from sale of shares of stock
On sale, barter, exchange or other disposition
of shares of stockof a domestic corporation not
listed and traded through a local stock exchange,
held as a capital asset:
On the net capital gain:
(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000: plus
10% Final tax on the excess
Income from the sale of real property
situated in the Philippines
Philippine & (iii) Income from the sale, exchange,
or other disposition of other capital assets
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 On the gross selling price,
or the current fair market value at the time of
the sale, whichever is higher, a final tax of 6%
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UP LAW BOC
tax on proprietary educational
institutions and non-profit hospitals
Tax Rate and Base – 10% on net income
(except on income subject to capital gains tax
and passive income subject to final tax) within
and without the Philippines
Caveat: If gross income from unrelated trade or
business or other activity exceeds 50%of total
gross income derived from all sources, the tax
rate of 30% shall be imposed on the entire
taxable income.
tax on government-owned or
controlled corporations, agencies or
instrumentalities
For GOCCs:
General rule:GOCCs are taxable as any other
corporation engaged in similar business,
industry or activity, except:
(a) Government Service Insurance System
(GSIS)
(b) Social Security System (SSS)
(c) Philippine Health Insurance Corporation
(PHIC)
(d) Local water districts (LWDs)
(e) Philippine Charity Sweepstakes Office
(PCSO)
(Sec. 27(C), NIRC)
For instrumentalities and agencies of
government:
General Rule: The government is exempt from
tax.
Exception: When it chooses to tax itself.
Nothing can prevent Congress from decreeing
that even instrumentalities or agencies of the
TAXATION 1 TAXATION LAW
government performing governmental
functions may be subject to tax. Where it is
done precisely to fulfilfulfill a constitutional
mandate and national policy, no one can doubt
its wisdom. (Mactan Cebu Airport v Marcos,
1996)
If the taxing authority is the local gov’t unit - RA
7160 expressly prohibits LGUs from levying tax
on the Nat’l Gov’t, its agencies and
instrumentalities and other LGUs.
Taxation of Resident Foreign
Corporations
general rule
A resident foreign corporation is a corporation
organized under the laws of a foreign country,
which is engaged in trade or business in the
Philippines.
(a) A Philippine branch of a foreign corporation
duly licensed by the SEC is considered a
resident foreign corporation. Thus, only the
income of the Philippine branch from sources
within the Philippines is subject to Philippine
income tax.
(b) Marubeni v. Commissioner: As general rule,
the head office of a foreign corporation is
the same juridical entity as its branch in the
Philippines following the single entity
concept. Thus, the income from sources
within the Phils. of the foreign head office
shall thus be taxable to the Philippine
branch.
with respect to their income from sources
within the philippines
Resident foreign corporations are subject to
any or some of the following:
(1) Capital Gains Tax
(2) Final Tax on Passive Income
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UP LAW BOC TAXATION 1
(3) Normal Tax [OR] Minimum Corporate
Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
(4) Branch Profit Remittance Tax
minimum corporate income tax
The discussion with respect to this topic
(income subject to normal tax, MCIT, or GIT)
under the subheading of domestic
corporations is equally applicable to resident
foreign corporations, both as to concepts and
computations, except that RFCs are taxed only
on income from sources within the Philippines.
(a) Normal Corporate Income Tax Rate30% of
net taxable income from sources within the
Philippines [RA 9337]
(b) Minimum Corporate Income Tax (MCIT)2%
of MCIT Gross Income from sources within
the Philippines. The MCIT is imposed on
RFCs underRFCsunder the same conditions
as domestic corporations. [Sec. 28(A)(2)]
(c) Gross Income Tax (GIT) The President,
upon the recommendation of the Secretary
of Finance, may allow resident foreign
corporations the option to be taxed at
fifteen percent (15%) of gross income within
the Philippines, under the same conditions
as domestic corporations. [Sec. 28(A)(1)]
tax on certain income
Interest from deposits and yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements and royalties
On any currency bank deposit, yield or any
other monetary benefit from deposit
substitutes, trust funds and similar
arrangements – Final tax of 20%
Income derived from a depository bank under the
expanded foreign currency deposit system
Under the expanded foreign currency deposit
system (EFCDS) – Final tax of 7.5%
68
TAXATION LAW
Capital gain from sale of shares of stock not
traded in the stock exchange
On sale, barter, exchange or other disposition
of shares of stock ofstockof a domestic
corporation not listed and traded through a
local stock exchange, held as a capital asset:
On the net capital gain:
(a) First P100,000: Final Tax of 5%
(b) On any amount in excess of P100,000: plus
10% Final tax on the excess
Intercorporate dividends
Dividends received from a domestic corporation
liable to tax under the NIRC- exempt
Taxation of Non-Resident Foreign
Corporations
general rule
Except as otherwise provided, the tax is 30% of
the gross income (except certain passive
income)received during each taxable year from
all sources within the Philippines, such as
interests (except interests on foreign loans,
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
on the sale of shares of stock (not listed and
traded through a local stock exchange), of a
domestic corporation which are subject to the
tax rates prescribed for individuals and resident
foreign corporations.
tax on certain income
Interest on foreign loans
(a) on foreign loans contracted on or after
August 1, 1986 – 20%
(b) under the expanded foreign currency
deposit system (EFCDS) - exempt
UP LAW BOC TAXATION 1 TAXATION LAW

Intercorporate dividends On sale, barter, exchange or other disposition

(a) (Intercorporate Dividend) – 15%, as long as
the country in which the nonresident foreign
corporation is domiciled allows a tax credit
for taxes “deemed paid” in the Philippines
equivalent to at least15%
(b) 15% represents the difference between the
regular income tax of 30% on corporations
and the 15% tax on dividends (“tax sparing
credit”)
(c) If the country within which the NRFC is
domiciled does NOT allow a tax credit, a
final withholding tax at the rate of30% is
imposed on the dividends received from a
domestic corporation.
of real property or on shares of stock of a
domestic corporation not listed and traded
through a local stock exchange, held as a
capital asset:
On the net capital gain:
(a) First P100,000 Final Tax of 5%
(b) On any amount in excess of P100,000 plus
Final Tax of 10% on the excess
Summary of Tax Bases and Rates of Special
Corporations
Quick Glance

Capital gains from sale of shares of stock not

traded in the stock exchange

Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals
Taxable Income from all sources 10%
(Non-profit)
Depository Banks (Foreign Currency Deposit Units)
(1) With respect to income derived under the Exempt (except that net income
expanded foreign currency deposit system from from such transactions is subject -
certain foreign currency transactions to the regular income tax payable
(2) With respect to interest income from foreign by banks)
currency loans to residents other than offshore
units in the Philippines or other depository banks Amount of interest income 10%
under the expanded system
Resident Foreign Corporations
International Carriers (Preferential Rate/Exempt subj Gross Philippine Billings
2.5%
to reciprocity RA 10378)
Offshore Banking Units
(1) With respect to income derived by offshore Exempt (except that net income
banking units from certain foreign currency from such transactions is subject -
transactions to the regular income tax payable
(2) With respect to interest income derived from by banks)
foreign currency loans granted to residents other
than offshore banking units or local commercial Amount of interest income 10%
banks

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UP LAW BOC TAXATION 1 TAXATION LAW

Tax
Type of Corporation Tax Base
Rate
Resident Depository Bank (Foreign Currency Deposit
Units) Exempt (except that net income
(1) With respect to income derived under the from such transactions is subject -
expanded foreign currency deposit system from to the regular income tax payable
certain foreign currency transactions by banks)
(2) With respect to interest income from foreign
currency loans to residents other than offshore
Amount of interest income 10%
units in the Philippines or other depository banks
under the expanded system
Regional or Area Headquarters Exempt -
Regional Operating Headquarters of Multinational Taxable Income from within the
10%
Companies Philippines
Non-resident Foreign Corporations [EXCLUDED]
Non-resident cinematographic film owners, lessors or Gross Income from the
25%
distributors Philippines
Non-resident Owner or Lessor of Vessels Chartered by Gross Rentals, Lease and Charter
4.5%
Philippine Nationals Fees from the Philippines
Non-resident Owner or Lessor of Aircraft, Machineries Gross Rentals, Charges and Fees
7.5%
and Other Equipment from the Philippines

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UP LAW BOC TAXATION 1
Improperly Accumulated Earnings of
Corporations
See: Sec. 29, as implemented by RR 2-2001
which prescribes rules governing the
imposition of IAET
Rule: There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of
the improperly accumulated taxable income of
domestic and closely-held corporations formed
or availed of for the purpose of avoiding the
income tax with respect to its shareholders or
the shareholders of any other corporation, by
permitting the earnings and profits of the
corporation to accumulate instead of dividing
them among or distributing them to the
shareholders.
Exception: The use of undistributed earnings
and profits for the reasonable needs of the
business would not generally make the
accumulated or undistributed earnings subject
to the tax.
What is meant by “reasonable needs of the
business” is determined by the immediacy test.
It states that the “reasonable needs of the
business are the
(1) immediate needs of the business; and
Covered Corporations
Only domestic corporations classified as closely-
held corporations are liable for IAET.
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TAXATION LAW
Taxation of Partnerships
Classification of Partnerships for Tax
Purposes
(1) General Professional Partnerships (GPP)–
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.
A GPP is exempt from income tax. It is,
however, required to file a tax return for its
income for the purpose of furnishing
information as to the share in the gains or
profits that each partner shall include in his
individual tax return.
(2) Other Partnerships (or General Co-
partnerships) – partnerships wherein all or
part of their income is derived from the
conduct of trade or business. An ordinary
business partnership is considered as a
corporation and is thus subject to corporate
tax of 30%.
Other Partnerships (or general co-partnerships)
Rules:
(1) The partnership is subject to the same rules
on corporations (capital gains tax, final tax
on passive income, normal tax, minimum
corporate income tax [MCIT] and gross
income tax [GIT]), but is not subject to the
improperly accumulated earnings tax [IAET].
The partnership must file quarterly and
year-end income tax returns.
(2) The taxable income of the partnership, less
the normal corporate income tax (30%)
thereon, is the distributable net income of
the partnership.
The share of a partner in the partnership’s
distributable net income of a year shall be
deemed to have been actually or constructively
received by the partners in the same taxable
year and shall be taxed to them in their
UP LAW BOC TAXATION 1 TAXATION LAW

individual capacity, whether actually
distributed or not. [Sec. 73(D)] Such share will
be subjected to a final tax of 10% to be
withheld by the partnership. [Sec. 24(B)(2)]
Co-ownership
When Co-ownership is not subject to tax
When the co-ownership’s activities are limited
merely to the preservation of the co-owned
property and to the collection of the income
from the property. The income derived by a co-
owner from the property shall be reported in
his individual tax return regardless of whether
such income is actually or constructively
received.
the joint venture partners will be taxed on their
respective shares in the income of the joint
ventures.
Two elements necessary to exempt a joint
venture or consortium from tax
(a) The joint venture must be an
unincorporated entity formed by two or
more persons
(b) The joint venture was formed for the
purpose of undertaking a construction
project, or engaging in the petroleum and
other energy operations with operating
contract with the government.

When Co-ownership is subject to tax

The following circumstances would render a
co-ownership subject to a corporate income
tax: (a) When a co-ownership is formed or
established voluntarily, or upon agreement of
the parties; (b) When the individual co-owner
reinvested his share, and (c) When the
inherited property remained undivided for
more than ten years, and no attempt was ever
made to divide to same among the co-heirs,
nor was the property under administration
proceedings nor held in trust, the property
should be considered as owned by an
unregistered partnership.

Joint Venture and Consortium

An unincorporated joint venture is taxed likes a

corporation. The share of the joint venture
partners will no longer be taxable to them
because they partake of dividends if paid to a
domestic or resident corporation.

However, an unincorporated joint venture

formed for the purpose of undertaking a
construction project or engaging in petroleum
operations pursuant to the consortium
agreement with the Philippine Government is
not subject to the corporate income tax. Only

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Taxation of General Professional
Partnerships
Rules
(1) A GPP is a partnership formed by persons
for the purpose of exercising their common
profession, no part of the income of which is
derived from engaging in trade or business.
A GPP as such shall not be subject to the
income tax. It is not a taxable entity for
income tax purposes.
(2) The partners shall only be liable for income
tax only in their separate and individual
capacities.
(3) For purposes of computing the distributive
share of the partners, the net income of the
GPP shall be computed in the same manner
as a corporation.
(4) Each partner shall report as gross income
his distributive share, actually or
constructively received, in the net income of
the partnership.
(5) The distributive share of a partner (actual or
constructive) shall be subject to a creditable
withholding income tax of 10% if the amount
share is not more than P720,000 and 15% if
the amount of the share is more than
P720,000. (RR 2- 1998)
(6) If the partnership sustains a net operating
loss, the partners shall be entitled to deduct
their respective shares in the net operating
loss from their individual gross income.
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TAXATION LAW
Withholding Tax
Withholding tax is a method of collecting
income tax in advance from the taxable income
of the recipient of income. It is a systematic
way of collecting taxes at source, an
indispensable method of collecting taxes to
ensure adequate revenue for the government.
In the operation of the withholding tax system,
the payee is the taxpayer, the person on whom
the tax is imposed, while the payor, a separate
entity, acts no more than an agent of the
government for the collection of the tax in
order to ensure its payment.
The amount thereby used to settle the tax
liability is deemed sourced from the proceeds
constitutive of the tax base. In an ad valorem
tax, the tax paid or withheld is not deducted
from the tax base, except when the law clearly
spells out in defining the tax base.
The duty to withhold is different from the duty
to pay income tax. The revenue officers
generally disallow the expenses claimed as
deduction from gross income, if no withholding
of tax as required by law or the regulations was
withheld and remitted to the BIR within the
prescribed dates.
Withholding Agent
Any person or entity who is required to deduct
and remit the taxes withheld to the
government.
Duties and Obligations of the Withholding
Agent
(a) To Register
(b) To Deduct and Withhold
(c) To Remit the Tax Withheld
(d) To File Annual Return
(e) To Issue Withholding Tax Certificates
Kinds
UP LAW BOC TAXATION 1
Withholding of final tax of certain incomes
Subject to rules and regulations the Secretary
of Finance may promulgate, upon the
recommendation of the Commissioner,
requiring the filing of income tax return by
certain income payees, the tax imposed or
prescribed by specific section of the NIRC on
specified items of income shall be withheld by
payor-corporation and/or person and paid in
the same manner and subject to the same
conditions as provided in Section 58 of the
NIRC.
Withholding of creditable tax at source
The Secretary of Finance may, upon the
recommendation of the Commissioner, require
the withholding of a tax on the items of income
payable to natural or juridical persons, residing
in the Philippines, by payor-
corporation/persons as provided for by law, at
the rate of not less than one percent (1%) but
not more than thirty-two percent(32%), which
shall be credited against the income tax
liability of the taxpayer for the taxable year.
withholding of vat
(1) On gross payments for the purchase of
goods
(2) On gross payments for the purchase of
services
(3) Payments made to government public
works contractors
(4) Payments for lease or use of property or
property rights to non-resident owners
filing of return and payment of taxes
withheld
Where to file and pay:
(1) Authorized agent bank;
(2) Collection Agent;
(3) the duly authorized Treasurer of the city or
municipality where the employer has his
legal residence or principal place of
business, or in case the employer is a
74
TAXATION LAW
corporation, where the principal office is
located; or
(4) As Commissioner otherwise permits.
Period for filing and payment:
(a) The return shall be filed and the payment
made within twenty-five (25) days from the
close of each calendar quarter.
(b) The Commissioner may, with the approval
of the Secretary of Finance, require the
employers to pay or deposit the taxes
deducted and withheld at more frequent
intervals, in cases where such requirement is
deemed necessary to protect the interest of
the Government.
final withholding tax at source
Under the final withholding tax system, the
amount of income tax withheld by the
withholding agent is constituted as a full and
final payment of the income tax due from
payee on the said income (e.g., interest on
deposits, royalties, etc.). The liability for
payment of the tax rests primarily on the payor
as a withholding agent. Thus, in case of the
withholding agent’s failure to withhold the tax
or in case of under-withholding, the deficiency
tax shall be collected from him. The payee is
not required to file an income tax return for the
particular income, nor is he liable for the
payment of the tax. (Sec. 2.57, RR No. 2-98)
The finality of the withholding tax is limited
only to the payee’s income tax liability on the
particular income. It does not extend to the
payee’s other tax liability on said income, such
as when the said income is further subject to a
percentage tax, such as gross receipts tax in
the case of a bank.
Income payments subject to Final Withholding
Tax:
(1) Income Payments to a Citizen or to a
Resident Alien Individual
(a) Interest on any peso bank deposit
UP LAW BOC TAXATION 1
(b) Royalties
(c) Prizes (except prizes amounting to
P10,000 or less which is subject to tax (5)
under Sec. 25(A)(1) of the Tax Code
(d) Winnings (except from Philippine (6)
Charity Sweepstake Office and Lotto)
(e) Interest income on foreign currency
deposit (7)
(f) Interest income from long term deposit
(g) Cash and/or property dividends
(h) Capital Gains presumed to have been
realized from the sale, exchange or
other disposition of real property
(2) Income Payments to a Non-Resident Alien
Engaged in Trade or Business in the
Philippines
(a) On Certain Passive Income
(1) cash and/or property dividend
(2) Share in the distributable net
income of a partnership
(3) Interest on any bank deposits
(4) Royalties
(5) Prizes (except prizes amounting to
P10,000 or less which is subject to
tax under Sec. 25(A)(1) of the Tax
Code.
(6) Winnings (except from Philippine
Charity Sweepstake Office and
Lotto)
(b) Interest on Long Term Deposits
(c) Capital Gains presumed to have been
realized from the sale, exchange or
other disposition of real property
(3) Income Derived from All Sources Within
the Philippines by a Non-Resident Alien
Individual Not Engaged in Trade or (8)
Business
(a) On gross amount of income derived
from all sources within the Philippines
(b) On Capital Gains presumed to have
been realized from the sale, exchange
or disposition of real property located
in the Philippines
(4) Income Derived by Alien Individual
Employed by a Regional or Area
75
TAXATION LAW
Headquarters and Regional Operating
Headquarters of Multinational Companies
Income Derived by Alien Individual
Employed by Offshore Banking Unit
Income of Aliens Employed by Foreign
Petroleum Service Contractors and
Subcontractors
Income Payment to a Domestic
Corporation
(a) Interest from any currency bank
deposits and yield or any other
monetary benefit from deposit
substitutes and from trust fund and
similar arrangements derived from
sources within the Philippines
(b) Royalties derived from sources within
the Philippines
(c) Interest income derived from a
depository bank under the Expanded
Foreign Currency Deposit (FCDU)
System
(d) Income derived by a depository bank
under the FCDU from foreign
transactions with local commercial
banks
(e) On capital gains presumed to have
been realized from the sale, exchange
or other disposition of real property
located in the Philippines classified as
capital assets, including pacto de retro
sales and other forms of conditional
sales based on the gross selling price
or fair market value as determined in
accordance with Sec. 6(E) of the NIRC,
whichever is higher
Income Payments to a Resident Foreign
Corporation
(a) Offshore Banking Units
(b) Tax on branch Profit Remittances
(c) Interest on any currency bank deposits
and yield or any other monetary benefit
from deposit substitute and from trust
funds and similar arrangements and
royalties derived from sources within
the Philippines
UP LAW BOC TAXATION 1
(d) Interest income on FCDU
(e) Income derived by a depository bank
under the expanded foreign currency
deposits system from foreign currency
transactions with local commercial
banks
(9) Income Derived from all Sources Within
the Philippines by a Non-Resident Foreign
Corporation
(a) Gross income from all sources within
the Philippines such as interest,
dividends, rents, royalties, salaries,
premiums (except re-insurance
premiums), annuities, emoluments or
other fixed determinable annual,
periodic or casual gains, profits and
income or capital gains
(b) Gross income from all sources within
the Philippines derived by a non-
resident cinematographic film owner,
lessor and distributor
(c) On the gross rentals, lease and charter
fees derived by a non-resident owner or
lessor of vessels from leases or
charters to Filipino citizens or
corporations as approved by the
Maritime Industry Authority
(d) On the gross rentals, charter and other
fees derived by a non-resident lessor of
aircraft, machineries and other
equipment
(e) Interest on foreign loans contracted on
or after August 1, 1986
(10) Fringe Benefits Granted to the Employee
(except Rank and File)
Goods, services or other benefits furnished
or granted in cash or in kind by an
employer to an individual employee
(except rank and file) such as but not
limited to the following:
(a) Housing
(b) Vehicle of any kind
(c) Interest on loans
76
TAXATION LAW
(d) Expenses for foreign travel
(e) Holiday and vacation expenses
(f) Educational assistance to employees
or his dependents
(g) Membership fees, dues and other
expense in social and athletic clubs or
other similar organizations
- Health insurance
(h) Informers Reward
creditable withholding tax
Taxes withheld on certain income payments
are intended to equal or at least approximate
the tax due of the payee on the income. The
income recipient is still required to file his
income tax return as prescribed in Section 51 of
the NIRC, wither to report the income and/or
pay the difference between the tax withheld
and the tax due on the income.
Expanded Withholding Tax
(a) a kind of withholding tax which is
prescribed on certain income payments and
is creditable against the income tax due of
the payee for the taxable quarter/year in
which the particular income was earned.
(b) An income payment is subject to the
expanded withholding tax if the following
conditions concur:
(1) An expense is paid or payable by the
taxpayer, which is income to the recipient
thereof subject to income tax;
(2) The income is fixed or determinable at the
time of payment;
(3) The income is one of the income payments
listed in the regulations that is subject to
withholding tax;
(4) The income recipient is a resident of the
Philippines liable to income tax; and
(5) The payor-withholding agent is also a
resident of the Philippines.
Income payments subject to Expanded
Withholding Tax:
UP LAW BOC TAXATION 1 TAXATION LAW

(1) Professional fees / talent fees for services pesos (P2,000) per month,
rendered by the following individuals: regardless of the number of
(a) Those individually engaged in the shipments during the month
practice of profession or callings (2) Filling, demolition and salvage
(b) Professional entertainers such as but work contractors and operators of
not limited to actors and actresses, mine drilling apparatus
singers and emcees (3) Operators of dockyards
(c) Professional athletes including (4) Persons engaged in the installation
basketball players, pelotaris and of water system, and gas or electric
jockeys light, hear or power
(d) Directors involved in movies, stage, (5) Operators of stevedoring,
radio, television and musical directors warehousing or forwarding
(e) Insurance agents and insurance establishments
adjusters (6) Printers, bookbinders,
(f) Management and technical lithographers and publishers,
consultants except those principally engaged in
(g) Bookkeeping agents and agencies the publication or printing of any
(h) Other recipient of talent fees newspaper, magazine, review or
(i) Fees of directors who are not bulletin which appears at regular
employees of the company paying such intervals, with fixed prices for
fees whose duties are confined to subscription and sale
attendance art and participation in the (7) Advertising agencies, exclusive of
meetings of the Board of Directors payments to media
(2) Professional fees, talent fees, etc for (8) Independent producers of
services of taxable juridical persons television, radio and stage
(3) Rental of real property used in business performances or shows
(4) Rental of personal properties in excess of P (9) Independent producers of "jingles"
10,000 annually (10) Labor recruiting agencies
(5) Rental of poles, satellites and transmission (11) Persons engaged in the installation
facilities of elevators, central air
(6) Rental of billboards conditioning units, computer
(7) Cinematographic film rentals and other machines and other equipment
payments and machineries and the
(8) Income payments to certain contractors maintenance services thereon
(a) General engineering contractors (12) Messengerial, janitorial, security,
(b) General building contractors private detective and other
(c) Specialty contractors business agencies
(d) Other contractors like: (13) Persons engaged in landscaping
(1) Transportation contractors which services
include common carriers for the (14) Persons engaged in the collection
carriage of goods and merchandise and disposal of garbage
of whatever kind by land, air or (15) TV and radio station operators on
water, where the gross payments sale of TV and radio airtime, and
by the payor to the same payee (16) TV and radio blocktimers on sale of
amounts to at least two thousand TV and radio commercial spots

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(17) Persons engaged in the sale of
computer services, computer
programmers, software
developer/designer, etc.
(9) Income distribution to the beneficiaries of
estates and trusts
(10) Gross commission or service fees of
customs, insurance, stock, real estate,
immigration and commercial brokers and
fees of agents of professional entertainers
(11) Commission, rebates, discounts and other
similar considerations paid/granted to
independent and exclusive distributors,
medical/technical and sales
representatives and marketing agents and
sub-agents of multi level marketing
companies
(12) Income payments to partners of general
professional partnerships
(13) Payments made to medical practitioners
through a duly registered professional
partnership
(14) Payments for medical/dental/veterinary
services thru hospitals/clinics/health
maintenance organizations, including
direct payments to service providers
(15) Gross selling price or total amount of
consideration or its equivalent paid to the
seller/owner for the sale, exchange or
transfer of real property
(16) Additional income payments to
government personnel from importers,
shipping and airline companies or their
agents
(17) Certain income payments made by credit
card companies
(18) Income payments made by the top 10,000
private corporations to their purchase of
goods and services from their
local/resident suppliers other than those
covered by other rates of withholding
(19) Income payments by government offices
on their purchase of goods and services,
from local/resident suppliers
(20) Tolling fees paid to refineries
(21) Payments made by pre-need companies to
funeral parlors
(22) Payments made to embalmers by
funeral parlors
(23)Income payments made to suppliers of
agricultural products
(24) Income payments on purchases of
mineral, mineral products and quarry
resources
Withholding tax on compensation
The tax withheld from income payments to
individuals arising from an employer-
employee relationship.
Compensation is any remuneration received for
services performed by an employee from his
employer under an employee-employer
relationship.
The different kinds of compensation are:
(1) Regular compensation - includes basic
salary, fixed allowances for representation,
transportation and others paid to an
employee
(2) Supplemental compensation - includes
payments to an employee in addition to
the regular compensation such as but not
limited to the following:
(a) Overtime Pay
(b) Fees, including director's fees
(c) Commission
(d) Profit Sharing
(e) Monetized Vacation and Sick Leave
(f) Fringe benefits received by rank & file
employees
(g) Hazard Pay
(h) Taxable 13th month pay and other
benefits
(i) Other remunerations received from an
employee-employer relationship

78
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Exemptions from Withholding tax on
compensation:
Remuneration as an incident of employment
(a) Retirement benefits received under RA
7641 (Retirement Pay Law) and those
received by officials and employees of
private firms, under a reasonable private
benefit plan.
(b) Any amount received by an official or
employee or by his heirs from the employer
due to death, sickness or other physical
disability or for any cause beyond the
control of the said official or employee
such as retrenchment, redundancy or
cessation of business
(c) Social security benefits, retirement
gratuities, pensions and other similar
benefits
(d) Payment of benefits due or to become due
to any person residing in the Philippines
under the law of the US administered US
Veterans Administration
(e) Payment of benefits made under the SSS
Act of 1954, as amended
(f) Benefits received from the GSIS Act of 1937,
as amended, and the retirement gratuity
received by the government employee
(g) Remuneration paid for agricultural labor
(h) Remuneration for domestic services
(i) Remuneration for casual labor not in the
course of an employer's trade or business
(j) Compensation for services by a citizen or
resident of the Philippines for a foreign
government or an international
organization
(k) Payment for damages – actual, moral,
exemplary damages received by an
employee or his heirs pursuant to a final
judgment or compromise agreement
arising out of or related to an employer-
employee relationship.
(l) Proceeds of 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;
TAXATION 1 TAXATION LAW
provided however, that interest payments
agreed under the policy for the amounts
which are held by the insured under such
an agreement shall be INCLUDED in the
gross income.
(m) Amount received by the insured as a return
of premium
(n) 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
amount of any damages received whether
by suit or agreement on account of such
injuries or sickness.
(o) Income exempt under Treaty
(p) Thirteenth (13th) month pay and other
benefits (not to exceed P 30,000)
(1) Mandatory 1 month basic salary
received after the twelfth *12th) month
pay
(2) Other benefits such as Christmas
bonus, productivity incentives, loyalty
award, gift in cash or in kind and other
benefits of similar nature actually
received by officials and employees of
both government and private offices
including the Additional Compensation
Allowance (ACA) granted and paid to
all officials and employees of the
Nations Government (NGAs) including
State Universities and Colleges (SUCs),
Government-Owned-or-Controlled
Corporations (GOCCs), Government
Financial Institutions (GFIs) and Local
Government Units (LGUs)
(a) De minimis benefits, given in
excess of the ceilings prescribed in
regulations, shall be taxable to the
recipient –employee only if such
excess is beyond the P30,000
threshold.
(q) GSIS, SSS, Medicare and other
contributions – GSIS, SSS, Medicare and
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Pag-Ibig contributions, and union dues of

individual employees
(r) Compensation income of MWEs who work
in the private sector and being paid the
statutory minimum wage (SMW), as fixed
by Regional Tripartitie Wage and
Productivity Board (RTWPB)/National
Wages and Productivity Commission
(NWPC), applicable to the place where
he/she is assigned
(s) Compensation income of employees in the
public sector with compensation income of
not more than the SMW in the non-
agricultural sector, as fixed by
RTWPB/NWPC, applicable to the place
where he/she is assigned.

timing of withholding
The obligation of the payor to deduct and
withhold the tax arises at the time an income
payment is paid or payable, or the income
payment is accrued or recorded as an expense
or asset, whichever is applicable, in the payor’s
books, whichever comes first. The term
“payable” refers to the date the obligation
becomes due, demandable or legally
enforceable.

Where income is not yet paid or payable but

the same has been recorded as an expense or
asset, whichever is applicable, in the payor’s
books, the obligation to withhold shall arise in
the last month of the return period in which the
same is claimed as an expense or amortized
for tax purposes. (Mamalateo)

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TAXATION LAW
TAXATION LAW 2

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I. ESTATE TAX will, ad nutum; but document.

revocability may be
BASIC PRINCIPL ES provided for indirectly
by means of a reserved
Time of death governs: power in the donor to
(1) The determination of the extent of the dispose of the
decedent’s interest for computing his gross properties conveyed;
estate. (iii) That the transfer
(2) The statute that governs estate taxation. should be void if the
(3) The accrual of the estate tax. transferor should
survive the transferee.
Subject to ESTATE TAX Subject to DONOR’S
DEFINITION
TAX
ESTATE TAX is tax on the (i) right to transmit Exceptions: (subject to
property at death and on certain transfers by the estate tax) when inter
decedent during his lifetime OR (ii) those which vivos is treated by law
are made by the law equivalent of testamentary as substitutes for
dispositions. testamentary
dispositions (i.e.,
transfers which are
TAXABLE TRANSFERS
inter vivos in form but
Taxable transfers are complete when the mortis causa in
transferor divested himself of all economic substance)i.e.
beneficial interest in himself or his estate. transfers in
contemplation of
Transfers Mortis Causa Transfers Inter Vivos death [Sec. 85(B),
A donation which Gratuitous transfers NIRC]
purports to be one inter that take effect after Transfer with retention
vivos but withholds death, either testate or or reservation of
from the donee the intestate certain rights [Sec.
right to dispose of the 85(B), NIRC]
donated property Revocable transfers
during the donor's [Sec. 85(C), NIRC]
lifetime is in truth Transfers of property
one mortis causa. arising under general
Characteristics: Donative intent of the power of appointment
(i) It conveys no title or donor1 [Sec. 85(D), NIRC]
ownership to the Capacity of the donor Transfers for
transferee before the Delivery of the insufficient
death of the transferor; donated property consideration [Sec.
or what amounts to the Acceptance of the 85(G), NIRC]
same thing, that the donee
transferor should retain Donation must be in CLASSIFICATION OF DECEDENT
the ownership (full or the proper form
naked) and control of Movable: orally or in Estate Tax applies only to individuals. The
the property while writing if value is equal decedent may be classified into:
alive; to or less than P5,000. (a) Citizen (RC/NRC)
(ii) That before his Otherwise, it shall be
(b) Resident alien (RA); or
death, the transfer in writing.
should be revocable by Immovable: must be (c) Non-resident alien (NRA).
the transferor at made in a public
CONCEPT OF RESIDENCE
Residence and domicile are used
1 Note: The transfers which may be constituted as donation
interchangeably without distinction.
is exempt from the donative intent requirement.

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If there is reciprocity, the intangible personal

SITUS OF INTANGIBLE PERSONAL property of an NRA shall not be included in
PROPERTIES his gross estate. If there is no reciprocity,
General Rule: Mobilia Sequuntur Personam such intangible personal property will be
Principle: Taxation of intangible personal included.
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows GROSS ESTATE VIS-À-VIS NET ESTATE
the residence/domicile of owner thereof. Situs is Gross Estate Net Estate
the domicile or residence of the owner. (Collector
Value at the time of Value of the estate after
v Fisher)
death of all the all deductions have
Exceptions:
decedent’s property been made against the
(1) When it is inconsistent with express
wherever situated gross estate; subject to
provisions of law
HOWEVER, in the case the graduated tax rates.
(2) When justice does not demand that it should
of a NRA at the time of [Sec. 6, RR 2-2003]
be, as where the property in fact has a situs
his death, only that part
elsewhere
of the entire gross This is the TAX BASE.
estate which is situated
Intangible Properties which are considered
in the Philippines shall
situated in the Philippines (Sec 104)
be included in his
(a) Franchise which must be exercised in the
taxable estate. [Sec 85,
Philippines
NIRC]
(b) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in FORMULA FOR ESTATE TAX
accordance with its laws Gross Estate (Sec. 85)
(c) Shares, obligations or bonds issued by any Less: Deductions (Sec. 86)
foreign corporation 85% of the business of -------------------------------------------------------
which is located in the Philippines Net estate before share of surviving spouse (if
(d) Shares, obligations or bonds issued by any married)
foreign corporation if such shares, Less: Net share of the surviving spouse in the
obligations or bonds have acquired a conjugal property (Sec. 86(C))
business situs in the Philippines -------------------------------------------------------
(e) Shares or rights in any partnership, business = Net taxable estate
or industry established in the Philippines Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
RULE OF RECIPROCITY = Estate Tax Due
There is reciprocity if the foreign country of which Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
the decedent was a citizen and resident at the -------------------------------------------------------
time of his death: = Estate Tax Due, if any
(a) 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) Allowed a similar exemption from transfer
tax in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country

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DETERMINATION OF GROSS ESTATE AND

NET ESTATE (AND COMPOSITION)
NOTE: Memorize Sections 85 and 86.

SUMMARY OF THE COMPOSITION OF THE GROSS ESTATE AND EXCLUSIONS, DEDUCTIONS

THEREFROM
RC/NRC/RA NRA
Composition and Determination of GROSS Estate
The value at the time of his death of all the The value at the time of his death of all the
deceased’s: deceased’s:
a. Real property wherever situated a. Real property located in the Phil.
b. Tangible personal property wherever situated, b. Tangible personal property located in the Phil.,
and and
c. Intangible personal property wherever situated c. Intangible personal property with a situs in the
Phil. (subject to the rule of reciprocity)

Note: If there is reciprocity, intangible assets are

excluded from gross estate
Exclusions from GROSS Estate(Sec 85H and Sec 87)
GSIS proceeds/ benefits
Accruals from SSS
Proceeds of life insurance where the beneficiary is irrevocably appointed
Proceeds of life insurance under a group insurance taken by employer
War damage payments and Benefits received from US Veterans Administration
Transfer by way of bona fide sales
Transfer of property to the National Government or to any of its political subdivisions
Separate property of the surviving spouse
Merger of usufruct in the owner of the naked title
Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee
to the fideicommissay
Transmission from the first heir, legatee, or done in favour of another beneficiary, in accordance with the
desire of their predecessor
Acquisition and/or transfer expressly declared as not taxable
Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions
Deductions from GROSS estate to arrive at the NET estate

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RC/NRC/RA NRA
Ordinary deductions Ordinary deductions2
(1) Expenses, losses, indebtedness, taxes. (ELIT) (1) Proportionate deductions for expenses, losses,
Funeral expenses indebtedness, taxes. (ELIT)3
Judicial expenses Funeral expenses
Claims against the estate Judicial expenses
Claims against insolvent persons Claims against the estate
Unpaid mortgage and debt Claims against insolvent persons
Taxes Unpaid mortgage and debt
Losses Taxes
Losses
(2) Vanishing deductions (2) Vanishing deductions
(3) Transfers for public use (3) Transfers for public use
(4) Amounts received under R.A. 4917 No Amounts received under R.A. 4917

Special deductions
(a) Family home No special deductions
(b) Standard deduction
(c) Medical expenses

Share in conjugal property Share in conjugal property

2 No deduction shall be allowed for NRA, if the executor, administrator, or anyone of the heirs, DID NOT include in the return
required to be filed under Section 90 of the Code the value at the time of the decedent’s death of that part of his gross estate NOT
situated in the Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]
𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 𝑃ℎ𝑖𝑙
3 Formula for Proportionate Deductions of NRA: Allowable Deduction = 𝑥 ELIT
𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒 𝑊𝑜𝑟𝑙𝑑

85
UP LAW BOC TAXATION 2
VALUATION OF GROSS ESTATE (SEC 88)
General Rule: Gross Estate = FMV at the time of
the decedent’s death
Real Property
Appraised value, whichever is higher between:
(a) FMV, as determined by the
Commissioner (zonal value) or
(b) FMV, as shown in the schedule of values
fixed by the Provincial or City Assessor.
If there is no zonal value, the taxable base is the
FMV that appears in the latest tax declaration.
If there is an improvement, the value of
improvement is the construction cost per
building permit or the fair market value per latest
tax declaration.
Personal Property
FMV at the time of death. If none, acquisition cost
for recently acquired properties or the current
market price for the previously acquired
properties. (Sec 40(B)
Stocks, bonds, and other securities.
If listed and traded stocks = value is the mean
between the highest and lowest quoted selling
prices at the date of death; if none, nearest the
date of death (Sec 5 RR02-2003)
If unlisted stocks = (ordinary common shares)
book value at time of death or (preferred shares)
par value
NB: Bonds, mortgages, and Certificates of Stocks
are taxable at the place where they are physically
located.
Proceeds of Life Insurance with Revocable
Beneficiary: face value of policy (not cash
surrender value)
Right to Usufruct use or habitation, and annuity
Probable life of the beneficiary in accordance
with the latest basic standard mortality table
shall be taken into account.
ITEMS TO BE INCLUDED IN GROSS ESTATE
[SEC. 85, NIRC]
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TAXATION LAW
(1) Property owned by the decedent actually and
physically present in his estate at the time of
his death;
(2) Decedent’s interest;
(3) Properties not physically in the estate, such
as:
(4) Transfers in contemplation of death [Sec.
85(B), NIRC];
(5) Transfers with retention or reservation of
certain rights [Sec. 85(B), NIRC];
(6) Revocable transfers [Sec. 85(C), NIRC];
(7) Property passing under general power of
appointment [Sec. 85(D), NIRC];
(8) Transfers for insufficient consideration [Sec.
85(G), NIRC];
(9) Proceeds of life insurance [Sec. 85(E), NIRC];
(10) Claims against insolvent persons; and
(11) Capital of the surviving spouse [Sec. 85(H),
NIRC].
DEDUCTIONS FROM ESTATE
ORDINARY DEDUCTIONS
(1) Expenses, Losses, Indebtedness and Taxes,
Etc. (ELIT)
(2) Funeral Expenses (Sec. 86 (A)(1)(a))
Actual funeral expenses shall mean (i) those
which are actually incurred (ii) in connection
with, and before the interment or burial of
the deceased and (iii) must be paid out of the
estate and not by another person or out of
contributions from friends and relatives.
These must be (iv) duly supported by receipts
or invoices or other evidence to show that
they were actually incurred.
Limitation: Allowable deduction is not to exceed
P200,000 and whichever is lower of:
(a) The actual funeral expenses (whether or not
paid) up to the time of interment, or
(b) An amount equal to 5% of the gross estate.
The unpaid portion of the funeral expenses
incurred which is in excess of the P200,000
threshold is NOT allowed to be claimed as a
deduction under “claims against the estate”.
(Sec. 6(A)(1), RR 02-2003)
UP LAW BOC TAXATION 2
Not included are:
(1) Expenses incurred after the interment, such
as for prayers, masses, entertainment, or the
like are not deductible.
(2) (ii) Any portion of the funeral and burial
expenses borne or defrayed by relatives and
friends of the deceased are not deductible.
(3) (iii) Medical expenses as of the last illness
will not form part of funeral expenses but
should be claimed as medical expenses. (Sec.
6, RR 2-2003)
JUDICIAL EXPENSES OF TESTAMENTARY
AND INTESTATE PROCEEDINGS (SEC. 86
(A)(1)(B))
Expenses allowed as deduction under this
category are (i) those incurred in the inventory-
taking of assets comprising the gross estate,
their administration, the payment of debts of the
estate, as well as the distribution of the estate
among the heirs. In short, these deductible items
are expenses (ii) incurred during the settlement
of the estate but not beyond the last day
prescribed by law, or the extension thereof, for
the filing of the estate tax return. (Sec. 86 (A)(2),
RR 2-2003). These expenses must be (iii) for the
benefit of the estate, and (iv) substantiated by
recipts OR if unpaid, should be supported by a
sworn statement of account issued and signed by
the creditor.
Judicial expenses may include:
(a) Fees of executor or administrator
(b) Attorney’s fees (Commissioner v CA (2000)
(c) Court fees
(d) Accountant’s fees
(e) Appraiser’s fees
(f) Clerk hire
(g) Costs of preserving and distributing the
estate
(h) Costs of storing or maintaining property of
the estate
(i) Brokerage fees for selling property of the
estate
Not deductible
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TAXATION LAW
(a) Compensation paid to a trustee of the
decedent’s estate for his services rendered
for the purpose of managing the decedent’s
real estate for the benefit of the testamentary
heirs (Lorenzo v. Posadas)
(b) Expenses incurred by the presumptive heir
and that of her witnesses for appearance at
the trial to oppose the probate of a will.
(c) Attorney’s fees incident to litigation incurred
by the heirs in asserting their respective
rights, or claims as to who are entitled to the
estate left by the deceased.
(d) Premiums paid by the administrator on his
bond, being exclusively used for his account,
since the giving of the bond is in the nature of
a qualification for the office and not
necessary in the settlement of his estate.
CLAIMS AGAINST THE ESTATE (SEC. 86
(A)(1)(C))
The word “claims” is generally construed to
mean (i) debts or demands of a pecuniary nature
(ii) which could have been enforced against the
deceased in his lifetime and could have been
reduced to simple money judgements. These are
liabilities of the estate or indebtedness of such
(iii) arising out of: contract, tort, or operation of
law. (Dizon v CTA, 2008)
Requisites for Deductibility of Claims Against the
Estate:
(a) The liability represents a personal obligation
of the deceased existing at the time of his
death except unpaid obligations incurred
incident to his death such as unpaid funeral
expenses (i.e., expenses incurred up to the
time of internment) and unpaid medical
expenses which are classified under a
different category of deductions.
(b) The liability was contracted in good faith and
for adequate and full consideration in money
or money’s worth
(c) The claim must be a debt or claim which is
valid in law and enforceable in court;
(d) The indebtedness must not have been
condoned by the creditor or the action to
UP LAW BOC TAXATION 2
collect from the decedent must not have
prescribed.
(e) They must be reasonably certain in amount,
and substantiated.
CLAIMS AGAINST INSOLVENT PERSONS
(SEC. 86 (A)(1)(D))
These are claims of the estate (i) against
insolvent persons (ii) which are not collectible. To
be deductible from the gross estate:
Additional Requirements:
(a) The incapacity of the debtor to pay his
obligation should be proven, although a
judicial declaration of insolvency is not
required;
(b) The full amount owed by the insolvent must
first be included in the decedent’s gross
estate; and
(c) If the insolvent could only pay a partial
amount, the full amount owed shall be
included in the gross estate, and the amount
uncollectible shall be allowed as a deduction.
UNPAID MORTGAGES, LOSSES AND
TAXES (SEC. 86(A)(1)(E))
UNPAID MORTGAGES
Requisites for Deductibility [Sec. 6-A5(a), RR 2-
2003]
(a) The value of the decedent’s interest therein,
undiminished by such mortgage or
indebtedness, is included in the value of the
gross estates.
(b) The mortgages were contracted bona fide
and for an adequate and full consideration in
money or money’s worth.
In case the loan of the decedent is only an
accommodation loan where the loan proceeds
went to another person, the value of the unpaid
loan must be included as a receivable of the
estate. If there is a legal impediment to recognize
the same as a receivable of the estate, the said
unpaid obligation shall not be allowed as a
deduction. In all instances, the mortgaged
property, to the extent of the decedent’s interest
88
TAXATION LAW
therein, should always form part of the taxable
gross estate. (RR 2-2003)
UNPAID TAXES
Requisites for Deductibility
(a) Taxes which have accrued as of or before the
death of the decedent (if it was incurred after,
it is chargeable to the income of the estate),
and
(b) Unpaid as of the time of his death, regardless
of whether or not it was incurred in
connection with trade or business
Not included:
(a) Income tax upon income received after death,
or
(b) Property taxes not accrued before his death,
or
(c) The estate tax due from the transmission of
his estate
CASUALTY LOSSES
Requisites for Deductibility
(a) Incurred during the settlement of the estate
(b) Arising from fires, storms, shipwreck, or other
casualties from robbery, theft, or
embezzlement
(c) Not compensated by insurance or otherwise
(d) At the filing of the estate tax return, such
losses have not been claimed as a deduction
for income tax purposes in an income tax
return
(e) Incurred not later than the last day for the
payment of the estate tax as prescribed by
law.
Casualty loss can be allowed as deduction in one
instance only, either for income tax purposes or
estate tax purposes. (Sec. 6(A)(5)), Rev. Reg 2-
2003)
NOTE: See Formula for computing Ordinary
Deductions of NRA above.
B. PROPERTY PREVIOUSLY TAXED/PPT
(SEC. 86(A)(2)) ALSO CALLED AS
VANISHING DEDUCTIONS
UP LAW BOC TAXATION 2
This is an amount allowed to reduce the taxable
estate of a decedent where property:
(1) Received by him from a prior decedent by gift,
bequest, device, or inheritance
(2) Transferred to him by gift, has been the
object of previous transfer transaction
Conditions
(1) There must be 2 deceased persons and the
first one is the donor
(2) The second decedent dies within 5 years after
the death of a prior decedent, or in case of
gift, the decedent-donee dies within the
same period after the date of the gift.
Requisites
(1) Death – The present decedent died within 5
years from the date of the prior decedent OR
date of gift.
(2) Identity of the property– The property with
respect to which deduction is sought can be
identified as the one who received from prior
decedent, or from the donor, or as the
property acquired in exchange for the
original property so received.
(3) Inclusion of the property – The property must
have formed part of the gross estate situated
in the Philippines of the prior decedent, or
have been included in the total amount of
the gifts of the donor made within 5 years
prior to the present decedent’s death.
(4) Previous taxation of property – The estate tax
on the prior succession, or the donor’s tax on
the gift must have been finally determined
and paid by the prior decedent or by the
donor, as the case may be.
(5) No previous vanishing deduction on the
property – No such deduction on the property,
or the property given in exchange therefor,
was allowed in determining the value of the
net estate of the prior decedent. This is
intended to preclude the application of the
vanishing deduction on the same property
more than once.
Limitations
(1) Value of property – The deduction is limited
by the value of property previously taxed or
89
TAXATION LAW
the aggregate value of such property if more
than one item, as finally determined for the
purpose of the prior estate tax (or gift tax) or
the value of such property in present
decedent’s gross estate, whichever is lower.
(2) Deduction for mortgage or lien – The initial
value (in number 1 above) shall be reduced by
the total amount paid, if any, by the present
decedent on any mortgage or other lien on
the property where a deduction was allowed,
by reason of the payment, of such mortgage
or other lien from the gross estate of the prior
decedent, or gift or donor, in determining the
estate tax of the prior decedent or the
donor’s tax.
(3) Deductions for expenses, etc. – The value as
reduced in #2 shall be further reduced by an
amount which bears the same ratio to the
amounts allowed as deductions for:
(a) Expenses, losses, indebtedness, and taxes
(ordinary deductions), and
(b) Transfers for public use as the amount
otherwise deductible for property previously
taxed bears to the value of the decedent’s
gross estate; and
(4) Percentage of deductions – The vanishing
deduction shall be the value (final basis) in
#3 multiplied by the ff. percentages:
VD If received by inheritance or gift
Rate
100% Within one (1) year prior to the death of
the present decedent
80% More than one year but not more than
two years prior to the death of the
decedent
60% More than two years but not more than
three years
40% More than three years but not more than
four years prior to the death of the
decedent
20% More than four years but not more than
five years prior to the death of the
decedent
UP LAW BOC TAXATION 2
FORMULA FOR VANISHING DEDUCTIONS:
(please take note of the limitations above)
Value Taken of Property
Less: Mortgage debt paid, if any
= Initial Basis
Less: Proportionate Deduction**
= Final Basis
Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔
= 𝒙 (𝑬𝑳𝑰𝑻 +
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
𝑻𝑷𝑼)
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to
determine the share of surviving spouse. It is
deducted from the exclusive property of the
decedent.
C. TRANSFERS FOR PUBLIC PURPOSE
(SEC. 86(A)(3))
These are (i) dispositions in a last will and
testament or transfers to take effect after death
(ii) in favor of the Government of the Republic of
the Philippines, or any political subdivision
thereof, for exclusively public purposes. The
whole amount of all the bequests, legacies,
devises, or transfers to or for the use of shall be
deductible from gross estate, (iii) provided such
amount or value had been included in the
computation of the gross estate. Thus, there is no
limitation for the amount to be deducted.
D. AMOUNTS RECEIVED BY HEIRS UNDER
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.
(SEC. 86(A)(7))
Any amount received by the heirs from the
decedent’s employer as a consequence of the
TAXATION LAW
death of the decedent-employee in accordance
with RA 4917, provided that such amount is
included in the gross estate of the decedent.
These include:
(1) Retirement benefits from private firms with
private benefit plan, if the retiring employee
is 50 years old or older. This can only be once
availed.
(2) Benefits granted in case of separation
beyond the control of the employee.
RA 4917 provides that retirement benefits of
private employees shall not be subject to
attachment, levy execution or any tax.
SPECIAL DEDUCTIONS
A. FAMILY HOME (SEC. 86(A)(4))
Requisites for Deductibility (Sec. 6(D)(b), RR 2-
2003)
(1) The family home must be the actual
residential home of the decedent and his
family at the time of his death, as certified by
the barangay captain of the locality.
(2) The total value of the family home must be
included as part of the gross estate of the
decedent
(3) Allowable deduction must be in an amount
equivalent to the current FMV of the family
home as declared or included in the gross
estate, or the extent of the decedent’s
interest (whether conjugal/community or
exclusive property), whichever is lower, but in
no case shall the deduction exceed
P1,000,000.
(4) The decedent was married or if single, was a
head of the family.
(5) Along with the decedent, any of the
beneficiaries must be dwelling in the family
home.
(6) The family home as well as the land on which
it stands must be owned by the decedent.
Therefore, the FMV of the family home
should have been included in the
computation of the decedent’s gross estate.
Limitation: P 1,000,000.00
90
UP LAW BOC TAXATION 2 TAXATION LAW

estate is taxed. Net share of the surviving spouse

B. STANDARD DEDUCTION (SEC. 86(A)(5), is neither an ordinary nor a special deduction.
SEC. 6(E), RR 2-2003)
An amount equivalent to one million pesos
(P1,000,000) shall be deducted from the gross EXCLUSIONS FROM ESTATE
estate without need of substantiation.
CAPITAL OF THE SURVIVING SPOUSE (SEC.
C. MEDICAL EXPENSES (SEC. 86(A)(6), 85(H))
NIRC; SEC. 6(F), RR 2-2003) Capital: property of the spouses brought into
All medical expenses (cost of medicine, hospital marriage. Strictly speaking, capital under the
bills, doctors’ fees, etc.) incurred (whether paid or Civil Law refers to the property brought by the
unpaid). husband to the marriage while that brought into
the marriage by the wife known is as paraphernal
Requisites for Deductibility property. (Domondon)
(1) The expenses were incurred by the decedent
within 1 year prior to his death EXCLUSIVE PROPERTY OF EACH SPOUSE
(2) The expenses are duly substantiated with If ACP governs property If CPG governs property
receipts and other documents in support relations relations
thereof
The community of The husband and wife
property shall consist of place in a common fund
Limitation Provided, that in no case shall the
all the property owned the proceeds, products,
deductible medical expenses exceed Five
by the spouses at the fruits, and income from
Hundred Thousand Pesos (P500,000).
time of the celebration their separate
of the marriage or properties and those
Not allowed as deduction: (i) Any amount of
acquired thereafter. acquired by either or
medical expenses incurred within one year from
(Art. 91 Family Code) both spouses through
death in excess of P500,000 shall no longer be
their efforts or by
allowed as a deduction under this subsection.
1. The following are chance, and, upon
Neither can (ii) any unpaid amount thereof in
excluded from the dissolution of the
excess of the P500,000 threshold nor (iii) any
community property: marriage or of the
unpaid amount for medical expenses incurred
a. Property acquired by partnership, the net
prior to the one-year period from date of death
gratuitous title by either gains or benefits
be allowed to be deducted from the gross estate
spouse, and the fruits obtained by either or
under “Claims against the estate”. (RR 2-2003,
as well as the income both spouses shall be
Sec. 6-F)
thereof, if any, unless it divided equally
is expressly provided by between them, unless
NET SHARE OF THE SURVIVING spouse in the
the donor, testator, or otherwise agreed in
conjugal partnership property (Sec. 86(C), NIRC;
grantor that they shall marriage settlements.
Sec. 6(H), RR 2-2003)
form part of the (Art. 106, Family Code)
The amount deductible is the net share of the
community property.
surviving spouse in the conjugal partnership
b. Property for personal 1. The following are
property. The net share is equivalent to ½ of 50%
and exclusive use of exclusive property of
of the conjugal property after deducting the
either spouse; however, each spouse:
obligations chargeable to such property. The
jewelry shall form part a. That which is
share of the surviving spouse must be removed to
of the community brought to the marriage
ensure that only the decedent’s interest in the
property. as his or her own
c. Property acquired b. That which each

91
UP LAW BOC
before the marriage by
either spouse who has
legitimate descendants
from a former marriage,
and the fruits as well as
the income, if any, of
such property. (Art. 92
Family Code)
2. Property acquired
during the marriage is
presumed to belong to
the community, unless
it is proved that it is one
of those excluded
therefrom.
TAXATION 2
acquires DURING the
marriage by gratuitous
title
c. That which is
acquired by right of
redemption, by barter
or by exchange with
property belonging to
only one of the spouses
d. That which is
purchased with
exclusive money of the
wife or the husband
(Art. 109, Family Code)
2. Property bought on
instalments paid partly
from exclusive funds of
either or both spouses
and partly from
conjugal funds belong
to the buyer or buyers if
full ownership was
vested BEFORE the
marriage subject to
reimbursement
advanced by the
conjugal partnership or
by either or both
spouses. (Art. 118,
Family Code)
3. Whenever an amount
or credit payable within
a period of time
belongs to one of the
spouses, the sums
collated during the
marriage in partial
payments or by
instalments on the
principal are considered
the exclusive property
of the spouse. However,
interest falling due
during the marriage on
the principal belong to
the conjugal
partnership.
92
TAXATION LAW
4. All property acquired
during the marriage
whether the acquisition
appears to have been
made, contracted or
registered in the name
of one or both spouses,,
is presumed to belong
to the conjugal
partnership, unless it is
proved that it pertains
exclusively to the
husband or to the wife.
If separation of property governs property
relations
Separation of property may refer to present or
future property or both. It may be total or partial.
In the latter case, the property not agreed upon
as separate shall pertain to the absolute
community. (Art. 144, Family Code)
To each spouse shall belong all earnings from
his or her profession, business or industry, and
all fruits, natural, industrial, or civil, due or
received during the marriage from his or her
separate property. (Art. 145, Family Code)
Exemptions:
1. Where net estate does not exceed P200,000.
(Sec. 84)
2. The following transmissions shall not be
taxed:
a. Merger of the usufruct in the owner of the
naked title
b. Transmission or delivery of the inheritance or
legacy by the fiduciary heir or legatee to the
fideicomissary
c. The transmission from the first heir, legatee, or
done in favor of another beneficiary in
accordance with the desire of the predecessor
d. All bequests, devises, legacies, or transfers to
social welfare, cultural and charitable
institutions, no part of the net income of which
inures to the benefit of any individual, and
provided that not more than 30% of the said
bequests, etc shall be used by such institution
for administration purposes.
Note: Effectivity of Family Code (Aug 3, 1988)
UP LAW BOC TAXATION 2
Exemptions under special laws
(1) Benefits received by members from the GSIS
and the SSS by reason of death
(2) Amounts received from the Philippines and
US governments for damages suffered
during the last war.
(3) Benefits received by beneficiaries residing in
the Philippines under laws administered by
the US Veteran Administration
(4) Bequests, legacies, or donations mortis
causa to social welfare, cultural, or charitable
organizations. Bequests to be used actually,
directly and exclusively for educational
purposes are also exempt from tax.
(5) Grants and donations to the Intramuros
Administration
TAX CREDIT FOR ESTATE TAXES PAID IN
A FOREIGN COUNTRY
It is a remedy against international double
taxation. To minimize the onerous effect of
taxing the same property twice, tax credit against
Philippine estate tax is allowed for estate taxes
paid to foreign countries.
Who may claim: RC/NRC/RA. Only the estate of a
decedent who was a citizen or a resident of the
Philippines at the time of his death can claim tax
credit for any estate tax paid to a foreign country.
General Rule
The estate tax imposed by the NIRC shall be
credited with the amounts of any estate tax
imposed by the authority of a foreign country.
Limitations on Credit
A. For Estate Taxes paid to one foreign country
(Specific Country Limitation)
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 the tax code
bears to his entire net estate.
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TAXATION LAW
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 =
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
B. For estate taxes paid to 2 or more foreign
countries (Global Limitation)
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 the tax code bears to his entire net estate.
𝑇𝑎𝑥 𝐶𝑟𝑒𝑑𝑖𝑡 𝐿𝑖𝑚𝑖𝑡 =
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Compare the tax credit allowed under Limitation
A and Limitation B. The lower of the two
amounts is the final allowable tax credit. In this
case, the amount computed under Limitation A
(4,400) is lower, thus it becomes the final
allowable tax credit.
If there is only one foreign country involved, both
Limitations will yield the same answer.
The resulting amount will be compared to the
actual tax paid to the foreign country. The lower
amount will be the final allowable tax credit.
EXEMPTION OF CERTAIN ACQUISITIONS
AND TRANSMISSIONS
Merger of usufruct in the owner of the naked title
Transmission or delivery of the inheritance or
legacy by the fiduciary heir (1st heir) to the
fideicomissary (2ndheir). Pending transmission of
the property, the fiduciary is entitled to all the
rights of a usufructuary, although the
fideicomissary is entitled to all the rights of a
naked owner.
Transmission from the first heir, legatee or done
in favour of another beneficiary, in accordance
with the desire of the predecessor.
UP LAW BOC TAXATION 2 TAXATION LAW

All bequests, devises, legacies or transfers to C. DONOR’S TAX

social welfare, cultural and charitable
institutions, no part of the net income of which
inures to the benefit of any individual; provided,
however, that not more than 30% of said bequest,
devises, legacies or transfers shall be used by
such institutions for administration purposes.
The donor’s tax is imposed on donations inter
vivos or those made between living persons to
take effect during the lifetime of the donor. It
shall not apply unless and until there is a
completed gift.

Tax Rates: A donor’s tax is levied, assessed, collected and

paid upon the transfer by any person, resident or
If the Net Estate is nonresident, of the property by gift. (Sec. 98(A),
Over But not Over The Tax Shall be NIRC). It shall apply
Plus Of thewhether the transfer is in
Excess Over
trust or otherwise, whether the gift is direct or
P 200,000.00 Exempt indirect, and whether the property is real or
P 200,000.00 500,000.00 0 5 %personal, tangible or intangible. [Sec. 98(B),
P 200,000.00
NIRC]
500,000.00 2,000,000.00 P 15,000.00 8% 500,000.00
2,000,000.00 5,000,000.00 135,000.00 11 %Donor’s tax is not a property tax but a tax
2,000,000.00
imposed on the transfer of property by way of gift
5,000,000.00 10,000,000.00 465,000.00 15 % 5,000,000.00
inter vivos. [Sec 11, RR 2-2003 citing Lladoc v. CIR
10,000,000.00 1,215,000.00 20 (1965)]
% 10,000,000.00

Exempt: If net taxable estate ≤ 200,000
NB: If donor is RC/NRC/RA = liable for donor’s
tax REGARDLESS of where the gift was made or
where property is located
NRA = liable for donor’s tax only if the
property donated is w/in the Phil.

REQUISITES OF VALID DONATION

(ART 725, NCC)

A gift that is incomplete because of reserved

powers becomes complete when either:
(a) the donor renounces the power OR
(b) his right to exercise the reserved power
ceases because of the happening of some
event or contingency or the fulfillment of
some condition, other than because of the
donor’s death. [Sec. 11, RR 2-2003]

TRANSFERS WHICH MAY BE

CONSTITUTED AS DONATION

(1) Sale, exchange or transfer of property for

insufficient consideration

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UP LAW BOC TAXATION 2
(2) Condonation or remission of debt where the
debtor did not render service in favor of the
creditor
(3) Renunciation in favor of other heirs (Sec 11,
RR 2-2003)
(a) Renunciation by the surviving spouse of their
share in the ACP/CPG after the dissolution of
the marriage in favor of heirs of the deceased
spouse or any other person/s
(b) Renunciation by an heir, specifically and
categorically in favor of identified heir/s to
the exclusion or disadvantage of the other
co-heirs in the hereditary estate
(c) However, general renunciation by an heir,
including the surviving spouse, of their share
in the hereditary estate left by the decedent
is NOT subject to DT
TRANSFER FOR LESS THAN ADEQUATE
AND FULL CONSIDERATION
In order for the rule to apply, there must be 1) a
transfer of property, other than real property
classified as a capital asset and subject to capital
gains tax under Sec. 24 (D) and 2) the transfer
was for less than an adequate and full
consideration in money or money’s worth.
In this case, the amount by which the fair market
value of the property exceed the value of the
consideration shall be considered a gift.
CLASSIFICATION OF DONOR
Donor’s Tax applies to individuals and
corporations (in their secondary purpose). They
may be classified into:
Residents (RC/RA/DC/RFC)
Non-Residents (NRC/NRA/NRFC)
Such classification is important in determining
the deductions from the gross gift of the donor,
and in filing the return.
Situs of Intangible Personal Properties
General Rule: Mobilia Sequuntur Personam
Principle: Taxation of intangible personal
properties (such as credits, bills, bank deposits
promissory notes, and corporate stocks) follows
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TAXATION LAW
the residence/domicile of owner thereof. Situs is
the domicile or residence of the owner. (Collector
v Fisher)
Exceptions:
(1) When it is inconsistent with express
provisions of law
(2) When justice does not demand that it should
be, as where the property in fact has a situs
elsewhere
Intangible Properties which are considered
situated in the Philippines (Sec 104)
(1) Franchise which must be exercised in the
Philippines
(2) Shares, obligations or bonds issued by any
corporation or sociedad anonima organized
or constituted in the Philippines in
accordance with its laws
(3) Shares, obligations or bonds issued by any
foreign corporation 85% of the business of
which is located in the Philippines
(4) Shares, obligations or bonds issued by any
foreign corporation if such shares,
obligations or bonds have acquired a
business situs in the Philippines
(5) Shares or rights in any partnership, business
or industry established in the Philippines
Rule of Reciprocity
There is reciprocity if the foreign country of which
the decedent was a citizen and resident at the
time of his death:
(a) 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) Allowed a similar exemption from transfer
tax in respect of intangible personal property
owned by citizens of the Philippines not
residing in that country
If there is reciprocity, the intangible personal
property of an NRA shall not be included in his
gross estate. If there is no reciprocity, such
intangible personal property will be included.
UP LAW BOC TAXATION 2 TAXATION LAW

DETERMINATION OF GROSS GIFT RESIDENT NON-RESIDENT

(INCLUDING COMPOSITION OF GROSS
profit, or to any political
GIFT) 2. Gifts made to or for subdivision of the said
the use of the National Government.
RESIDENT NON-RESIDENT Government or any
Composition and Determination of GROSS Estate entity created by any of 2. Gifts in favor of an
its agencies which is educational and/or
Gifts made by donor Gifts made by donor not conducted for charitable, religious,
who is either a resident who is non-resident
profit, or to any political cultural or social
or citizen at the time of alien at the time of the subdivision of the said welfare corporation,
the donation: donation: Government. institution, accredited
a. Real property a. Real property located nongovernment
wherever situated in the Phil.
3. Gifts in favor of an organization, trust or
b. Tangible personal b. Tangible personal
educational and/or philanthropic
property wherever property located in the charitable, religious, organization or
situated, and Phil., and cultural or social research institution or
c. Intangible personal c. Intangible personal
welfare corporation, organization, provided
property wherever property with a situs in institution, accredited not more than 30% of
situated the Phil. (subject to the
nongovernment said gifts will be used
rule of reciprocity)
organization, trust or by such donee for
philanthropic administration
Note: If there is organization or purposes.
reciprocity, intangible research institution or
assets are excluded
organization, Provided Common Exemptions
from gross gifts not more than 30% of 1. Encumbrances on the
Deductions and Exemptions from GROSS gift to said gifts will be used property donated if
arrive at NET Gifts by such donee for assumed by the donee
Deductions (These are Deductions (These are administration in the deed of donation.
exempt donations but exempt donations but purposes. 2. Donations made to
are deductible from, are deductible from, entities exempted
and not treated as and not treated as Common Exemptions under special laws.
exclusions from the exclusions from the 1. Encumbrances on the
gross gift) gross gift) property donated if
1. Dowries or donations assumed by the donee
made: in the deed of donation.
a. On account of 2. Donations made to
marriage entities exempted
b. Before its celebration under special laws
or within one year
thereafter
c. By parents to each of 1. Gifts made to or for Note:
their legitimate, the use of the National NOT SUBJECT TO DONOR’S TAX
recognized natural, or Government or any (1) Contributions to candidate or political party
adopted children entity created by any of for campaign purposes duly reported to
d. To the extent of the its agencies which is COMELEC
first P10,000 not conducted for (2) (ii) Gift to Parish Priest or Church (applies
only to real property tax)

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UP LAW BOC TAXATION 2
(3) (iii) Onerous Donations or Donations in
exchange for goods/services (since they are
subject to income tax)
SUBJECT TO DONOR’S TAX
Gratuitous Donations to Homeowners’
Association
VALUATION OF GIFTS MADE IN
PROPERTY
Taxable Base: Net gifts i.e. net economic benefit
from the transfer that accrues to the done AT
THE TIME OF DONATION
If gift is personal property = FMV at the time of
donation
If gift is real property = whichever is HIGHER
FMV as determined by the Commissioner of
Internal Revenue (Zonal Value) or
FMV in the latest schedule of values fixed by the
provincial and city assessor (MV per Tax
Declaration)
NOTE: Real property considered as capital assets
under the Tax Code are excepted from this rule
because the taxable value taken into account in
the computation of tax is the higher of either the
zonal value or the assessor’s value; not the
consideration. Therefore, the insufficiency and
inadequacy of the consideration paid would not
affect the computation of the tax due and
payable [Sec. 100 in relation to Sec. 24(d), NIRC]
Under Section 24(d), the fair market value itself, if
higher than the gross selling price, is the basis
for computing the capital gains tax imposed
upon the sale of such capital assets.
Thus, what the seller avoids in the payment of
the donor’s tax, it pays for in the capital gains tax.
If there is an improvement = construction cost
(based on the building permit and/or occupancy
permit ) + 10% per year after the year of
construction; or the FMV based on the latest tax
declaration.
If unlisted stocks = Adjusted Net Asset Method
shall be used whereby all assets and liabilities
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TAXATION LAW
are adjusted to fair market values. The net of
adjusted asset minus the adjusted liability value
is the indicated value of the equity.
Note:
Where property is transferred for less than an
adequate and full consideration in money or
money’s worth, then the amount by which the
FMV of the property at the time of the execution
of the Contract to Sell or execution of the Deed of
Sale which is not preceded by a Contract to Sell
exceeded the value of the agreed or actual
consideration or selling price shall be deemed a
gift, and shall be included in computing the
amount of gifts made during the calendar year.
[Sec. 11, RR 2-2003]
However, where the consideration is fictitious,
the entire value of the property shall be subject
to donor’s tax.
TAX CREDIT FOR DONOR’S TAXES PAID IN
A FOREIGN COUNTRY
Who may claim the tax credit
(1) Resident citizen
(2) Non-resident citizen
(3) Resident alien
1. Per Country Limit
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦)
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
2. Worldwide Limit
𝐷𝑒𝑐𝑒𝑑𝑒𝑛𝑡 ′ 𝑠 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 (𝐴𝑙𝑙 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠)
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
EXEMPTIONS OF GIFTS FROM DONOR’S
TAX
(See table above)
(1) Encumbrances on the property donated if
assumed by the donee in the deed of
donation.
(2) Donations made to entities exempted under
special laws.
Aquaculture Department of the Southeast Asian
Fisheries Development Center of the Philippines
UP LAW BOC TAXATION 2 TAXATION LAW

Development Academy of the Philippines =Aggregate Net Gifts

Integrated Bar of the Philippines
International Rice Research Institute
National Museum
National Library
National Social Action Council
Ramon Magsaysay Foundation
Philippine Inventor’s Commission
Philippine American Cultural Foundation
Task Force on Human Settlement on the
donation of equipment, materials and services
Multiply by: Tax rate
-------------------------------------------------------
= Donor’s Tax on Aggregate Net Gifts
Less: Donor’s Tax Paid on Prior Net Gifts
-------------------------------------------------------
Donor’s Tax Due on the Net Gifts to Date
Less: Tax Credit, if any
-------------------------------------------------------
= Donor’s Tax Due, if any

TAX BASIS Tax Rate

IF NOT A STRANGER
The tax for each calendar year shall be computed
on the basis of the total net gifts made during The Of the
the calendar. (Sec. 99, NIRC) Net Gift But not Pl
Tax Shall Excess
Over Over us
be Over
“Net gifts”
100,000.
The net economic benefit from the transfer that Exempt
00
accrues to the donee.
Accordingly, if a mortgaged property is 100,000. 200,000. 2 100,000.
0
transferred as a gift, but imposing upon the 00 00 % 00
donee the obligation to pay the mortgage
P
liability, then the net gift is measured by 200,000. 500,000. 4 200,000.
2,000.0
deducting from the fair market value of the 00 00 % 00
0
property the amount of the mortgage assumed.
(Sec. 11, RR 2-2003) 500,000. 1,000,00 14,000.0 6 500,000.
00 0.00 0 % 00
General Formula
1,000,00 3,000,00 44,000. 8 1,000,00
Gross Gifts
0.00 0.00 00 % 0.00
Less: Deductions from gross gifts
------------------------------------------------------- 3,000,00 5,000,00 204,000 10 3,000,00
Net gifts 0.00 0.00 .00 % 0.00
Multiply by: Tax rate 5,000,00 10,000,0 404,000 12 5,000,00
------------------------------------------------------- 0.00 00.00 .00 % 0.00
= Estate Tax Due
Less: Tax Credit, if any 10,000,0 1,004,00 15 10,000,0
and over
------------------------------------------------------- 00.00 0.00 % 00.00
= Donor’s Tax Due, if any
2) IF A STRANGER: 30%
If there are several gifts during the year
Gross Gifts made on a certain date (1) Rate applicable shall be based on the law
Less: Deductions from gross gifts prevailing at the time of donation.
------------------------------------------------------- (2) When the gifts are made during the same
Net gifts made on a certain date calendar year but on different dates, the
Add: Prior Net gifts during the year donor's tax shall be computed based on the
------------------------------------------------------- total net gifts during the year.

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Donation made to a stranger is subject to 30% of

the net gift. A stranger is a person who is not a:
brother, sister (whether by whole or half blood),
spouse, ancestor and lineal descendants; or
relative by consanguinity in the collateral line
within the fourth degree of relationship.

Exempt: If gift/donation ≤ 100,000

SUMMARY OF TRANSFER TAXES
TRANSFER TAXES
Estate Tax Donor’s Tax
Time for filing a return and payment of tax
FILED: within six (6) months from the decedent's death. NOTE: separate return is filed for each gift
E: not exceeding 30 days (in meritorious cases) made on different dates during the year
reflecting therein any previous net gifts
NB: Written notice of death to CIR w/in 2 mos. After death made in the same calendar year.

PAID: before the delivery of the distributive share in the FILED: within thirty (30) days after the gift
inheritance to any heir or beneficiary; upon filing of return. (donation) is made
E: extension (when payment on the due date would impose
undue hardship) not to exceed In case of donation to relatives, only one
1. 5 years, in case the estate is settled through the courts; or return shall be filed for several gifts by the
2. 2 years in case the estate is settled extra-judicially. donor to the different donees on the same
date.
NB: when extension is granted, a bond may be required by
CIR ≤ 2x amount of tax If the gift involves CPG, each spouse shall
file separate return wrt his/her respective
share in the CPG.
Where to file and to whom paid
GR: to the Authorized Agent Bank (AAB), Revenue Resident
Collection Officer (RCO) or duly authorized Treasurer of the GR: to AAB of the RDO having jurisdiction
city or municipality in the Revenue District Office having over the place of the domicile of the donor
jurisdiction over the place of domicile of the decedent at the at the time of the transfer.
time of his death
E:
E: if NRA/NRC, 1.If no AAB = to the RCO or duly Authorized
If w/ Aor, Eor in Phil = to the AAB of the RDO where such City or Municipal Treasurer where the donor
Aor,Eor is registered/domiciled, if not yet registered with the was domiciled at the time of the transfer,
BIR.
if w/o Aor,Eor in Phil = to AAB under the jurisdiction of RDO 2. if no legal residence in Phil or NRA = with
No. 39 Revenue District No. 39 - South Quezon
City or with the Philippine Embassy or
Consulate in the country where donor is
domiciled at the time of the transfer.

Non-resident
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.

Who should file

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The Eor/Aor or any of the legal heirs of the decedent, Any person, natural or juridical, resident or
whether resident or non-resident of the Philippines, under non-resident, who transfers or causes to
any of the following situations: transfer property by gift, whether in trust or
In all cases of transfers subject to estate tax; otherwise, whether the gift is direct or
Where though exempt from estate tax, the gross value of indirect and whether the property is real or
the estate exceeds two hundred thousand (P200,000) personal, tangible or intangible.
pesos; 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 BIR is required as a
condition precedent for the transfer of ownership therof in
the name of the transferee; or
2. 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.

NB: Eor/Aor has the primary obligation to pay the estate tax
but the heir or beneficiary has subsidiary liability for the
payment of that portion of the estate which his distributive
share bears to the value of the total net estate. The extent of
his liability, however, shall in no case exceed the value of his
share in the inheritance.

ESTATE TAX FORMULAE Value Taken of Property

EXCLUSIVE COMMUNITY TOTAL Less: Mortgage debt paid, if any
Gross Estate 4

Add: Initial Basis

Taxable Transfers & Others Less: Proportionate Deduction
Revocable Transfers/Donation Mortis Causa
Final Basis
Transfers in contemplation of death Multiplied by Deduction Rate
Property passing under GPoA
Transfers for insufficient consideration5 VANISHING DEDUCTION
Decedent’s Interest Accrued6
Proceeds of Life Insurance w/ **Proportionate Deduction
𝑰𝒏𝒊𝒕𝒊𝒂𝒍 𝑩𝒂𝒔𝒊𝒔
revocable beneficiary7 = 𝒙 (𝑬𝑳𝑰𝑻 + 𝑻𝑷𝑼)
𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑮𝑬 𝒐𝒇 𝒑𝒓𝒆𝒔𝒆𝒏𝒕 𝒅𝒆𝒄𝒆𝒅𝒆𝒏𝒕
Family Home
Claims against an Insolvent Person8
Amount received by heirs

Less: (Ordinary Deductions)

7 ELIT9

4 DO NOT INCLUDE: EXEMPTIONs

5 Amount included in the GE = FMV at the time of death – consideration amount
6 Accrued before his death but only received after his death, e.g. dividends declared on/before, and received after death;

partnership’s profit earned on/before and received after, accrued interest and rents on/before and collected after death
7 Beneficiary must be the estate of the decedent, Eor/Aor or a third person. If premiums are paid using conjugal funds, part of

conjugal funds.
8 Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.

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Vanishing Deductions
Transfers for Public Use

𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒

9 If NRA, Allowable Deduction wrt ELIT = 𝑥 𝐸𝐿𝐼𝑇
𝑊𝑜𝑟𝑙𝑑 𝐺𝑟𝑜𝑠𝑠 𝐸𝑠𝑡𝑎𝑡𝑒

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UP LAW BOC TAXATION 2 TAXATION LAW

Retirement Benefits received by heirs 2. Donor’s Tax

ON FIRST DONATION
Net Estate
Less: (Special Deductions10) Gross Gift xxx
Standard Deduction Less: Deductions (those not beneficial
Family Home to the done e.g. mortgage)
Medical Expenses xxx
Amounts received by heirs
Net Gift xxx
Net Taxable Estate (before share of surviving Less: Exemptions, if applicable
spouse) xxx
Less: Share of Surviving Spouse
Net Taxable Gift
xxx
Net Taxable Estate Multiply by Tax Rate
Multiply by Tax Rate xx%

Estate Tax Due Donor’s Tax Due

Less: Tax Credit11, if any xxx

ESTATE TAX DUE

If only 1 country is involved: (whichever is lower)

𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦

Estate Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝑊𝑜𝑟𝑙𝑑 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

OR actual estate tax paid to foreign country

If two or more countries are involved: (whichever is lower)

𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦

Estate Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑜𝑓 𝐴𝐿𝐿 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦

OR 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

OR actual estate tax paid to foreign country

10 These are not allowable deductions when TP is NRA.

11 Applies only to RC/NRC/RA

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UP LAW BOC TAXATION 2 TAXATION LAW

Less: Tax Credit12, if any

xxx
DONOR’S TAX DUE
xxx

ON SUBSEQUENT DONATIONS w/in the same

calendar year

Gross Gift xxx

Less: Deductions (those not beneficial
to the done e.g. mortgage)
xxx

Net Gift xxx If only 1 country is involved: (whichever is lower)

Less: Exemptions, if applicable 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑃ℎ𝑖𝑙

Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 ′ 𝑠 𝑇𝑎𝑥
xxx 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜

If two or more countries are involved: (whichever is lower)

Net Taxable Gift
xxx Tax Credit =
Add: All previous net gifts during the year 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
xxx
Aggregate Net Gifts OR
xxx 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑤/𝑜
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 ′ 𝑠 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
Multiply by Tax Rate
xx%

Donor’s Tax on Aggregate Net Gifts

xxx
Less: Donor’s tax on previous net gifts during the
year xxx

Donor’s Tax Due

xxx
Less: Tax Credit13, if any
xxx
DONOR’S TAX DUE
xxx

12 Applies only to RC/NRC/RA

13 Applies only to RC/NRC/RA

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UP LAW BOC TAXATION 2 TAXATION LAW

ESTATE TAX

DEATH GR: w/in 6m after death

E: extension of 30d CANCEL TIN

Transfer
Prepare the LIST of assets properties to
NOTICE OF DEATH to RDO Get TIN for ESTATE and liabilities and their the heirs
by Eor/Aor supporting documents

ESTATE TAX RETURN + PAYMENT

(NB: Date of payment may be extended, 5yrs or
2yrs), if estate exceeds 200,000php
DONOR’S TAX

Full Exemption NO TAX RETURN

NECESSARY
COMPLETION/ Exempt
PERFECTION OF
DONATION Partial Exemption
w/in 30d after
gift was made DONOR’S TAX RETURN + PAYMENT
(NB: Date of payment may be extended No Notice of
≤ 6 months) Donation Necessary

Liable

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UP LAW BOC TAXATION 2
D. VALUE-ADDED TAX (VAT)
CONCEPT
VAT is a consumption tax imposed at every
stage of distribution process on (i) the sale,
barter, exchange, or lease of goods or
properties and (ii) rendition of services in the
course of trade or business, or the (iii)
importation of goods, whether such imported
goods are for use in business or non-business
purposes. (Sec. 4.105-2, RR 16-2005)
The taxpayer (seller) determines his tax liability
by computing the tax on the gross selling price
or gross receipt (output tax), and subtracting or
crediting the earlier VAT on the purchase or
importation of goods or on the purchase of
service (input tax) against the tax due on his
own sale
Constitutionality of VAT
ABAKADA Guro Party List, et. al. v Ermita
(2005):
The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.
With respect to Sec. 8, amending Sec. 110 (A),
which provides for 60-month amortization of
the input tax on capital goods purchased: It is
not oppressive, arbitrary, and confiscatory. The
taxpayer is not permanently deprived of his
privilege to credit the input tax. For whatever
is the purpose, it involves executive economic
policy and legislative wisdom in which the
Court cannot intervene.
The tax law is uniform: it provides a standard
rate of 0% or 10% (or 12% now) on all goods or
services. The law does not make any distinction
as to the type of industry or trade that will bear
the 70% limitation on the creditable input tax,
5-year amortization of input tax on purchase of
capital goods, or the 5% final withholding tax
by the government.
It is equitable: The law is equipped with a
threshold margin (P1.5M). Also, basic marine
and agricultural products in their original state
are still not subject to tax. Congress also
105
TAXATION LAW
provided for mitigating measures to cushion
the impact of the imposition of the tax on those
previously exempt. Excise taxes on petroleum
products and natural gas were reduced.
Percentage tax on domestic carriers was
removed. Power producers are now exempt
from paying franchise tax.
VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is essentially
regressive).
What it simply provides is that Congress shall
“evolve a progressive system of taxation”.
In Tolentino v. Sec. of Finance (1995), the Court
said that direct taxes are to be preferred, and
as much as possible, indirect taxes should be
minimized… but not avoided entirely because
it is difficult, if not impossible, to avoid them.
Tolentino v. Secretary of Finance (1995):
Regressivity is not a negative standard for
courts to enforce.
What Congress is required by the Constitution
to do is to “evolve a progressive system of
taxation.”
This provision is placed in the Consti as moral
incentives to legislation, not as judicially
enforceable rights.
The regressive effects are corrected by the zero
rating of certain transactions and through the
exemptions
CHARACTERISTICS/ELEMENTS OF A
VAT-TAXABLE TRANSACTION
General Characteristics/Nature:
Privilege/Percentage Tax – imposed by law
directly not on the thing or service but on the
ACT (sale, barter, exchange, lease, importation,
or perfrormance of service)
Ad Valorem Tax –the amount is based on the
gross selling price or gross value in money of
the goods or service, including the use or lease
or properties.
Indirect Tax – it may be shifted or passed on to
the buyers, transferee, or lessee of the goods,
UP LAW BOC TAXATION 2 TAXATION LAW

properties or services as part of the purchase (1) Seller (w/n natural) executes contract to
price. SBE of RP
Excise Tax - a tax on the privilege of engaging (2) RP is in the Phil
in the business of selling goods or services, or (3) Seller is engaged in sale or exchange of RP
in the importation of goods but unlike excise, it or real estate (dealer, developer, lessor)
is not applied only to a few selected goods (4) RP is held primarily for sale/lease ICT/B or
an ordinary asset used in T/B as an
Transactions Covered and their elements incident to his vatable activity (NOT a
(summary): capital asset)
General Requirements (5) not exempt from VAT (NIRC, special law,
Done in the course of trade or business (ICT/B) special agreement)
w/n profit-oriented: rule of regularity +
incidental thereto (inc isolated) Sale of Services16
Exception: (1) for a valuable consideration
(a) NRC/NRA who perform services in Phil, (actually/constructively received)
even if no regularity (2) performed ICTB in the Phil.
(b) Importation of Goods may be for business (3) not exempt from VAT (NIRC, special law,
or non-business use special agreement)
Gross sales or receipts for the past 12 months (4) person rendering service is VAT-liable
or the next 12 months > 1,919,500php (5) no ee-er relationship
OR there are reasonable grounds to believe (6) Importation of Goods
that gross sales or receipts for the past 12
months or the next 12 months will exceed The transfer must be made in the Philippines.
1,919,500php. If the title to the goods were transferred
outside the Philippines, then the same is not
Taxable Transactions and Specific subject to VAT.
Requirements
Sale, Barter, Exchange or Lease (SBEL) of TAX CREDIT METHOD
Goods or Properties14
A VAT-registered person is entitled to credit
Goods/Personal Properties input taxes evidenced by VAT invoice or official
(1) Actual/deemed sale for a valuable receipt against the output tax payable. The tax
consideration
(2) for use or consumption in the Phil Commercial Subject to 12% VAT
Property
(regardless of the payment arrangements) (Sale/Lease
(3) not exempt from VAT (NIRC, special law, )
special agreement) Residential If monthly rental ≤ 12,800 = VAT and
Units OPT-exempt
(Lease) If monthly rental > 12,800 but
Real Properties (RP) 15: aggregate annual rentals ≤1,919,500
= subject to OPT
If monthly rental > 12,800 and
aggregate annual rentals > 1,919,500
14 Sec 106 = subject to VAT
15 Residential If SP > 1,919,500.00 = subject to VAT
Lot IF SP ≤ 1,919,500.00 = VAT-exempt
Casual Sale Subject to CGT (6%)
(Capital Residential If SP > 3,199,200.00 = subject to VAT
Assets) House and IF SP ≤ 3,199,200.00 = VAT-exempt
Regular Sales Lot
(Ordinary
Assets) 16 Sec 108
106
UP LAW BOC
credit method refers to the manner by which
the value added tax of a taxpayer is computed.
The input taxes shifted by the sellers to the
buyer are credited against the buyer’s output
taxes when he sells the taxable goods,
properties or services.
Under this method, the tax is computed by
determining the difference between the output
tax on his sales and the input tax on the
purchases of goods, services, capital goods,
supplies, and materials.
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or
local purchases of goods, properties, or
services, including lease or use of properties, in
the course of his trade or business.
Output tax – the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code.
If at the end of any taxable month or quarter:
The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
The input tax exceeds the output tax, the
excess shall be carried over to the succeeding
quarter or quarters
DESTINATION PRINCIPLE
This provides that the destination of goods
determines the taxation or exemption from
VAT.
CIR v. American Express International (2005):
As a general rule, goods and services are taxed
only in the country where they are consumed.
(Deoferio Jr. and Mamalateo. The Value Added
Tax in the Philippines, p. 43)
Corollarily, the Cross Border Doctrine
mandates that no VAT shall be imposed to
form part of the cost of the goods destined for
consumption outside the territorial border of
the taxing authority.
TAXATION 2 TAXATION LAW
Atlas Consolidated Mining & Dev. Corp. v. CIR
(2007): Hence, actual export of goods and
services from the Philippines to a foreign
country must be free of VAT, while those
destined for use or consumption within the
Philippines shall be imposed with 12% VAT.
[Deoferio Jr. and Mamalateo, p. 422]
CIR v. American Express (2005):
The court enumerated the exceptions to the
destination principle.
As a general rule, the value-added tax (VAT)
system uses the destination principle.
However, our VAT law itself provides for a clear
exception, under which the supply of service
shall be zero-rated when the following
requirements are met:
the service is performed in the Philippines;
the service falls under any of the categories
provided in Section 102(b) of the Tax Code; and
it is paid for in acceptable foreign currency that
is accounted for in accordance with the
regulations of the BSP.
PERSONS LIABLE
Persons Liable:
Any persons who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or buesiness,
and any person who imports goods, whether or
not in the course of business, is liable to pay
either VAT or 3% percentage tax.
The term “person” refers to any individual,
trust, estate, partnership, corporation, joint
venture, cooperative or association (Sec. 4.105-
1, RR 16-2005).
The following are liable to pay VAT:
(1) any person who sell, barters, exchange or
leases goods or properties
(2) if real property: persons engaged in real
estate business:
107
UP LAW BOC
(a) Any person who SBE of real properties
ICT/B
(b) Real estate lessors/ sub-lessors
(c) NRA/NRC lessors when RP is in Phil
(d) non-stock, non-profit corp engaged in
SBE of real properties ICT/B,
regardless of disposition of income
(e) Gov’t inc GOCCs in SBEL of RP ICT/B
(3) who renders services
(4) who imports goods
(5) if importer is tax-exempt/VAT-exempt
AND goods are subsequently SBE to non-
exempt persons,
(6) purchasers/recipients will be deemed the
importer
(7) if the Philippine branch of an NRFC
“imported”, first local buyer will be
deemed the importer
Additional Requirements to be subject to VAT:
(1) As regards person who sells, barters or
exchanges goods or properties, or sale of
services, is required to register for VAT
when: (i)such act is done in the course of
trade or business, and (ii) if his gross sales
or receipts for the past 12 months or the
next 12 months exceed P1,919,500;
(2) As regards person who imports, it is not
necessary that such importation is made in
the course of trade or business.
(3) Any person who elects to register for VAT
(cf Optional VAT Registration)
Persons NOT LIABLE to pay VAT:
(1) Any person whose gross sales or receipts
are less than P,1919,500 AND is not VAT
registered. (subject to OPT)
(2) Is exempt under Section 109;
(3) Marginal income earners are not subject to
business taxes because they are not
considered as engaged in trade or business.
A marginal income earner is an individual
deriving gross sales or receipts of not
exceeding P100,000 during any 12-month
period (Rev. Reg. 11-2000)
TAXATION 2 TAXATION LAW
General Rule: VAT and Percentage Tax cannot
be charged together. It’s either the transaction
is under VAT or Other Percentage Tax.
Exception: When one erroneously declares
himself to VAT registered.
VAT ON SALE OF GOODS OR
PROPERTIES
Rate: 12% VAT beginning 1 February 2006
[RMC No. 7-06]
Transactions: Every sale, barter or exchange, or
transactions “deemed sale” of taxable goods or
properties (RR 16-2005)
Basis: Gross selling price or gross value in
money of the goods or properties sold,
bartered or exchanged.
Who Pays: Paid by SELLER/TRANSFEROR.
(Sec. 106, NIRC)
Goods or properties – all tangible and
intangible objects which are capable of
pecuniary estimation, including:
(1) Real properties held primarily for sale to
customers or held for lease in the ordinary
course of trade or business;
(2) 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;
(3) The right or the privilege to use in the
Philippines of any industrial, commercial or
scientific equipment;
(4) The right or the privilege to use motion
picture films, films tapes and discs;
(5) Radio, television, satellite transmission
and cable television time.
Requirements
(1) Done in the course of trade or business (w/n
profit-oriented): rule of regularity +
incidental thereto (including isolated
transactions)
108
UP LAW BOC TAXATION 2 TAXATION LAW

(2) Gross sales or receipts for the past 12 incident to his vatable activity (NOT a
months or the next 12 months > capital asset)
1,919,500php (5) not exempt from VAT (NIRC, special law,
(3) OR there are reasonable grounds to special agreement)
believe that gross sales or receipts for the
past 12 months or the next 12 months will Gross (Sales) Selling Price (GSP): total amount
exceed 1,919,500php. of money or its equivalent which the purchaser
pays or is obligated to pay to the seller in
Additional Requirements depending on the consideration of the sale, barter or exchange of
nature of property: the goods or properties, excluding the VAT.
The excise tax, if any, on such goods or
Goods/Personal Properties properties shall form part of the gross selling
(1) Actual/deemed sale for a valuable price.
consideration
(2) for use or consumption in the Phil General Rule: GSP is the total amount of
(regardless of the payment arrangements) money paid in consideration of SBEL
(3) not exempt from VAT (NIRC, special law, Excludes: VAT, sales discounts 18 and,
special agreement) allowances and returns
Includes: Excise tax paid, initial payments 19 ,
Real Properties (RP) 17: interests and penalties (if instalment),
(1) Seller (w/n natural) executes contract to commission income (if exported), purchase
SBE of RP price, charges for packing, delivery and
(2) RP is in the Phil insurance
(3) Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor) If goods/personal properties
(4) RP is held primarily for sale/lease ICT/B or GSP = amount paid in consideration
an ordinary asset used in T/B as an
IF DEEMED SALE: FMV at the time of the
17
transaction
Casual Sale Subject to CGT (6%)
NB: in retirement/cessation, inventory (raw
(Capital materials, finished goods, machinery,
Assets) equipment, furniture, fixture), tax base =
Regular Sales
(Ordinary whichever is lower,
Assets) (1) acquisition cost
Commercial Subject to 12% VAT
Property
(2) current market price of goods
(Sale/Lease
) If real property,
Residential If monthly rental ≤ 12,800 = VAT and
Units OPT-exempt GSP = amount higher:
(Lease) If monthly rental > 12,800 but (1) consideration stated in the sales document
aggregate annual rentals ≤1,919,500
= subject to OPT
If monthly rental > 12,800 and 18 It should be determined at the time of the sale,
aggregate annual rentals > 1,919,500 indicated in the invoice and granting does not depend on
= subject to VAT
the happening of a future event
Residential If SP > 1,919,500.00 = subject to VAT 19 Initial payments does not include the amount of
Lot IF SP ≤ 1,919,500.00 = VAT-exempt
Residential If SP > 3,199,200.00 = subject to VAT mortgage on RP sold (except excess when mortgage
House and IF SP ≤ 3,199,200.00 = VAT-exempt exceeds the cost of the property), notes and other
Lot evidence on=f indebtedness issued by the purchaser at
the time of the sale
109
UP LAW BOC TAXATION 2
(2) FMV, whichever is higher of:
(a) Zonal value: FMV as determined by CIR
(b) Real Property Tax Value: FMV as
determined by provincial & city
assessors
IF ON INSTALLMENT (RR16-2005) : 20
GSP = down payments received + interests +
penalties + other charges – amount of
mortgage (paid)
Note:
If zonal/FMV, tax base
𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟
Upon full collection, if a difference is
uncovered because the zonal value or market
value at the date of sale is higher than the total
receipts or collections based on the agreed
consideration, the additional VAT shall be paid
accordingly (RMC 03-96)
IF DEFERRED21
GSP = entire selling price or zonal/FMV,
whichever is higher
Thus, subsequent receipt of unpaid balance is
NOT subject to VAT
Note: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales
20Considered instalment when the initial payment is less
than or equal to 25% of GSP. Taxable only on the
payment actually or constructively received.
Initial payments – payment/payments which the seller
receives before or upon execution of the instrument of
sale and payments which he expects or is scheduled to
receive in cash or property during the year when the sale
or disposition of the real property was made.
constructively received during the year of sale.
property sold (except as to the excess when such
mortgage exceeds the cost or other basis of the property
to the seller) and notes or other evidence of indebtedness
issued by the purchaser to the seller at the time of the
sale.
21 Considered deferred payment when the initial payment
is more than 25% of GSP. Treated as cash sale and the
entire selling price is taxable on the month of sale
TAXATION LAW
and 2) when GSP is unreasonably lower than
AMV22
AS REGARDS SALE OF REAL PROPERTY
Taxable:
(1) On installment plan
(2) Pre-selling by real estate dealers
(3) Sale of residential lot >P1,919,500 ; or
house and lot/other residential dwelling
>P3,199,200
= (4) Lease of residential units (rental per unit >
12,800/month OR total rental from ALL
units>P1,919,500/year)
Not taxable: (Sec. 109 (P)(Q)(V))
(1) Not primarily held for sale or lease in the
course of trade or business OR those held
for sale or lease in the course of trade or
business BUT does not exceed P 1,919,000.
(2) Low cost or socialized housing
(3) Residential lot when value does not exceed
P1,919,500
(4) House and lot/other residential dwelling <
P3,199,200
(5) Lease (rental per unit < 12,800/month and
total rental from all units < P1,919,500/
year)
(6) Transmission to a trustee (Except:
transmission is deemed sale transaction)
GR: Transmission of property to a trustee shall
NOT be subject to VAT if the property is to be
merely held in trust for the trustor and/or
beneficiary.
Exception: However, if the property transferred
is originally intended for sale, lease or use in
the ordinary course of trade or business AND
the transfer constitutes a completed gift, the
transfer is subject to VAT as a deemed sale
transaction. The transfer is a completed gift if
the transferor divests himself absolutely of
22 GSP is unreasonably lower than the actual market
value if it is lower than 30% of AMV of the same goods of
the same quantity or quality sold in the immediate
locality or the nearest date of sale.
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UP LAW BOC TAXATION 2 TAXATION LAW

control over the property, i.e., irrevocable ZERO-RATED SALES OF GOODS OR

transfer of corpus and/or irrevocable PROPERTIES, AND EFFECTIVELY ZERO-
designation of beneficiary. RATED SALES OF GOODS OR
7. Transfer to corporation in exchange of PROPERTIES
shares of stocks (see Sec. 40, NIRC for Tax-free
exchange) Rate: 0% VAT
8. Advance payment by the lessee Transactions: Every sale, barter or exchange, or
9. Security deposits for lease agreements.23 transactions “deemed sale” of taxable goods or
properties (RR 16-2005)

Zero-Rated Sales on Goods or Property (RR 16-

2005)
A zero-rated sale of goods or properties by a
VAT-registered person is a taxable transaction
for VAT purposes, but shall not result in any
output tax. However, the input tax on
purchases of goods, properties or services,
related to such zero-rated sale, shall be
available as tax credit or refund.
(1) Export Sales
(2) Foreign Currency Denominated Sales
(3) Sales of Goods or Property to perons or
entites who are tax-exempt/Effectively
Zero-Rated Sales

Export Sales [Sec. 106(A)(2)(a), NIRC]

(1) The (i) sale and actual shipment of goods

from the Philippines to a foreign country
AND (ii) paid for in acceptable foreign
currency or its equivalent in goods or
services, AND (iii) accounted for in
accordance with the rules and regulations
of the BSP

(2) 2.(i) Sale of raw materials or packaging

materials to a nonresident buyer (ii) for
delivery to a resident local export-oriented
enterprise (iii) to be used in manufacturing,
processing, packing or repacking in the
Philippines of the said buyer's goods AND
(iv) paid for in acceptable foreign currency
AND (v) accounted for in accordance with
the rules and regulations of the BSP.

23 Please take note of the difference between security

deposits and those applied to rent.
111
UP LAW BOC TAXATION 2
a. (i) Sale of raw materials or
packaging materials (ii) to export-
oriented enterprise (iii) whose
export sales exceed seventy
percent (70%) of total annual
production.
(3) Any enterprise whose export sales exceed
70% of the total annual production of the
preceding taxable year shall be considered
an export-oriented enterprise upon
accreditation under the rules & regulations
of Export Development Act, RA 7844 (RR
7-95)
a. Sale of gold to the Bangko Sentral
ng Pilipinas (BSP)
b. The sale of goods, supplies,
equipment and fuel to persons
engaged in international shipping
or international air transport
operations (RA 9337)
c. Limited to goods, supplies,
equipment and fuel pertaining to
or attributable to the transport of
goods and passengers from a port
in the Phil. directly to a foreign port
without docking or stopping at any
other port in the Phil.
d. If any portion of such fuel, goods,
or supplies is used for purposes
other than that mentioned, such
portion of fuel, goods, and supplies
shall be subject to 12% VAT. (RR
16-2005)
e. Those considered export sales
under the Omnibus Investment
Code of 1987, and other special
laws (ex. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
(1) Phil. port FOB value of export products
exported directly by a registered export
producer; OR
112
TAXATION LAW
(2) Net selling price of export products sold by
a registered export producer to another
export producer, or to an export trader that
subsequently exports the same (only when
actually exported by the latter) evidenced
by landing certificates.
Constructive Exports (without actual
exportation):
(1) Sales to bonded manufacturing
warehouses of export-oriented
manufacturers;
(2) Sales to export processing zones (RA
7916);
(3) Sales to registered export traders
operating bonded trading warehouses
supplying raw materials in the
manufacture of export products (RA 7227)
(4) Sales to diplomatic missions and other
agencies and/or instrumentalities granted
tax immunities, of locally manufactured,
assembled or repacked products, whether
paid for in foreign currency or not.
(5) Sales by a VAT-registered supplier to a
manufacturer/producer whose products
are 100% exported are considered export
sales. A certification to this effect must be
issued by the Board of Investment which
shall be good for 1 year unless
subsequently re-issued. (RR 16-2005)
Export sales of registered export traders shall
include commission income, and that
exportation of goods on consignment shall not
be deemed export sales until the export
products consigned are in fact sold by the
consignee.
Foreign Currency Denominated Sale (FCDS)
(1) (i) Sale to a nonresident of goods (except
those mentioned in Sections 149 and 150
i.e.automobiles and non-essential goods
like jewelry, perfume, and yachts), (ii)
assembled or manufactured in the
Philippines (iii) for delivery to a resident in
the Philippines (iv) paid for in acceptable
foreign currency AND (v) accounted for in
UP LAW BOC TAXATION 2
accordance with the rules and regulations
of the BSP.
(2) (i) Sales of locally manufactured or
assembled goods (ii) for household and
personal use (iii) to Filipinos abroad and
other non-residents of the Philippines as
well as returning Overseas Filipinos under
the Internal Export Program of the
government (iv) paid for in convertible
foreign currency AND (v) accounted for in
accordance with the rules and regulations
of the BSP shall also be considered export
sales. (RR 16-2005)
Effectively Zero-Rated Sales
(1) 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.
(2) (i) The local sale of goods and properties
(ii) by a VAT-registered person (iii) to a
person or entity who was granted indirect
tax exemption under special laws or
international agreement. (RR 16-2005)
ECOZONES
CIR v. Seagate Technology (2005): The
ECOZONES shall be managed and operated by
the PEZA as separate customs territory. (Sec. 8,
RA 7916 “Special Economic Zone Act of 1995”)
This means that in such zone is created the
legal fiction of foreign territory. (Deoferio Jr.
and Mamalateo, p. 227) Consequently, sales
made by a person in the customs territory to a
PEZA-registered entity are considered exports
to a foreign country and thus, zero-rated.
Conversely, sales by a PEZA-registered entity
to a person in the customs territory are
deemed imports from a foreign country.
(1) Tax treatment of sales to & by PEZA-
registered enterprise within & without the
ecozone [rmc 74-99]:
(a) Any sale of goods, property or services
made by a VAT registered supplier
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TAXATION LAW
from the Customs Territory** to any
registered enterprise operating in the
ecozone, REGARDLESS of the class or
type of the latter’s PEZA registration, is
actually qualified and thus LEGALLY
ENTITLED TO THE 0% VAT.
(2) Customs Territory shall mean the national
territory of the Philippines outside of the
proclaimed boundaries of the ECOZONES
except those areas specifically declared by
other laws and/or presidential
proclamations to have the status of special
economic zones and/or free ports. [Sec.
2(g), Rule 1, Part I, RA 7916-IRR]
(a) By a VAT-Exempt Supplier from the
Customs Territory to a PEZA registered
enterprise
(3) Sale of goods, property and services by
VAT-Exempt supplier from the Customs
Territory to a PEZA registered enterprise
shall be treated EXEMPT FROM VAT,
regardless of whether or not the PEZA
registered buyer is subject to taxes under
the NIRC or enjoying the 5% special tax
regime.
(a) By a PEZA Registered Enterprise
(b) Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (ie domestic sales) -- this case
shall be treated as a technical
IMPORTATION made by the buyer.
Such buyer shall be treated as an
IMPORTER thereof and shall be
imposed with the corresponding VAT.
(c) Sale of Services by a PEZA registered
enterprise to a buyer from the Customs
Territory – this is NOT embraced by the
5% special tax regime, hence, such
seller shall be SUBJECT TO 12% VAT.
(d) Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (ie Intra-ECOZONE Sales of
Goods) – this shall be EXEMPT from
VAT.
(e) Sale of Services by ECOZONE
enterprise, to Another ECOZONE
UP LAW BOC
enterprise (Intra-ECOZONE enterprise
Sale of Service)
(f) if PEZA registered seller is subject to
5% special tax regime - EXEMPT from
VAT
(g) if PEZA registered seller is subject to
taxes under NIRC (ie not subject to 5%
special tax regime) – subject to 0%
VAT pursuant to “cross border doctrine”
TRANSACTIONS DEEMED SALE (SEC.
106 (B)
Rate: 12% VAT
Basis: Market value of the goods deemed sold
as of the time of the occurrence of the
transactions or as the Commissioner shall
prescribe. In the case of retirement/cessation
of business, the tax base shall be the
acquisition cost or the current market price of
the goods or properties, whichever is lower. In
the case of a sale where the gross selling price is
unreasonably lower than the fair market value,
the actual market value shall be the tax base.
The gross selling price is unreasonably lower
than the actual market value if it is lower by
more than 30% of the actual market value of
the same goods of the same quantity and
quality sold in the immediate locality on or
nearest the date of sale. (RR 16-2005)
Transactions 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 shareholders,
investors or creditors
(3) Shareholders or investors as share in the
profits of the VAT-registered persons;
(4) Creditors in payment of debt;
(5) Consignment of goods if actual sale is not
made within 60 days following the date
such goods were consigned
a. Retirement from or cessation of
business, with respect
inventories of taxable goods
TAXATION 2 TAXATION LAW
existing as of such retirement or
cessation
Distribution or transfer to shareholders,
investors or creditors
As regards distribution to shareholders or
investors as share in the profits of the VAT-
registered persons, property dividends which
constitute stocks in trade or properties
primarily held for sale or lease declared out of
retained earnings on or after Jan. 1, 1996 and
distributed by the company to its shareholders
shall be subject to VAT based on the zonal
value or FMV at the time of the distribution,
whichever is applicable. (RR 16-2005)
Consignment of goods
Consigned goods returned by the consignee
within the 60-day period are not deemed sold.
(RR 16-2005)
Retirement from or cessation of business
With respect to ALL goods on hand, whether
capital goods, stock-in-trade, supplies or
materials, as of the date of such retirement or
cessation, whether or not the business is
continued by the new owner or successor ARE
CONSIDERED DEEMED SALES
Examples: change of ownership of the business
(e.g. when a sole proprietorship incorporates,
or the proprietor sells his entire business) and
dissolution of a partnership and creation of a
new partnership which takes over the business.
(RR 16-2005)
CHANGE OR CESSATION OF STATUS AS
VAT-REGISTERED PERSON (SEC 106 C)
Rate: 12% VAT
Basis: the acquisition cost or the current
market price of the goods or properties,
whichever is LOWER.
VAT shall apply to goods disposed of or
existing as of a certain date if under the
to circumstances to be prescribed in rules and
regulations to be promulgated by the
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UP LAW BOC TAXATION 2
Secretary of Finance, upon recommendation of
the Commissioner, the status of a person as a
VAT-registered person changes or is
terminated.
Subject to output VAT (RR 16-2005 sec. 4.106
(b))
12%VAT is applicable to goods/properties
originally intended for sale or use in business
and capital goods which are existing as of the
occurrence of the following:
(1) Change of business activity from VAT
taxable status to VAT-exempt status
(2) Example: A VAT-registered person
engaged in a taxable activity like
wholesaler or retailer who decides to
discontinue such activity and engages
instead in life insurance business or in any
other business not subject to VAT.
(3) Approval of request for cancellation of a
registration due to reversion to exempt
status
(4) Approval of request for cancellation of
registration due to desire to revert to
exempt status after lapse of 3 consecutive
years from the time of registration by a
person who voluntarily registered despite
being exempt under Sec. 109 (2)
(5) Approval of request for cancellation of
registration of one who commenced
business with the expectation of gross
sales/receipts exceeding P1,919,500 (per
RR 16-2011) but who failed to exceed this
amount during the first 12 months of
operation
Not Subject to Output Vat – goods or
properties existing as of the occurrence of the
following:
(1) Change of control of a corporation by the
acquisition of the controlling interest of
such corporation by another stockholder
(individual or corporate) or group of
stockholders.
Note: Exchange of goods or properties
including the real estate properties used in
business or held for sale or for lease by the
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TAXATION LAW
transferor, for shares of stocks, whether
resulting in corporate control or not, is
SUBJECT TO VAT (RR 10-11)
(2) Change in the trade or corporate name of
the business
(3) Merger or consolidation of corporations.
The unused input tax of the dissolved
corporation, as of the date of merger or
consolidation, shall be absorbed the
surviving or new corporation.
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the
surviving corporation
(4) Inventory used for promotions and Office
Supplies
VAT ON IMPORTATION OF GOODS
Rate: 12% VAT
Basis: 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 as postage,
commission).
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.
Landed Cost = invoice amount + customs
duties + freight + insurance + other charges +
excise tax (if any)
Who Pays: IMPORTER prior to the release of
such goods from customs custody (Sec. 107 (A),
NIRC)
Importer: any person who brings goods into the
Philippines, whether or not made in the course
of his trade or business, including non-exempt
persons or entities who acquire tax-free
imported goods from exempt persons, entities
or agencies (RR 16-2005)
Importation of goods BEGINS when the
carrying vessel/aircraft enters the Philippine
jurisdiction with an intention to unload its
cargoes. It ENDS when there is already
UP LAW BOC TAXATION 2
paymentof duties/taxes/other charges and
issuance of permit to withdraw.
Note: Importation of goods to bonded
warehouse for processing is not importation.
Importation connotes permanency and gain.
Thus, if goods are only for exhibit, such goods
are VAT-exempt.
Customs duty – amount of customs duty
legally due and paid by the importer. Therefore,
if importer is entitled to 90% customs duty
exemption, the 10% duty paid should be the
base in computation of the VAT.
Other similar chargers – specific charges which
an importer has to pay.
Other taxes (special import tax)
Bank charges
Arrastre charges
Wharfage dues
Brokerage fees
All other charges or expeses
Landed Cost - invoice amount including costs
of loading, shipping and unloading, customs
duties, freight, insurance, other charges, excise
tax (if any)
Expenses incurred after the release of the
goods such as those incurred in delivering
goods do not form part of the landed cost.
Transfer of goods by tax exempt persons:
(1) If importer is tax-exempt, the subsequent
purchasers, transferees or recipients of
such imported goods shall be considered
as importers who shall be liable for the tax
on importation.
(2) 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. (as
amended by RA 9337)
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TAXATION LAW
VAT ON SALE OF SERVICE AND USE OR
LEASE OF PROPERTIES (SEC 108)
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease
of properties.
Gross Receipts - the total amount of money or
its equivalent representing the contract price,
compensation, service fee, rental or royalty,
including the amount charged for materials
supplied with the services and deposits and
advanced payments actually or constructively
received during the taxable quarter for the
services performed or to be performed for
another person, excluding VAT. (Sec. 108 (A),
NIRC)
“Constructive receipt” occurs when the money
consideration or its equivalent is placed at the
control of the person who rendered the service
without restrictions by the payor.
Deposit in banks which are made available to
the seller of services without restrictions
Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by
the seller as payment for services rendered
Transfer of the amounts retained by the
contractee to the account of the contractor.
(RR 16-2005)
Requisites for taxability
(1) The service must be performed or is to be
performed (which may be performed by a
subcontractor) in the course of trade or
business in the Philippines;
(2) For a valuable consideration actually or
constructively received; and
(3) The service is not exempt under the Tax
Code, special law or international
agreement
(4) Person selling or rendering service is liable
to VAT
UP LAW BOC
“Sale/Exchange of Services”: means the
performance of all kinds of services in the
Philippines for others for a fee, remuneration
or consideration.” (Sec 108, Diaz v Secretary of
Finance, 2011). It includes:
(1) Construction and service contractors
(2) Stock, real estate, commercial, customs
and immigration brokers
(3) Lessors of property, whether personal or
real24
(4) Persons engaged in warehousing service.
(5) Lessors or distributors of cinematographic
films
(6) Persons engaged in milling, processing,
manufacturing or repacking goods for
others are subject to VAT,
EXCEPT palay into rice, corn into corn grits,
and sugarcane into raw sugar (not subject
to VAT)
(7) Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns,
resorts, theaters, and movie houses
(8) Proprietors or operators of restaurants,
refreshment parlors, cafes and other
eating places, including clubs and caterers
(9) Dealers in securities including pre-need
companies
“Gross receipts” means gross selling price
less cost of the securities sold. RR 7-95:
(10) Lending investors: All persons OTHER than
banks, non-bank financial intermediaries,
finance companies and other financial
intermediaries NOT performing quasi-
banking functions who make a practice of
lending money for themselves or others at
interest.
24
SUBJECT TO VAT NOT SUBJECT TO VAT
Loan to the lessor from
the lessee
Pre-Paid Rental Option money for the
property
Security deposit Security deposit to
when applied to the insure the faithful
rental performance of certain
obligations of
lessee to the lessor
TAXATION 2 TAXATION LAW
(11) Transportation contractors on their
transport of goods or cargoes, including
persons who transport goods or cargoes
for hire and other domestic common
carriers by land relative to their transport
of goods or cargoes
(12) Common carriers by air and sea relative to
their transport of passengers, goods or
cargoes from one place in the Philippines
to another place in the Philippines
(13) Sales of electricity by generation,
transmission, and/or distribution
companies
EXCEPT sale of power or fuel generated
through renewable sources of energy, such
as, but not limited to, biomass, solar, wind
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels, which shall be subject to
0% rate of VAT (zero-rated).
(14) Franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting and all other
franchise grantees (including PAGCOR and
its licensees/franchisees)
EXCEPT franchise grantees of radio and/or
television broadcasting whose annual
gross receipts of the preceding year do not
exceed Ten Million Pesos
(P10,000,000.00) (which shall be subject
to 3% franchise tax under Sec. 119, subject
to optional registration), and franchise
grantees of gas and water utilities (under
Sec. 109, subject to 2% franchise tax)
With respect to franchise grantees of
telephone and telegraph services, amounts
received for overseas dispatch, message, or
conversation originating from the
Philippines are subject to the percentage
tax under Sec. 120 and hence exempt from
VAT
(15) Non-life insurance companies including
surety, fidelity, indemnity and bonding
companies;
the
117
UP LAW BOC TAXATION 2
EXCEPT crop insurance, life and disability
insurance, and health and accident
insurance
(16) Insurance and reinsurance commissions,
as opposed to premiums, whether life or
non-life, are subject to VAT while non-life
insurance premiums are subject to VAT.
(17) Similar services regardless of whether or
not the performance thereof calls for the
exercise or use of the physical or mental
faculties
Lease of Properties: subject to the VAT
imposed irrespective of the place where the
contract of lease or licensing agreement was
executed if the property is leased or used in the
Philippines.
(1) The lease or the use of or the right or
privilege to use any copyright, patent,
design or model, plan secret, formula or
process, goodwill, trademark, trade brand
or other like property or right
(2) The lease of the use of, or the right to use
of any industrial, commercial or scientific
equipment
(3) The supply of scientific, technical,
industrial or commercial knowledge or
information
(4) The supply of any assistance that is
ancillary and subsidiary to and is furnished
as a means of enabling the application or
enjoyment of any such property, or right as
is mentioned in #2 or any such knowledge
or information as is mentioned in #3
(5) The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to,
or the installation or operation of any
brand, machinery or other apparatus
purchased from such nonresident person
(6) The supply of technical advice, assistance
or services rendered in connection with
technical management or administration
of any scientific, industrial or commercial
undertaking, venture, project or scheme
(7) The lease of motion picture films, films,
tapes and discs
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TAXATION LAW
(8) The lease or the use of or the right to use
radio, television, satellite transmission and
cable television time
Additional services subject to VAT:
(1) Services performed in the exercise or
practice of profession or calling by
individuals subject to professional tax
under the LGC, and professional services
rendered by general professional
partnerships (GPPs);
(2) Services performed by actors/actresses,
talents, singers, emcees, radio/television
broadcasters, choreographers,
musical/radio/movie/television/stage
directors, and professional athletes;
(3) Services rendered by customs, real estate,
stock, immigration and commercial
brokers;
(4) Services rendered by doctors, and lawyers.
(5) Association dues or membership fees and
other assessment or charges for the
beneficial services of the homeowner’s
association (RMC No. 9-2013)
(6) Lease/use of sports facilities and
equipment (RA 6847)
The performance of the services should not be
in pursuit of an employer-employee
relationship between the service-provider and
the service-recipient.
ZERO-RATED SALE OF SERVICES
A zero-rated sale by a VAT-registered person is
a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the
input tax on purchases of goods, properties or
services related to such zero-rated sale shall
be available as tax credit or refund.
The following services performed in the
Philippines by VAT-registered persons
areeffectively 0% VAT sales of services:
(1) Processing, manufacturing or repacking
goods for other persons doing business
outside the Philippines which goods are
UP LAW BOC TAXATION 2
subsequently exported, where the services
are paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(2) Services other than those mentioned in the
preceding paragraph rendered to a person
engaged in business conducted outside the
Philippines or a nonresident person not
engaged in business who is outside the
Philippines when the services are
performed, the consideration for which is
paid for in acceptable foreign currency
AND accounted for in accordance with the
rules and regulations of the BSP
(3) The services referring to ‘processing,
manufacturing, repacking’ and ‘services
other than those in (1)’ both require (i)
payment in foreign currency; (ii) inward
remittance; (iii) accounted for by the BSP;
AND (iv) that the service recipient is doing
business outside the Philippines. If this is
not the case, taxpayers can circumvent just
by stipulating payment in foreign currency.
(CIR v. Burmeister)
(4) Services rendered to persons or entities
whose exemption under special laws or
international agreements to which the
Philippines is a signatory effectively
subjects the supply of such services to zero
percent (0%) rate (as amended by RA
9337)
(5) Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of
property for use thereof [as amended by
RA 9337];
Provided, however, that the services
referred to herein shall not pertain to those
made to common carriers by air and sea
relative to their transport of passengers,
goods or cargoes from one place in the Phil.
to another place in the Phil. (the same
being subject to 12% VAT under Sec. 108)
(6) Services performed by subcontractors
and/or contractors in processing,
converting, or manufacturing goods for an
enterprise whose export sales exceed
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TAXATION LAW
seventy percent (70%) of total annual
production.
(7) Transport of passengers and cargo by air
or sea vessels from the Philippines to a
foreign country (as added by RA 9337) and;
(8) Sale of power or fuel generated through
renewable sources of energy such as, but
not limited to, biomass, solar, wind,
hydropower, geothermal, ocean energy,
and other emerging energy sources using
technologies such as fuel cells and
hydrogen fuels. (as added by RA 9337)
Zero-rating shall apply strictly to the sale of
power or fuel generated through renewable
sources of energy, and shall not extend to the
sale of services related to the maintenance or
operation of plants generating said power.
Effectively zero-rated sale of service – a local
sale of services by a VAT-registered person to a
person or entity granted indirect tax exemption
under special laws or international agreement.
The taxpayer must seek prior approval or prior
confirmation from the appropriate offices of
the BIR so that a transaction is qualified for
effective zero-rating except in export sales and
foreign denominated sales.
RR 4-2007 removed the distinction between
automatic and effectively zero-rated
transactions found in prior Revenue
Regulations (inc. RR 16-2005) with respect to
prior application from the BIR.
VAT EXEMPT TRANSACTIONS
Vat Exempt Transactions, in general
Sale of goods or 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 of VAT (input tax) on
purchases.
The person making the exempt sale of goods,
properties or services shall not bill any output
tax to his customers. (RR 16-2005)
But, the VAT-registered person may elect that
the exemption not apply to its sale of goods or
UP LAW BOC TAXATION 2
properties or services; provided that the
election made shall be irrevocable for a period
of three (3) years from the quarter the election
was made (Sec. 109(2), NIRC).
Exempt Transactions Enumerated
(1) Sale/import of agricultural, marine food
products in original state; of livestock and
poultry; breeding stock and genetic
materials
(2) Sale/ import of fertilizers; seeds, seedlings
and fingerlings; fish, prawn, livestock and
poultry feeds (including ingredients)
(3) Import of personal and household effects
of Phil resident returning from abroad and
nonresident citizens coming to resettle in
the Philippines
(4) Import of professional instruments and
implements, wearing apparel, domestic
animals, and personal household effects
belonging to persons coming to settle in
the Philippines, for their own use and not
for sale, barter or exchange
(5) Services subject to percentage tax
(6) Services by agricultural contract growers
and milling for others of palay into rice,
corn into grits and sugar cane into raw
sugar
(7) Medical, dental, hospital and veterinary
services except those rendered by
professionals:
(8) Educational services rendered by private
educational institutions, duly accredited by
DEPED, CHED, TESDA, and those rendered
by government educational institutions;
(9) Services rendered by individuals pursuant
to an employer-employee relationship
(10) Services rendered by regional or area
headquarters established in the
Philippines by multinational corporations
which act as supervisory, communications
and coordinating centers for their affiliates,
subsidiaries or branches in the Asia-Pacific
Region and do not earn or derive income
from the Philippines
(11) Transactions which are exempt under
international agreements to which the
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TAXATION LAW
Philippines is a signatory or under special
laws, except those under PD No. 529
[Petroleum Exploration Concessionaires
under the Petroleum Act of 1949]
(12) Sales by agricultural cooperatives duly
registered with the Cooperative
Development Authority to their members
as well as sale of their produce to non-
members. Exemption includes importation
of direct farm inputs, machineries and
equipment, including spare parts thereof,
to be used directly and exclusively in the
production and/or processing of their
produce.
(13) Gross receipts from lending activities by
credit or multi-purpose cooperatives duly
registered with the Cooperative
Development Authority
(14) Sales by non-agricultural, non- electric and
non-credit cooperatives duly registered
with the Cooperative Development
Authority are exempt BUT their
importation of machineries and equipment,
including spare parts thereof, to be used by
them are SUBJECT to VAT.
(15) Export sales by persons who are not VAT-
registered
(16) Sale of real properties – the ff. sales are
exempt:
(a) Sale of real properties NOT primarily
held for sale to customers or held for
lease in the ordinary course of trade or
business.
However, even if the real property is
not primarily held for sale to
customers or held for lease in the
ordinary course of trade or business
but the same is used in the trade or
business of the seller, the sale thereof
shall be subject to VAT being a
transaction incidental to the
taxpayer’s main business. [RR 4-
2007]
(b) Sale of real properties utilized for low-
cost housing as defined by RA No.
7279, otherwise known as the "Urban
Development and Housing Act of
UP LAW BOC TAXATION 2
1992" and other related laws, such as
RA No. 7835 and RA No. 8763.
“Low-cost housing" refers to housing
projects intended for homeless low-
income family beneficiaries,
undertaken by the Government or
private developers, which may either
be a subdivision or a condominium
registered and licensed by the
Housing and Land Use Regulatory
Board/Housing (HLURB) under BP
Blg. 220, PD No. 957 or any other
similar law, wherein the unit selling
price is within the selling price ceiling
per unit of P750,000.00 under RA No.
7279, and other laws, such as RA No.
7835 and RA No. 8763.
(c) Sale of real properties utilized for
socialized housing as defined under
RA No. 7279, and other related laws,
such as RA No. 7835 and RA No. 8763,
wherein the price ceiling per unit is
P225,000.00 or as may from time to
time be determined by the HUDCC
and the NEDA and other related laws.
"Socialized housing" refers to housing
programs and projects covering
houses and lots or home lots only
undertaken by the Government or the
private sector for the underprivileged
and homeless citizens which shall
include sites and services
development, long-term financing,
liberated terms on interest payments,
and such other benefits in accordance
with the provisions of RA No. 7279
and RA No. 7835 and RA No. 8763.
"Socialized housing" shall also refer to
projects intended for the
underprivileged and homeless
wherein the housing package selling
price is within the lowest interest rates
under the Unified Home Lending
Program (UHLP) or any equivalent
housing program of the Government,
the private sector or non-government
organizations.
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TAXATION LAW
(d) Sale of residential lot valued at
P1,919,500 and below, or house & lot
and other residential dwellings valued
at P3,199,200 and below
If two or more adjacent residential
lots are sold or disposed in favor of
one buyer, for the purpose of utilizing
the lots as one residential lot, the sale
shall be exempt from VAT only if the
aggregate value of the lots does not
exceed P1,919,500. [RR 13-2012]
Adjacent residential lots, although
covered by separate titles and/or
separate tax declarations, when sold
or disposed to one and the same
buyer, whether covered by one or
separate Deed of Conveyance, shall
be presumed as a sale of one
residential lot. [RR 16-2005]
Sale, transfer or disposal within a 12-
month period of 2 or more adjacent
residential lots, house and lots or
other residential dwellings to one
buyer, whether from the same or from
different sellers shall be considered
one single transaction. Hence, the
sale of the adjacent lots shall be
subject to VAT if the aggregate value
exceeds P1,919,500 for residential lots
and P3,199,200 for residential house
lots or residential dwellings,
notwithstanding that the value of the
individual properties do not exceed
the VAT exemption thresholds.
Sale/purchase of parking lots shall
not be considered a sale of residential
lot/dwelling. Hence, it shall be
subject to VAT regardless of its selling
price. [RR 13-2012]
(17) Lease of residential units with a monthly
rental per unit not exceeding P12,800,
regardless of the amount of aggregate
rentals received by the lessor during the
year.
Lease of residential units where the
monthly rental per unit exceeds P12,800
but the aggregate of such rentals of the
UP LAW BOC TAXATION 2
lessor during the year do not exceed One
Million Five Hundred Pesos P1,919,500
shall likewise be exempt from VAT,
however, the same shall be subjected to
three percent (3%) percentage tax.
In cases where a lessor has several
residential units for lease, some are leased
out for a monthly rental per unit of not
exceeding P12,800 while others are leased
out for more than P12,800 per unit, his tax
liability will be as follows:
(a) The gross receipts from rentals not
exceeding P12,800 per month per unit
shall be exempt from VAT regardless
of the aggregate annual gross receipts.
(b) The gross receipts from rentals
exceeding P12,800 per month per unit
shall be subject to VAT IF the
aggregate annual gross receipts from
said units only (not including the gross
receipts from units leased for not more
than P12,800 ) exceeds P1,919,500 .
Otherwise, the gross receipts will be
subject to the 3% tax imposed under
Section 116 of the Tax Code.
The term 'residential units' shall refer
to apartments and houses & lots used
for residential purposes, and buildings
or parts or units thereof used solely as
dwelling places (e.g., dormitories,
rooms and bed spaces) except motels,
motel rooms, hotels and hotel rooms.
The term 'unit' shall mean an
apartment unit in the case of
apartments, house in the case of
residential houses; per person in the
case of dormitories, boarding houses
and bed spaces; and per room in case
of rooms for rent. [RR 16-2005]
(18) Sale, importation, printing or publication
of books and any newspaper, magazine
review or bulletin which appears at regular
intervals with fixed prices for subscription
and sale and which is not devoted
principally to the publication of paid
advertisements;
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TAXATION LAW
(19) Transport of passengers by international
carriers (Added by RA 10378)
(20) Sale, importation or lease of passenger
or cargo vessels and aircraft, including
engine, equipment and spare parts thereof
for domestic or international transport
operations [added by RA 9337];
The exemption from VAT on the
importation and local purchase of
passenger and/or cargo vessels shall be
limited to those of 150 tons and above,
including engine and spare parts of said
vessels;
Provided, further, that the vessels to be
imported shall comply with the age limit
requirement, at the time of acquisition
counted from the date of the vessel's
original commissioning, as follows:
(a) for passenger and/or cargo vessels,
the age limit is 15 years old,
(b) for tankers, the age limit is 10 years old,
and
(c) for high-speed passenger crafts, the
age limit is 5 years old [RR 16-2005]
(21) Importation of fuel, goods, and supplies by
persons engaged in international shipping
or air transport operations; [added by RA
9337]
The said fuel, goods and supplies shall be
used exclusively or shall pertain to the
transport of goods and/or passenger from
a port in the Philippines directly to a
foreign port without stopping at any other
port in the Philippines;
If any portion of such fuel, goods or
supplies is used for purposes other than
that mentioned in this paragraph, such
portion of fuel, goods and supplies shall be
subject to 12% VAT starting Feb. 1, 2006.
[RR 16-2005]
(22) Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries; and
(23)Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
UP LAW BOC TAXATION 2
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of
P1,919,500
For purposes of the threshold of
P1,919,500, the husband and the wife shall
be considered separate taxpayers.
However, the aggregation rule for each
taxpayer shall apply.
For instance, if a professional, aside from
the practice of his profession, also derives
revenue from other lines of business which
are otherwise subject to VAT, the same
shall be combined for purposes of
determining whether the threshold has
been exceeded.
The VAT-exempt sales shall NOT be
included in determining the threshold. [RR
16-2005]
Other Services Exempt from VAT – such
services are those subject to percentage tax
(infra)
(1) Services rendered by domestic common
carriers by land for the transport of
passengers and keepers of garages;
(2) Services rendered by international
air/shipping carriers;
(3) Services rendered by franchise grantees of
radio and/or television broadcasting
whose annual gross receipts of the
preceeding year do not exceed
P10,000,000 and by franchise grantees of
gas and water utilities;
(4) Services rendered for overseas dispatch,
message, by franchise grantees or
conversation originating from the
Philippines;
(5) Services by any person, company or
corporation (except purley cooperative
companies or associations) doing life
insurance business of any sort in the
Philippines;
(6) Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies;
(7) Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or
123
TAXATION LAW
day clubs, boxing exhibitions, professional
basketball games, jai-alai and race tracks;
and
(8) Receipts on sale, barter for exchange of
shares of stock listed and traded through
the local stock exchange or through initial
public offering.
INPUT TAX AND OUTPUT TAX, DEFINED
Output tax – the VAT due on the sale or lease
of taxable goods or properties or services by
any person registered or required to register
under Section 236 of the Code. (Sec 110 A)
Input tax – the VAT due on or paid by a VAT-
registered person on importation of goods or
local purchases of goods, properties, or
services, including lease or use of properties, in
the course of his trade or business.
(1) It includes the transitional input tax and
the presumptive input tax as determined in
accordance with Section 111 of the Code.
(2) It includes input taxes which can be
directly attributed to transactions subject
to the VAT plus a ratable portion of any
input tax which cannot be directly
attributed to either the taxable or exempt
activity.
(3) Input tax must be evidenced by a VAT
invoice or official receipt issued by a VAT-
registered person in accordance with Secs.
113 and 237 of the Code. [RR 16-2005]
SOURCES OF INPUT TAX
(1) Purchase or importation of goods
(evidenced by VAT invoice/receipt)
(a) For sale; or
(b) For conversion into or intended to form
part of a finished product for sale
including packaging materials; or
(c) For use as supplies in the course of
business; or
(d) For use as materials supplied in the
sale of service; or
UP LAW BOC TAXATION 2
(e) For use in trade or business for which
deduction for depreciation or
amortization is allowed under the Code.
(2) Purchase of real properties for which VAT
has actually been paid
(3) Purchase of services in which VAT has
actually been paid
(4) Transactions deemed sale
(5) Presumptive Input Tax
(6) Transitional Input Tax
Presumptive Input Tax (Sec. 111(B))
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil
and packed noodle based instant meals, shall
be allowed a presumptive input tax, creditable
against the output tax, equivalent to FOUR
PERCENT (4%) of the gross value in money of
their purchases of primary agricultural
products which are used as inputs to their
production.
“Processing” means pasteurization, canning
and activities which through physical or
chemical process alter the exterior texture or
form or inner substance of a product in such
manner as to prepare it for special use to which
it could not have been put in its original form
or condition.
Claiming of input Tax on motor vehicles
subject to the ff conditions:
(1) Purchase of vehicle must be substantiated
with official receipts and other records;
(2) Taxpayer has to prove the direct
connection of the motor vehicle to the
business;
(3) Only one vehicle for land transport is
allowed for the use of an official/employee
with value not exceeding P2.4 million;
(4) No depreciation shall be allowed for yachts,
helicopters, airplanes
Transitional Input Tax (Sec 111)
124
TAXATION LAW
Who may avail: (i) By a person who becomes
VAT-liable for the 1st time, or (ii) any person
who elects to be a VAT-registered person
Rate: 2% Input VAT of the value of the
beginning inventory on hand or actual VAT
paid on such, goods, materials and supplies,
whichever is HIGHER, which amount shall be
creditable against the output tax of VAT-
registered person.
Tax base: The value allowed for income tax
purposes on inventories shall be the basis for
the computation of the 2% transitional input
tax, EXCLUDING goods that are exempt from
VAT under Sec. 109 of the Tax Code. (RR 16-
2005)
Note: A real estate dealer is entitled to claim
transitional input VAT based on the value of
the entire (including the value of the land and
the improvements thereon) real property sold
regardless of whether there was in fact actual
payment of VAT on the purchase of the real
property. At the time the purchase was made,
there was still no VAT imposed. (Fort Bonifacio
Development Corp. v. CIR)
PERSONS WHO CAN AVAIL OF INPUT
TAX CREDIT
Input tax on domestic purchase or importation
of goods or properties shall be creditable:
(1) To the purchaser upon consummation of
sale and on importation of goods or
properties; and
(2) To the importer upon payment of the VAT
prior to the release of the goods from the
custody of the Bureau of Customs.
(a) The input tax on goods purchased or
imported in a calendar month for use
in trade or business for which
deduction for depreciation is allowed
under the Code, shall be spread evenly
over the month of acquisition and the
fifty-nine (59) succeeding months if the
aggregate acquisition cost for such
goods, excluding the VAT component
thereof, exceeds One million pesos
UP LAW BOC TAXATION 2
(P1,000,000). If the aggregate
acquisition cost does not exceed
P1,000,000, the total input taxes will
be allowable as credit against output
tax in the month of acquisition.25
(b) However, if the estimated useful life of
the capital good is less than five (5)
years, as used for depreciation
purposes, then the input VAT shall be
spread over such a shorter period
(3) To the purchaser of services or the lessee or
licensee upon payment of the
compensation, rental, royalty or fee.
Input tax on purchase of services, lease or use
of properties shall be creditable:
(1) To the purchaser upon payment of the
compensation, royalty or fee
(2) To lessee or licensee upon payment of the
compensation, royalty or fee
Transitional tax-
The following persons shall be allowed INPUT
TAX in his beginning inventory of goods,
materials and supplies an equivalent to TWO
PERCENT (2%) of the value of such inventory;
OR the actual VAT paid on such goods,
materials and supplies, whichever is HIGHER,
which shall be creditable against the OUTPUT
TAX.
(1) Any person liable for VAT or
(2) who elects to be a VAT-registered person
Presumptive input tax
There shall be allowed a presumptive input tax,
creditable against the output tax, equivalent to
4% of the gross value in money of their
purchases of primary agricultural products
which are used as inputs to their production.
Persons or firms engaged in the processing of
sardines, mackerel and milk, and in
manufacturing refined sugar and cooking oil
and packed noodle based instant meals
25 Please refer below for the example.
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TAXATION LAW
DETERMINATION OF OUTPUT/INPUT
TAX; VAT PAYABLE; EXCESS INPUT TAX
CREDITS
Output VAT – Input VAT = VAT Payable
a) Determination of output tax (RR 16-2005)
Output VAT in a sale of goods/properties shall
be computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇
= 𝐺𝑟𝑜𝑠𝑠 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
Output VAT in a sale of services shall be
computed by multiplying the total amount
indicated in the invoice or receipt by 12%.
𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇
= 𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 (𝑜𝑟 12%)
b) Determination of input tax creditable
1. The sum of the excess input tax carried over
from the preceding month or quarter and the
input tax creditable to a VAT-registered person
during the taxable month or quarter shall be
reduced by the amount of claim for refund or
tax credit for value-added tax and other
adjustments, such as purchase returns or
allowances and input tax attributable to
exempt sale.
2. The claim for tax credit referred to includes
not only those filed with the BIR but also those
filed with other government agencies, such as
the Board of Investments the Bureau of
Customs.
c) Allocation of input tax on mixed
transactions26
26 Please refer below for the example
UP LAW BOC
There are four possible transactions a VAT-
registered person may enter into: (i) VAT
taxable, (ii) VAT-exempt, (iii) zero-rated VAT
and (iv) sale to governments.
A VAT-registered person who is also engaged
in transactions not subject to VAT shall be
allowed to recognize input tax credit on
transactions subject to VAT as follows:
(1) All the input taxes that can be directly
attributed to transactions subject to VAT
may be recognized for input tax credit.
Input taxes that can be directly
attributable to VAT taxable sales of goods
and services to the Government or any of
its political subdivisions, instrumentalities
or agencies, including GOCCs shall not be
credited against output taxes arising from
sales to non-Government entities
(2) If any input tax cannot be directly
attributed to either a VAT taxable or VAT-
exempt transaction, the input tax shall be
pro-rated to the VAT taxable and VAT-
exempt transactions and ONLY the ratable
portion pertaining to transactions subject
to VAT may be recognized for input tax
credit.
d) Determination of the output tax and VAT
payable and computation of VAT payable or
excess tax credits
If at the end of any taxable month or quarter:
 The output tax exceeds the input tax, the
excess shall be paid by the VAT-registered
person
 The input tax exceeds the output tax, the
excess shall be carried over to the
succeeding quarter or quarters
In all cases where the basis for computing the
output tax is either the gross selling price or
the gross receipts, but the amount of VAT is
erroneously billed in the invoice, the total
invoice amount shall be presumed to be
TAXATION 2 TAXATION LAW
comprised of the gross selling price/gross
receipts plus the correct amount of VAT. Hence,
the output tax shall be computed by
multiplying the total invoice amount by a
fraction using the rate of VAT as numerator
and one hundred percent (100%) plus rate of
VAT as the denominator. Accordingly, the
input tax that can be claimed by the buyer
shall be the corrected amount of VAT
computed in accordance with the formula
herein prescribed.
There shall be allowed as a deduction from the
output tax the amount of input tax deductible
to arrive at VAT payable on the monthly VAT
declaration and the quarterly VAT returns.
SUBSTANTIATION OF INPUT TAX
CREDITS
(1) INPUT TAXES must be substantiated and
supported by the following documents,
and must be reported in the information
returns required to be submitted to the
Bureau:
(a) the importation of goods = Import
entry or other equivalent document
showing actual payment of VAT on the
imported goods.
(b) For the domestic purchase of goods
and properties = Invoice showing the
information required under Secs. 113
(Invoicing and Accounting
Requirements for VAT-Registered
Persons) and 237 (Issuance of Receipts
or Sales or Commercial Invoices) of the
Tax Code.
(c) For the purchase of real property =
public instrument i.e., deed of absolute
sale, deed of conditional sale,
contract/agreement to sell, etc.,
together with VAT invoice issued by the
seller.
(d) For the purchase of services = official
receipt showing the information
126
UP LAW BOC TAXATION 2
required under Secs. 113 and 237 of the
Tax Code.
(2) A cash register machine tape issued to a
registered buyer shall constitute valid
proof of substantiation of tax credit only if
it shows the information required under
Secs. 113 and 237 of the Tax Code.
(3) TRANSITIONAL INPUT TAX shall be
supported by an inventory of goods as
shown in a detailed list to be submitted to
the BIR.
Input tax on "deemed sale" transactions
shall be substantiated with the invoice
required.
Input tax from payments made to non-
residents (such as for services, rentals and
royalties) shall be supported by a copy of
the Monthly Remittance Return of Value
Added Tax Withheld (BIR Form 1600) filed
by the resident payor in behalf of the non-
resident evidencing remittance of VAT due
which was withheld by the payor.
Advance VAT on sugar shall be supported
by the Payment Order showing payment of
the advance VAT.
REFUND OR TAX CREDIT OF EXCESS
INPUT TAX (CF REFUND OF
ERRONEOUSLY PAID TAXES)
Who may claim for refund/apply for issuance of
tax credit certificate
(1) Zero-Rated Sales (Sec. 112(A), NIRC)
Requirements:(Summary)
(a) The claimant should be a VAT-registered
person
(b) There should be an application filed with
the BIR or DOF center, as the case may be,
within 2yrs after close of taxable quarter.
(c) The claimed input tax must not have been
applied to any output tax during the period
covered and subsequent periods covered
by the claim.
(d) The claimed input tax must have been
deducted from the VAT quarterly return.
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TAXATION LAW
(e) The claimed input tax are directly
attributable to 0%-rated transactions.
(f) Acceptable foreign currency exchange
proceeds must have been duly accounted
for
(g) Claimed input tax must be duly supported
by VAT invoices/receipts.
(h) VAT returns for the succeeding quarters
must have been submitted.
(2) Cancellation of VAT Registration.
(a) A person whose registration has been
cancelled due to (i) retirement from or
cessation of business, or due to
changes in or (ii) cessation of status
under Section 106(C) of the 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.
(b) He shall be entitled to a refund if he
has no internal revenue tax liabilities
against which the tax credit certificate
may be utilized.
Period to file claim/apply for issuance of tax
credit certificate – this periods must be
distinguished from normal tax refunds for
erroneous payments where an administrative
claim and judicial claim may be made together,
and the reckoning point of the 2 years is from
the date of the erroneous payment.
(1) Application for issuance of tax credit
certificate or refund of creditable input tax
(except transitional input tax)
 w/in 2 years after the close of the
taxable quarter when the sale was
made.
 If the VAT registration has been
cancelled due to retirment or cessation
of business, or change of status, the 2
year period shall be after the date of
cancellation
(2) Administrative Claim
UP LAW BOC TAXATION 2 TAXATION LAW

 The CIR shall grant the tax

credit/refund within 120 days from the Invoicing requirements in general
date of submission of complete A VAT-registered person shall issue:
documents in support of the (1) A VAT invoice for every sale, barter or
application exchange of goods or properties; and
 “Complete Documents” is determined (2) A VAT official receipt for every lease of
by taxpayer himself. goods or properties, and for every sale,
barter or exchange of services
 Taxpayer may only resort to a Judicial
Claim either after the end of the 120
day period or after a decision is made Only VAT-registered persons are required to
print their TIN followed by the word “VAT” in
by the Commission, whichever comes
first. their invoice or ORs. Said documents shall be
considered as a “VAT Invoice” or VAT official
(3) Judicial Claim
receipt. All purchases covered by
 In case of denial of the application or
invoices/receipts other than VAT Invoice/VAT
the expiry of the 120 days, the taxpayer
OR shall not give rise to any input tax. [RR 16-
may appeal to the CTA within 30 days
05]
from the receipt of said denial or
inaction.
Note: VAT component of all transactions shall
be separately indicated in the VAT invoice or
Manner of giving refund
receipt. (RR 18-2011)
Revenue Memorandum Circular no. 57-2013
(August 23, 2013): Unutilized creditable input
Consequences of issuing erroneous vat invoice
taxes attributed to zero-rated sales can only be
or vat official receipt
recovered through the application for refund or
Issuance of a VAT Invoice or VAT Receipt by a
tax credit. There is no other mode of recovering
non-VAT person
unapplied input taxes aside from an
If a person who is not a VAT-registered person
application for refund or tax credit. The
issues an invoice or receipt showing his
Memorandum Circular also instructed the
Taxpayer Identification Number (TIN), followed
disallowance of unutilized creditable input
by the word "VAT", the erroneous issuance
taxes attributable to VAT zero-rated sales that
shall result to the ff:
is claimed as a deduction for income tax
(1) The non-VAT person shall be liable to:
purposes.
Percentage taxes applicable to his
transactions;
Refunds shall be made upon warrants drawn
VAT due on transactions under Section 106
by the Commissioner or by his duly authorized
or 108 of the Code, without the benefit of
representative without the necessity of being
any input tax credit; and
countersigned by the Chairman, Commission
A 50% surcharge under Section 248 (B) of
on Audit, the provisions of the Administrative
the code;
Code of 1987 notwithstanding: provided that
(2) The VAT shall, if the other requisite
refunds shall be subject to post audit by the
information required is shown on the
Commission on Audit. (Sec. 112(D), NIRC)
invoice/receipt, be recognized as an input
tax credit to the purchaser.
Destination principle or cross-border doctrine
(see above)
Issuance of a VAT Invoice or VAT Receipt on an
INVOICING REQUIREMENTS (SEC 113) Exempt Transaction by a VAT-registered Person

128
UP LAW BOC TAXATION 2
If a VAT-registered person issues a VAT invoice
or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on
the invoice or receipt the term "VAT-exempt
Sale:
(1) the transaction shall become taxable and
the
(2) issuer shall be liable to pay VAT thereon.
(3) The purchaser shall be entitled to claim an
input tax credit on his purchase. [RR 16-
05]
FILING OF RETURN AND PAYMENT(SEC
114)
VAT returns - VAT paid on a monthly basis.
Payments in the monthly VAT declarations
shall be credited in the quarterly VAT return to
arrive at the net VAT payable or excess input
tax/over-payment as of the end of a quarter.
(1) Filed by person liable to pay the VAT
(2) Quarterly return of the amount of his gross
sales or receipts within twenty-five (25)
days after the close of each taxable quarter
prescribed for each taxpayer.
(3) The monthly VAT Declarations of taxpayers
whether large or non-large shall be filed
and the taxes paid not later than the 20th
day following the end of each month.
Note: VAT paid on a monthly basis. Payments
in the monthly VAT declarations shall be
credited in the quarterly VAT return to arrive at
the net VAT payable or excess input tax/over-
payment as of the end of a quarter.
Administrative and Penal Provisions (Sec 115)
(1) Suspension of business operations. In
addition to other administrative and penal
sanctions provided for in the Tax Code and
implementing regulations, the
Commissioner of Internal Revenue or his
duly authorized representative may order
suspension or closure of a business
establishment for a period of not less than
five (5) days for any of the following
violations:
129
TAXATION LAW
(a) Failure to issue receipts and invoices.
(b) Failure to file VAT return as required
under the provisions of Sec. 114 of the
Tax Code.
(c) Understatement of taxable sales or
receipts by 30% or more of his correct
taxable sales or receipt for the taxable
quarter.
(d) Failure of any person to register as
required under the provisions of Sec.
236 of the Tax Code.
(2) Surcharge, interest and other penalties.
The interest on unpaid amount of tax, civil
penalties and criminal penalties imposed
in Title XI of the Tax Code shall also apply
to violations of the provisions of Title IV of
the Tax Code (VAT).
WITHHOLDING OF FINAL VAT ON SALES
TO GOVERNMENT (RR 16-2005)
General Rule: Withholding tax does not apply
on transactions subject to VAT. The exceptions
are:
Gross payments by the government shall be
subject to the 5% final withholding tax;
Gross payments by resident VAT-taxpayers to
non-resident foreign persons of rentals,
royalties, reinsurance premiums, and services
done in the Philippines—12% (Sec. 114(c),
NIRC)
Beginning Nov. 1, 2005, when R.A. 9337
became effective, all sales of goods, properties,
or services to the government shall be subject
to the 5% final withholding tax. The
government shall, before making payment on
account of each purchase of goods and/or
services taxed at 12% VAT (Sec. 106 and 108)
deduct and withhold a final VAT due at the
rate of 5% of the gross payment thereof.
(Mamalateo, Reviewer on Taxation, 2008)
Sales to Government
(1) The Government or any of its political
subdivisions, instrumentalities or agencies,
including GOCCs shall, before making
UP LAW BOC TAXATION 2 TAXATION LAW

payment on account of each purchase of On the other hand, if actual input VAT is less
goods and services which are subject to the than 7% of gross payment, the difference must
VAT (Secs. 106 and 108, NIRC), deduct and be closed to expense or cost, in effect reducing
withhold a final VAT due at the rate of five it.
percent (5%) of the gross payment thereof.
(a) The payment for lease or use of However, 12% final VAT shall be withheld with
properties or property rights to respect to the following:
nonresident owners shall be subject to (a) Lease or use of properties or property
12% withholding tax at the time of rights owned by non-residents;
payment. (b) Services rendered to local insurance
(b) The payor or person in control of the companies, with respect to reinsurance
payment is considered as the premiums payable to non-residents; and;
withholding agent. Other services rendered in the Philippines by
(c) The VAT withheld shall be remitted non-residents.
within ten (10) days following the end
of the month the withholding was
made.
(2) The 5% final VAT shall represent the net
VAT payable of the seller. The remaining
7% effectively accounts for the standard
input VAT, in lieu of the actual input VAT
directly attributable or ratably apportioned
to such sales.
(This means that where the 5% final VAT
applies, the basic formula of output tax
less input tax does not apply.)
Should actual input VAT exceed 7% of the
gross payments, the excess may form part
of the sellers’ expense or cost.
On the other hand, if actual input VAT is
less than 7% of gross payment, the
difference must be closed to expense or
cost, in effect reducing it.

The 5% final VAT shall represent the net VAT

payable of the seller. The remaining 7%
effectively accounts for the standard input VAT,
in lieu of the actual input VAT directly
attributable or ratably apportioned to such
sales.
(This means that where the 5% final VAT
applies, the basic formula of output tax less
input tax does not apply.)
Should actual input VAT exceed 7% of the
gross payments, the excess may form part of
the sellers’ expense or cost.

130
UP LAW BOC TAXATION 2 TAXATION LAW

VAT FORMULA (IN GENERAL) On taxable goods/services

xxx xxx
Actual Sales/Receipts Net VAT Payable
xxx xxx
Add: Excise Tax Add Penalties:
xxx Surcharge
Remaining Merchandise (Cessation of VAT- xxx
registered Status) xxx Interest
Transactions Deemed Sale xxx
xxx xxx Compromise
xxx xxx
Less: Sales Returns and Allowances Total Amount Payable
xxx xxx
Sales Discounts
xxx xxx INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT:
Total Sales (Taxable Base) excess forms part of seller’s expense/cost
xxx When Actual Input VAT < Standard Input VAT:
Multiplied by 12% difference is treated as taxable other income
12%
Output VAT on sales or gross recipts Sales xxx
xxx Output VAT (Sales x 12%) xxx
Less: Input VAT on purchases and services Purchases
xxx xxx
Transitional Input VAT, if applicable Input VAT (Purchases x 12%)
xxx xxx
Presumptive Input VAT, if applicable
xxx OUTPUT VAT Payable:
Input VAT Carry-over from previous Output VAT
period xxx xxx
Creditable VAT withheld Less: Actual Input VAT
xxx xxx xxx
Net VAT payable (refundable) Standard Input VAT (Sales x 7%)
xxx xxx xxx
Cost of sale/Expense (Income and
expense summary) xxx
MONTHLY RETURN
Net VAT Payable
Gross Sales/Receipts for the Month
xxx
xxx
Less: Creditable Withholding Tax (Sales x 5%)
Multiplied by VAT rate
xxx
12%
Output VAT Payable
Output VAT
xxx
xxx
Less Input Taxes:
Transitional/Presumptive Input Tax
xxx

131
UP LAW BOC TAXATION 2 TAXATION LAW

Quick Notes on VAT (1) Seller (w/n natural) executes contract to

Transactions subject to VAT SBE of RP
General Requirements (2) RP is in the Phil
Done in the course of trade or business (w/n (3) Seller is engaged in sale or exchange of RP
profit-oriented): rule of regularity + incidental or real estate (dealer, developer, lessor)
thereto (inc isolated) (4) RP is held primarily for sale/lease ICT/B or
exception: an ordinary asset used in T/B as an
(a) NRC/NRA who perform services in Phil, incident to his vatable activity (NOT a
even if no regularity capital asset)
(b) Importation of Goods may be for business (5) not exempt from VAT (NIRC, special law,
or non-business use special agreement) NB: Deferred Payments (initial > 25%
Gross sales or receipts for the past 12 months GSP)
Instalment Plan (initial ≤ 25% GSP)
or the next 12 months > 1,919,500php S of Services29
OR there are reasonable grounds to believe (1) for a valuable consideration
(actually/constructively received)
Taxable Transactions and Specific Requirements (2) performed ICTB in the Phil.
SBEL of Goods or Properties27 (3) not exempt from VAT (NIRC, special law,
special agreement)
Goods/Personal Properties (4) person rendering service is VAT-liable
(1) Actual/deemed sale (4) for a valuable (5) no ee-er relationship
consideration (6) I of Goods
(2) for use or consumption in the Phil
(regardless of the payment arrangements) Persons Liable to pay VAT
(3) not exempt from VAT (NIRC, special law, Any person who SBEL goods or properties
special agreement) if real property: persons engaged in real estate
business:
Real Properties28: (1) Any person who SBE of real properties
ICT/B
(2) Real estate lessors/ sub-lessors
27 Sec 106
28 (3) NRA/NRC lessors when RP is in Phil
Casual Sale Subject to CGT (6%) (4) non-stock, non-profit corp engaged in SBE
(Capital of real properties ICT/B, regardless of
Assets)
Regular Sales
disposition of income
(Ordinary (5) Gov’t inc GOCCs in SBEL of RP ICT/B
Assets) who renders services
Commercial Subject to 12% VAT
Property who imports goods
(Sale/Lease
)
Residential If monthly rental ≤ 12,800 = VAT and
If importer is tax-exempt/VAT-exempt AND
Units OPT-exempt goods are subsequently SBE to non-exempt
(Lease) If monthly rental > 12,800 but persons,
aggregate annual rentals ≤1,919,500
= subject to OPT  purchasers/recipients = importer
If monthly rental > 12,800 and  if the Philippine branch of an NRFC
aggregate annual rentals > 1,919,500
= subject to VAT “imported”, first local buyer = importer
Residential If SP > 1,919,500.00 = subject to VAT
Lot IF SP ≤ 1,919,500.00 = VAT-exempt
Residential If SP > 3,199,200.00 = subject to VAT
House and IF SP ≤ 3,199,200.00 = VAT-exempt
Lot 29 Sec 108
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UP LAW BOC TAXATION 2
Tax Bases of VAT
Gross (Sales) Selling Price: total amount of
money paid in consideration of SBEL
Excludes: VAT, sales discounts 30 and,
allowances and returns (2)
Includes: Excise tax paid, initial payments 31 ,
interests and penalties (if instalment),
commission income (if exported), purchase
price, charges for packing, delivery and
insurance
If goods/personal properties,
GSP = amount paid in consideration
IF DEEMED SALE: FMV at the time of the
transaction
NB: in retirement/cessation, inventory (raw
materials, finished goods, machinery,
equipment, furniture, fixture), tax base =
whichever is lower,
(1) acquisition cost
(2) current market price of goods
(3) If real property,
GSP = amount higher:
(1) consideration stated in the sales document
(2) FMV, whichever is higher of
Zonal value: FMV as determined by CIR
Real Property Tax Value: FMV as determined
by provincial & city assessors
IF ON INSTALLMENT:
GSP = down payments received + interests +
penalties + other charges – amount of
mortgage (paid)
NB: If zonal/FMV, tax base = Total Value/Landed Cost (determined on the
𝐴𝑐𝑡𝑢𝑎𝑙 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 (𝑒𝑥𝑐𝑙𝑢𝑠𝑖𝑣𝑒 𝑉𝐴𝑇)
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉, ℎ𝑖𝑔ℎ𝑒𝑟
30 It should be determined at the time of the sale,
indicated in the invoice and granting does not depend on
the happening of a future event
31 Initial payments does not include the amount of
mortgage on RP sold (except excess when mortgage
exceeds the cost of the property), notes and other
evidence on=f indebtedness issued by the purchaser at
the time of the sale
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TAXATION LAW
Upon full collection, if a difference is
uncovered because the zonal value or market
value at the date of sale is higher than the total
receipts or collections based on the agreed
consideration, the additional VAT shall be paid
accordingly (RMC 03-96)
IF DEFERRED
GSP = entire selling price or zonal/FMV,
whichever is higher
NB: CIR has the power to determine the
appropriate tax base in 1) SBE in deemed sales
and 2) when GSP is unreasonably lower than
AMV32
GROSS VALUE IN MONEY OF GOODS
Gross Receipts derived from transaction: total
amount of money/equivalent = contract price +
compensation + service fee + rental fee +
royalties + amount charged for materials
supplied with the services + deposits and
advanced payments actually or constructively
received + costs items of construction projects
– (VAT + amounts earmarked for payments to
unrelated 3rd party + amounts received as
reimbursement + monies/receipts held in trust
w/c do not redound to the benefit of taxpayer +
universal charge passed on and collected by
distribution companies and electric coop (if sale
of electricity) + receivables + local taxes)
IF DEALER IN SECURITIES: gross selling price
– cost of securities sold
basis of quantity/volume of goods)
Total Value used by Customs: tariff and
customs duties + custom duties +excise tax +
charges
Landed Cost: invoice amount inc. cost of
loading, shipping, unloading, + custom duties
32 GSP is unreasonably lower than the actual market
value if it is lower than 30% of AMV of the same goods of
the same quantity or quality sold in the immediate
locality or the nearest date of sale.
UP LAW BOC TAXATION 2 TAXATION LAW

+ freight + insurance + other charges +excise INPUT TAX

FORMULA
tax – expenses incurred after release of goods TREATMENT
(e.g. cost of delivery) Untraceable Input
Customs duty: amount of customs duty legally VAT x Creditable Input
(𝑉𝐴𝑇 𝑡𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠) VAT
due and paid by the importer 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
Charges: special import tax,foreign marginal Untraceable Input Input VAT Credit,
fees, bank and arrastre charges, wharfage VAT x eligible for tax
(𝑍𝑒𝑟𝑜−𝑟𝑎𝑡𝑒𝑑 𝑠𝑎𝑙𝑒𝑠)
dues, broker fees, other charges paid to refund or TCC
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
complete importation Untraceable Input Cost of Sales or
VAT x Operating
(𝑉𝐴𝑇−𝑒𝑥𝑒𝑚𝑝𝑡 𝑠𝑎𝑙𝑒𝑠)
Rates of VAT Expense
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
(a) Output Tax (Sale/Barter/Exchange/Lease) Compare to
12% standard rate: applied directly to TB Untraceable Input Standard Input
0%: applied directly to TB (𝑆𝑎𝑙𝑒 𝑡𝑜 𝐺𝑜𝑣′𝑡) VAT (Creditable
VAT x 𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
(b) Input Tax (Purchase from VAT-registered against Standard
businesses/Importation of goods) input VAT)
12% standard rate: applied directly to TB
0%: applied directly to TB
2% transitional VAT: applied to the
NB: Creditable Input VAT is increased by any
(inventory on hand) value of goods (exc.
input VAT carried over from the preceding
VAT-exempt good) existing at the date a
month or quarter decreased by:
person commences business and/or
(1) amount of the claim for refund or tax credit
becomes liable to VAT) or 12% actual input
for VAT filed during the same period
tax rate, higher
(2) input tax attributable to exempt sales and
4% presumptive input tax rate: applies to
unauthorized input tax attributable of
purchases of VAT-exempt goods used as
depreciable capital goods
inputs by a VAT-registered person in
(3) amount of input VAT wrt uncollected
manufacturing or processing certain food
portion of instalment receivable in
products
instalment sales
7% FWT (standard input VAT, when
government), 5% withholding

Creditable Input VAT Requirements

(1) Proper documentation
(2) No double input tax credit is allowed.
(3) Input VAT on a particular purchase
transaction can be claimed once only upon
consummation of the sale of goods and
based on the entire GSP (whether paid on
cash, credit or instalment)
(4) Ignore erroneous VAT rate. The correct rate
of input VAT can still be claimed.
(5) Transactions should have been made with
VAT-registered persons.
(6) IF MIXED TRANSACTIONS and input VAT
cannot be directly attributable:

134
UP LAW BOC TAXATION 2 TAXATION LAW

VAT-EXEMPT AND 0% VAT

VAT-Exempt 0% VAT
Non-VAT taxable transaction Taxable transaction
Taxpayer is relieved from payment of VAT for
w/c he is directly liable
NO output and input VAT No output VAT, but input VAT is available as tax credit
Optional VAT Registration or refund
Partial relief
Only removes VAT at the exempt stage Total relief
All VAT is removed at whatever stage

SALE OF SERVICES
VAT-Exempt 0% VAT
NB: There are 31 VAT-exempt sales of Processing, manufacturing, repacking goods to non-
services (Sec 109 and special laws) resident (5)
Processing, manufacturing, repacking goods to
export-oriented (3)
Services other than processing, manufacturing,
repacking (4)
Services to exempted persons (3): effectively 0-rate
Sale of power/fuel-generated through renewable
wrt lease of property =exempt resources (3)
if advance payment = loan, option money, Services rendered to int’l shipping/air transport (2)
security deposit Transport of passengers and cargo by air from Phil to
NB: if security deposit is applied to rental = Foreign (3)
VAT Transactions of VAT-reg person to foreign embassies
wrt persons engaged in milling, processing, (2)
manufacturing or repacking goods = exempt
if palay  rice; corn  corn grits; sugar cane
 raw sugar
wrt franchise grantees of electric utilities,
telephone and telegraph, radio and/or
television broadcasting = exempt
if annual gross receipts <= 10M;
franchise grantees of gas and water
utilities;
of telephone & telegraph services,
amounts received for overseas dispatch from
Phil.
wrt PREMIUMS of non-life insurance
companies = exempt
if life and disability insurance;
crop insurance;
health and accident insurance
(included are only those with exceptions) Exceptions to the Exemptions (Subject to VAT)
5. sale/import of agricultural & marine food wrt livestock and poultry DOES NOT INCLUDE
products in their original state; livestock and fighting cocks, race horses, zoo animals and pets
poultry (used/yield for human consumption);
breeding stock and genetic materials DOES NOT INCLUDE vehicles, vessels, aircrafts,
6. import of professional instruments, machineries, and other goods for use in
implements, wearing apparel, domestic manufacturing in commercial quantities

135
UP LAW BOC TAXATION 2 TAXATION LAW

animals, and personal household effects DOES NOT INCLUDE those under Petroleum
7. Transactions exempt pursuant to special Exploration Concessionaires under Petroleum Act of
laws 1949
Wrt sale by agricultural coops to non-members, if
8. Cooperatives seller is the member = VAT
Wrt sale by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
9. Residential lots ≥ 1,919,500 & lot & DOES NOT INCLUDE parking lot
dwellings ≥ 3,199,200
10. lease of residential units, if ≤
12,800/unit/month (regardless of aggregate
amount); if ≥ 12,800/unit/month (AND If any portion of such goods are used for purposes
aggregate amount is ≥ 1,919,500) other than those stated = VAT
11. importation of fuels, goods, supplies by
international shipping or air transport

Importation of Services

136
UP LAW BOC TAXATION 2 TAXATION LAW

SALE OF GOODS
VAT-Exempt 0% VAT
Real Property Actual Export Sales (3)
Not primarily held ICT/B
Low-cost or socialized housing Deemed Export Sales
Residential lot <= 1,919,500 Internal or constructive export sales
House and/or other residential dwellings <= Raw/Packaging materials to non-resident buyer (5)
3,199,200 Raw/Packaging materials to export-oriented (3)
Lease (12,800/unit/year or total Phil. Port FOB value of export products (2)33
1,919,500/year) Net selling price of export products (4)34
Transmission to a trustee sales to bonded manufacturing warehouses (2)35
E: if transmission is deemed sale sales to export processing zones36
Transfer to corporation in exchange of SoS sales to enterprises duly accredited by Subic Bay
Advance payments/Security Deposits in Metropolitan Authority (2)
lease sales to registered export traders (3)
E: if applied to the rent sales to diplomatic missions etc. (2)
sale by VAT-supplier to manufacturer/producer whose
products are 100% exported (3)
Sale of gold to BSP
Sale of goods/supplies/equipment/fuel to persons
engaged in int’l shipping/air transport (4)
Docking/Undocking services to foreign vessels

Foreign currency denominated goods

To a NRC/NRA of goods (5)
To a NRC/NRA of goods locally manufactured for
household and personal use (2)
E: automobiles and non-essential goods

Effectively-zero rated sales (3)

Made by VAT registered supplier from customs
territory to any registered enterprise inside ecozone
Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes
As regards ecozones and PEZA-registered
entities
Made by VAT-exempt supplier from customs
territory to any registered enterprise inside
ecozone
Intra-ecozone enterprise sale of service, if
PEZA registered seller is subject to 5%
special tax regime
Intra-ecozone sales of goods

33 Under Omnibus Investment Code (EO226)

34 Ibid
35 RA7227

36 RA 7916

137
 UP LAW BOC TAXATION 2 TAXATION LAW

Taxable Activity/Property TR Tax Base Tax Payable

Actual SBE of Goods or
Gross Selling Price
Properties
Goods/ Personal
= amt. paid to the seller
Properties
12%
Real Properties = consideration/FMV, higher
IF sale is on instalment =
plan AND ZV/FMV > SP 𝐴𝑐𝑡𝑢𝑎𝑙 𝑐𝑜𝑙𝑙𝑒𝑐𝑡𝑖𝑜𝑛 𝑜𝑓 𝑐𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉 (𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑜𝑛)
(excluding VAT) 𝐴𝑔𝑟𝑒𝑒𝑑 𝐶𝑜𝑛𝑠𝑖𝑑𝑒𝑟𝑎𝑡𝑖𝑜𝑛 VAT Payable
Deemed Sale Transactions paid by
Not ICB/T, but originally seller/transfer
intended for sale/use or
ICB/T FMV (at the time of transaction)
Transfer to SH in share of E: if FMV is unreasonably lower (by more than 30% of AMV) =
profit or Cr in payment of 12% AMV or determined by CIR
debt
Consignment after 60d
Retirement/Cessation of
AC or current market price, lower
business
VAT Payable
12
Sale of Services Gross receipts derived paid by
%
performer
Importation of Goods Total Value used by BOC VAT paid by
=tariff & custom duties + custom duties + excise tax + importer
In general
charges PRIOR tp the
12% release of
When custom duties are
goods in
based on quantity or = landed cost + excise tax
Customs
volume
custody
withhold a Final VAT due at the rate of five
(1) Once registered as a VAT person, the percent (5%) of the gross payment.
taxpayer shall be liable to output tax and
be entitled to input tax credit beginning on The five percent (5%) final VAT withholding
the first day of the month following rate shall represent the net VAT payable of the
registration. seller. The remaining seven percent (7%)
(2) The cancellation for registration will be effectively accounts for the standard input VAT
effective from the first day of the following for sales of goods or services to government or
month the cancellation was approved. any of its political subdivisions,
What is the treatment for Withholding of instrumentalities or agencies including GOCCs
VAT on Government Money Payments? in lieu of the actual input VAT directly
(3) The government or any of its political attributable or ratably apportioned to such
subdivisions, instrumentalities or agencies, sales. Should actual input VAT attributable to
including government-owned or controlled sales to government exceeds seven percent
corporations (GOCCs) shall, before making (7%) of gross payments, the excess may form
payment on account of each purchase of part of the sellers' expense or cost. On the
goods and/or services taxed at twelve other hand, if actual input VAT attributable to
percent (12%) VAT pursuant to Sections sale to government is less than seven percent
106 and 108 of the Tax Code, deduct and (7%) of gross payment, the difference must be
closed to expense or cost.
138
UP LAW BOC TAXATION 2 TAXATION LAW

The government or any of its political

subdivisions, instrumentalities or agencies
including GOCCs, as well as private
corporation, individuals, estates and trusts,
whether large or non-large taxpayers, shall
withhold twelve percent (12%) VAT with
respect to the following payments:
Lease or use of properties or property rights
owned by non-residents; and
Other services rendered in the Philippines by
non-residents.

139
 UP LAW BOC TAXATION 2 TAXATION LAW
Before start of business or
VAT-Exempt Person within 10d before the VAT-registered
(cannot be cancelled w/in beginning of taxable quarter
Person
3years; franchise of
(w/ TIN)
radios/tv broadcasting,
Optional Registration
VAT AND NON-VAT REGISTRATION
irrevocable)
Compliance activities after registration:
Certificate of 1. Registration of books of accounts (3) of the
Registration Fee (500php) to Registration business/occupation/calling including practice
Before start of business Register to authorized bank agent, of profession, before using the same.
and every year RDO for every RDOfficer, Rev Collection 2. Registration of sales invoices and official
thereafter (on/before
separate and Officer, authorized receipts (If there are transactions not subject to
Jan 31)
distinct city/municipal treasurer VAT, registration of non-VAT invoices or non-
Person APPROVE VAT official receipts)
establishment
Liable for 3. Annual Registration: Pay registration fee for
EXEMPT from 500php every place of business that generates sales
VAT 1. if aggregate gross after updating the registration records.
sales/receipts ≤ 100,000; 4. Filing of the Monthly VAT Declaration and
Did not register: 2. cooperative; Quarterly VAT Return to be submitted to
 Still liable for VAT 3. individuals earning pure DENY RTO/LTDO
 No input credit compensation income;
4. overseas workers CANCELLATION/UPDATE OF VAT REGISTRATION
(registration of a taxpayer of a franchise grantee of radio and/or tv
broadcasting whose gross annual receipts≤ 10,000,000 =
irrevocable)

Before start of business or Certificate of Non-VAT Cancellation/Update Minor change in

within 10d before the
necessitating cancellation original registration
beginning of taxable quarter
APPROVE w/in 15d
Registration Fee (500php) to w/in 25d from
from
cancellation
Register to authorized bank agent, change
RDO for every RDOfficer, Rev Collection Filing of Short Period Return
Officer, authorized (for the remaining period Notice of Change (f
separate and
city/municipal treasurer that he was VAT-reg) change of address)
distinct DENY
establishment
EXEMPT from 500php
if aggregate gross Instances when a taxpayer may
sales/receipts ≤ 100,000; CANCEL his registration:
1. When TP’s gross sales/receipts for the following 12 months ≤ 1,919,500
cooperative; individuals
2. When TP has ceased to carry on his T/B and does not expect to recommence within 12m
earning pure compensation 3. In case of a single proprietorship, a change of ownership
income; overseas workers 4. Dissolution of a partnership or corporation
5. Merger/consolidation wrt dissolved corporations
6. Person who registered prior to planned business commencement but failed to actually start
business

UPDATE his registration:

140
RE applications for VAT zero-rating: Taxpayers shall file their application directly with
the Audit Information, Tax Exemption and Incentives Division (AITEID) under the
Assessment Service, or with the LTAID I and II, BIR National Office, as the case may be.
1. When TP’s business has become exempt
2. When there is a change of the nature of business (from vatable to exempt)
3. When TP a tax-exempt individual who applied for optional registration and cancelled his
registration after 3yrs.
4. When TP is a VAT-registered person whose gross sales/receipts for 3 consecutive years ≤ 1,919,500
 UP LAW BOC TAXATION 2 TAXATION LAW

VAT REFUND OR VAT CREDIT CERTIFICATE

VAT- registered
cancelling their
w/in 2 years after close registration (regardless of
of the taxable quarter the source of input tax)
when sales are made
Input Tax wrt Zero-rated and Application for w/in 2 years after
Effectively zero-rated Sales refund or TCC to close of the
Direct Tax CIR + taxable quarter
Credit supporting docs when sales are
VAT-registered made
Taxpayer Presumptive Input Tax
w/in 120 days
Transitional Input Tax w/in 120 days
Carry-over from
If VAT-exempt Actual Input Tax not related from submission
Tax Credit
changes his to zero-rated sales submission
status to VAT-
registered =
GRANTED
transitional
VAT-exempt Transactions DENIED INACTION
input tax

w/in 30 days w/in 30 days

Non-VAT Apply against from receipt from expiration
Taxpayer OUTPUT VAT of denial of 120-days

Appeal to CTA ISSUANCE

Related INPUT VAT shall

NO INPUT TAX be treated as a cost of
sale or operating
expense

DENIED GRANTED

Related INPUT VAT Related OUTPUT

shall be treated as VAT shall be treated
cost of purchases as an operating Tax Credit Tax Refund
expense Certificate

141
UP LAW BOC TAXATION 2
VI. Tax Remedies under
the NIRC
Remedies: method by which a cause of action
can be enforced by law or equity. It is a
procedure which may be availed of by a person
as a means to obtain the relief desired
In tax, these remedies may be availed of if the
taxpayer overpaid, or if the taxpayer paid the
wrong king of tax, or did not pay.
TAXPAYER’S REMEDIES
1. ADMINISTRATIVE (BIR)
a. Before payment
i. Filing a petition or reconsideration or
reinvestigation; and
ii. Entering into a compromise
b. After payment
i. Filing a claim for refund; and
ii. Filing a claim for tax credit
2. JUDICIAL (CTA/RTC)
a. Civil action
i. Appeal to the CTA
ii. Action to contest forfeiture of
chattel; and
iii. Action for damages
b. Criminal action
i. Filing a criminal complaint against
erring BIR officials and employees
Note: Petition for declaratory Relief is not
under the jurisdiction of the CTA.
ASSESSMENT
Concept of assessment
Assess means to impose a tax; to charge with a
tax; to declare a tax to be payable; to
apportion a tax to be paid or contributed, to fix
a rate; to fix or settle a sum to be paid by way
of tax; to set, fix or charge a certain sum to
142
TAXATION LAW
each taxpayer; to settle determine or fix the
amount of tax to be paid [84 C.J.S 74-750]
An assessment is the notice to the effect that
the amount therein stated is due from a
taxpayer as a tax with a demand for payment
of the same within a stated period of time.
[Commissioner v. CTA, 27 SCRA 1159]
Requisites for valid assessment:
(a) The taxpayer shall be informed in writing of
the law and the facts on which the
assessment is made [Sec. 228, NIRC]
(b) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period [CIR v. PASCOR]
(c) An assessment must be served on and
received by the taxpayer [CIR v. PASCOR]
Note: The presumption of the correctedness of
assessment CANNOT be made to rest on
another presumption e.g. presumption of
regularity of performance of official functions.
CONSTRUCTIVE METHODS OF INCOME
DETERMINATION
Rely upon circumstantial evidence of
determining the correct income or transaction
of a taxpayer (Indirect Method)
(a) Expenditure Method  It proceeds on the
theory that where the amount of money
which a taxpayer spends during a given year
exceeds his reported income, and the
source of such money is otherwise
unexplained, it may be inferred that such
expenditures represent unreported income.
(b) Percentage Method This method is a
computation whereby determinations are
made by the use of percentages or ratios
considered typical of the business under
investigation. By reference to similar
business or situations, percentage
computations are secured to determine
sales, gross profit or even net profit.
UP LAW BOC TAXATION 2 TAXATION LAW

(c) Unit and Value Method The determination present his books of accounts and/or pertinent
of gross receipts may be computed by records or ii.) substantiate all or any of the
applying price and profit figures to the deductions, exemptions or credits claimed in
known ascertainable quality of business his return.
done by taxpayer
It is usually issued when statutory prescriptive
Inventory method for income determination periods for the assessment or collection of
(Net Worth Method) taxes are about to lapse due principally to the
Holland v US: In a typical net worth taxpayer’s fault.
prosecution, the Government, having Tax Delinquency v. Tax Deficiency
concluded that the taxpayer's records are Tax Delinquency Tax Deficiency
inadequate as a basis for determining income It is when: It is when:
tax liability, attempts to establish an "opening a. Self-assessed a. The amount of tax
net worth" or total net value of the taxpayer's taxpayer filed his imposed by law is
assets at the beginning of a given year. It then tax return but did greater than the
proves increases in the taxpayer's net worth for not pay or only amount shown in
each succeeding year during the period under partially paid the the tax return
examination, and calculates the difference tax b.If no amount is
between the adjusted net values of the b.Deficiency Tax shown in the
taxpayer's assets at the beginning and end of assessed by the BIR return, or if there is
each of the years involved. The taxpayer's became final and no return, amount
nondeductible expenditures, including living executory by which the tax as
expenses, are added to these increases, and if determined by the
the resulting figure for any year is substantially CIR exceeds the
greater than the taxable income reported by amount previously
the taxpayer for that year, the Government assessed as a
claims the excess represents unreported deficiency
taxable income. CAN be collected CANNOT be
IMMEDIATELY immediately
Formula: through collected. CAN be
Increase in Net worth
1. Administrative collected only AFTER
Add: Non-deductible Item
Actions (warrant of the process of protest
Less: Non-taxable income or receipts subjected
to final tax transfer taxes
distraint or levy)
Taxable Net Income 2. Judicial Actions Thus, a civil action for
Less: Personal and additional exemptions collection to ordinary
NET INCOME SUBJECT TO TAX Thus, civil action for courts pending
collection to ordinary protest may be
JEOPARDY ASSESSMENT courts is the proper subject to Motion to
A tax assessment made by an authorized remedy. Dissmiss
Revenue Officer (RO) without the benefit of SUBJECT to SUBJECT to
complete or partial audit, in light of the RO’s administrative administrative
belief that the assessment and collection of penalties of: penalties of:
the deficiency tax will be jeopardized by delay 1. 25% surcharge 1. interest
caused by the taxpayer’s failure to: i) comply 2. interest 2. compromise
with audit and investigation requirements to 3. compromise penalty

143
UP LAW BOC TAXATION 2
penalty
Mamalateo: Reviewer on Taxation (2014) p559
a. Deficiency - amount still due and collectible
from a taxpayer upon audit or investigation. A
deficiency tax has to go through the process of
filing the protest against the assessment by
the by the taxpayer and denial of such protest
by the BIR. (Mamalateo, 2008)
b. Delinquency - failure of the taxpayer to pay
the tax due on the date fixed by law or
indicated in the assessment notice or letter of
demand.
POWERS OF THE COMMISSIONER:
(A) To make assessments and prescribe
additional requirements for tax administration
and enforcement [Sec. 6, NIRC]
(1) Examination of Returns and Determination
of Tax Due [Sec. 6(A), NIRC]
(a) After a return has been filed, the CIR may
authorize the examination of any
taxpayer and the assessment of the
correct amount of tax.
(b) Failure to file a return shall not prevent
the CIR from authorizing the
examination.
(2) Best evidence obtainable [Sec 6(B), NIRC]
The CIR shall assess the proper tax on the
best evidence obtainable when:
(a) the taxpayer fails to submit the required
returns, statements reports and other
documents
(b) there is a reason to believe that any such
report is false, incomplete or erroneous
(3) Conduct INVENTORY-TAKING,
SURVEILLANCE and to PRESCRIBE
presumptive gross sales and receipts [Sec.
6(C), NIRC]
(a) Inventory-taking – at any time during the
taxable year, for the purpose of
determining the correct tax liabilities.
(b) Surveillance – done if there is reason to
believe that the taxpayer is not declaring
144
TAXATION LAW
his correct income, sales or receipts for
tax purposes.
(c) Prescribe presumptive gross sales and
receipts if:
(1) It is found that the taxpayer has failed
to issue receipts and invoices, or
(2) When there is reason to believe that
the books of accounts or other records
do not correctly reflect the
declarations made by the taxpayer
(4) TERMINATE Taxable Period [Sec. 6(D),
NIRC]
Terminating taxable period and ordering
the immediate payment of the tax for the
terminated period and any remaining tax
that is unpaid, when the taxpayer is:
(a) retiring from business subject to tax, or
(b) intending to leave the Philippines or to
remove his property therefrom or to hide
or conceal his property;
(c) performing any act tending to obstruct
the proceedings for the collection of the
tax for the past or current quarter or year
or to render the same totally or partially
ineffective unless such proceedings are
begun immediately
(5) PRESCRIBE Real Property Values [Sec. 6(E),
NIRC]
(a) Dividing the Philippines into different
zones or areas, and determining the FMV
of real properties in each zone or area,
upon consultation with competent
appraisers from private and public
sectors.
(b) For the purpose of computing any
internal revenue tax, the value of the
property shall be WHICHEVER IS
HIGHER OF:
(i) The FMV as determined by the
Commissioner, or
(ii) The FMV as shown in the schedule of
values of the provincial and city
assessors
(6) INQUIRE into Bank Deposit Accounts [Sec.
6(F), NIRC]
UP LAW BOC TAXATION 2
Notwithstanding any contrary provision of
R.A. 1405 (Bank Secrecy Law) and other
general or special laws, the Commissioner is
authorized to inquire into bank deposits of:
(a) A decedent to determine his gross estate,
and
(b) Any taxpayer who has filed an application
for compromise of tax liability by reason
of financial incapacity: the taxpayer must
waive in writing his privilege under R.A.
1405 and other relevant laws, before the
Commissioner may inquire into his bank
accounts.
(7) ACCREDIT and REGISTER Tax Agents [Sec
6(G), NIRC]
Accrediting and registering tax agents (may
be individuals or general professional
partnerships) based on the following
criteria:
(a) Professional competence
(b) Integrity
(c) Moral fitness
(8) PRESCRIBE additional PROCEDURAL OR
DOCUMENTARY requirements [Sec. 6(H),
NIRC]
In relation to the manner of compliance of
any requirement in connection with the
submission or preparation of financial
statements accompanying the tax returns.
(B) To obtain information and to summon,
examine, and take testimony of persons [Sec. 5,
NIRC]
(1) EXAMINE RETURNS and DETERMINE
TAX DUE [Sec 5, NIRC]
Authorizing the examination of any
taxpayer and the assessment of the
correct amount of tax, WON a return has
been filed by such taxpayer.
Note: Any return filed with the Commissioner
shall not be withdrawn, BUT the taxpayer
may MODIFY, CHANGE or AMEND such
return within three (3) years from the
date of filing, provided that no notice for
audit or investigation of such return has
been actually served on the taxpayer.
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TAXATION LAW
(2) ACCESS Letter [Sec. 5(B), NIRC]
(a) Obtaining on a regular basis, from any
person OTHER THAN the person
whose tax liability is subject to audit or
investigation, or from any office or
officer of the national and local
governments, government agencies
or instrumentalities, including BSP
and GOCCs,
(b) any information such as, but not
limited to, costs and volumes of
production, receipts or sales and gross
incomes of taxpayers, and the names
addresses, and financial statements
of corporations, mutual fund
companies, insurance companies etc.
Note: This is known as the Third Party
Information Rule.
(C) INTERPRET Tax LAWS and to DECIDE Tax
CASES [Sec. 4, NIRC; RMC 44-01]
(a) Shall be under the exclusive and original
jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
(b) A ruling by the BIR Commissioner shall be
presumed VALID unless modified, reversed
or superseded by the Secretary of Finance.
(c) A taxpayer who receives an adverse ruling
from the Commissioner may, within thirty
(30) days from the date of receipt of such
ruling, seek its review by the Secretary of
Finance, either by himself/itself or though
his/its duly authorized representative.
(d) A reversal or modification of the BIR ruling
shall terminate its effectivity upon the
receipt by the taxpayer or the BIR of written
notice of reversal or modification, whichever
came earlier.
Note: DOF Order 7-02 added that the Secretary
of Finance may review the rulings MOTU
PROPRIO.
UP LAW BOC TAXATION 2
WHEN ASSESSMENT IS MADE
Prescriptive period for assessment (Sec. 203,
NIRC)
If the taxpayer filed a return: internal revenue
taxes shall be assessed (FAN) within three
years after the last day prescribed by law for
the filing of the return.
If a return is filed beyond the period prescribed
by law: the three-year period shall be counted
from the day the return was filed.
Exception:(i) False return, (ii) Fraudulent return
with intent to evade tax, (iii) Failure to file a
return [Sec. 222, NIRC] These exceptions have a
prescriptive period of 10 years from the
discovery of the fraudulent act or discovery of
omission.
Waiver of Period for Assessment
The taxpayer and the Commissioner may agree
in writing, before the expiration of the time
prescribed in Sec. 203, to extend the period of
assessment [Sec. 222(b), NIRC]
(1) The waiver of prescription must be executed
properly, otherwise, invalid and results to
prescription of the right to assess/collect.
(Philippine Journalists Inc. vs. CIR,
December 16, 2004)
(2) Requirements for a valid waiver under RMO
20-90: i) definite agreed date, ii) date of
acceptance indicated, and iii) taxpayer must
be furnished with a copy of the waiver.
Suspension of running of statute of limitations
[Sec. 223, NIRC] (P-CORN)
(a) 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
(b) When the taxpayer requests for a
Reinvestigation which is granted by the
Commissioner
(c) 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, BUT if the taxpayer informs the
146
TAXATION LAW
Commissioner of any change in address, the
running of the statute of limitations shall
not be suspended
(d) 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 is located
(e) When the taxpayer is Out of the Philippines
RR 12-85 (DIFFERENCE BETWEEN
RECONSIDERATION
&REINVESTIGATION)
RECONSIDERATION – refers to a plea of re-
evaluation of the assessment on the basis of
existing records WITHOUT NEED OF
ADDITIONAL EVIDENCE. It may involve both
question of fact or of law or both
REINVESTIGATION – refers to a plea of re-
evaluation of an assessment on the basis of
NEWLY-DISCOVERED EVIDENCE that a
taxpayer intends to present in the
reinvestigation. It may also involve a question
of fact or law or both.
Note: A request for reconsideration does not
toll the running of the prescription period for
the collection of an assessed tax. [Phil Global
Communication v. CIR]
GENERAL PROVISIONS ON
ADDITIONS TO THE TAX
(A) CIVIL PENALTIES [SEC. 248, NIRC]
Surcharge
A civil penalty imposed by law as an addition
to the basic tax required to be paid. A
surcharge added to the main tax is subject to
interest.
UP LAW BOC TAXATION 2
Rates of Surcharge:
There shall be imposed a penalty equivalent to
twenty-five percent (25%) of the amount due,
in the following cases:
(1) FAILURE TO FILE ANY RETURN and PAY
THE TAX DUE THEREON on the date
prescribed; or
(2) Filing a return with an internal revenue
officer than those with whom the return is
required to be filed (except when authorized
by the Commissioner); or
(3) FAILURE TO PAY THE DEFICIENCY TAX
within the time prescribed for its payment
(4) FAILURE TO PAY THE FULL OR PART of the
amount of tax shown on any return required
to be filed, or the full amount of tax due for
which no return is required to be filed, on or
before the date prescribed for its payment.
The penalty shall be fifty percent (50%) of the
tax or of the deficiency tax, in the following
cases:
(1) WILLFUL NEGLECT to FILE THE RETURN
within the period prescribed
(2) A FALSE OR FRAUDULENT RETURN is
wilfully made
Prima-facie evidence of false or fraudulent
return: i.) substantial under declaration of
taxable sales, receipts or income (failure to
report sales, receipts or income in an amount
exceeding 30% of that declared per return) or
ii)substantial overstatement of deductions (a
claim of deduction in an amount exceeding
30% of actual deductions)
Section 5 of RR 12-99 is hereby amended by
modifying Section 5.5 thereof which provides
for modes of procedures in computing for the
tax and/or applicable surcharge. In cases of
late payment of a deficiency tax assessed, the
taxpayer shall be liable for the delinquency
interest (no longer civil penalties under RR 12-
99) provided under Section 249 (C)(3) of the
1997 National Internal Revenue Code, as
amended. [RR 18-2013]
147
TAXATION LAW
(B) INTEREST [SEC 249, NIRC]
In General
20% per annum on any unpaid amount of tax,
from the date prescribed for payment until the
amount is fully paid.
Deficiency Interest – the interest due on any
amount of tax due or installment thereof which
is not paid on or before the date prescribed for
its payment [Mamalateo, 2008]
Delinquency Interest- the interest required to be
paid in case of failure to pay:
(a) the amount of tax due on any return
required to be filed, or
(b) amount of tax due for which no return is
required, or
(c) a deficiency tax, or any surcharge or
interest thereon on the due date
appearing in the notice and demand of
the Commissioner, there shall be
assessed and collected on the unpaid
amount, interest at the rate prescribed
until the amount is fully paid, which
interest shall form part of the tax
The delinquency interest is in addition to the
interest in the FAN as a result of failure to pay
the deficiency tax assessed within the time
prescribed for its payment.
[First Lepanto Taisho Insurance Corp. v. CIR,
2013]
(C) COMPROMISE PENALTIES
Compromise penalty v. Compromise
Compromise penalty - an amount of money
paid by a taxpayer to compromise a tax
violation that he has committed, which may be
the subject of criminal prosecution. The basis
of the amount paid is the gross sales or
receipts during the year or the tax due.
UP LAW BOC
Compromise - an amount of money paid by the
taxpayer to settle his civil liability for tax
assessed by the government. The basis of the
amount paid is the basic tax assessed.
[Mamalateo, 2008]
ASSESSMENT PROCESS [SEC. 228,
NIRC; RR 12-99]
FIRST STEP: TAX AUDIT
In a tax audit, revenue officers examine the
books of account and other accounting records
of taxpayers to determine the correct tax
liability. This is through the issuance of a Letter
of Authority.
Letter of Authority: An official document that
empowers a Revenue Officer to examine and
scrutinize a taxpayer’s books of accounts and
other accounting records, in order to determine
the taxpayer’s correct internal revenue tax
liabilities.
Cases which need not be covered by a valid LA:
(1) Cases involving civil/criminal tax fraud
which fall under the jurisdiction of the tax
fraud division of the Enforcement Services,
and
(2) Policy cases under audit by the special
teams in national offices
Section 3 of RR 12-99 is hereby amended by
deleting Section 3.1.1 thereof which provides
for the preparation of a Notice of Informal
Conference, thereby renumbering other
provisions thereof, and prescribing other
provisions for the assessment of tax liabilities
(RR No. 18-2013). Thus, there is no Informal
Conference needed in an assessment process.
SECOND STEP: ISSUANCE OF
PRELIMINARY ASSESSMENT NOTICE
(PAN) [SEC. 228, NIRC; RR18-2013]
If after review and evaluation by the
Commissioner or his duly authorized
TAXATION 2 TAXATION LAW
representative, it is determined that there
exists sufficient basis to assess the taxpayer for
any deficiency tax or taxes, the said Office shall
issue to the taxpayer the PAN for the proposed
assessment.
The PAN shall show in detail the facts and the
law, rules and regulations, or jurisprudence on
which the proposed assessment is based.
THIRD STEP: REPLY TO PAN
Taxpayer is given time to respond: 15 days from
date of receipt of PAN
(a) If he/she fails to respond: taxpayer is
considered in default; a formal letter of
demand and assessment notice shall be
issued to the taxpayer
(b) The regulations use the term “reply” to
distinguish the written objection(s) against
a FAN issued by the BIR, where the generic
term “protest” or the specific term “request
for reconsideration” or “request for
reinvestigation” is utilized.
The PAN shall not be required in any of the ff
cases, in which case, issuance of the Formal
Assessment Notice (FAN) shall be sufficient:
(a) 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) A DISCREPANCY has been determined
between the TAX WITHHELD and the
amount ACTUALLY REMITTED by the
withholding agent; or
(c) 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) The EXCISE TAX due on excisable articles
has not been paid; or
148
UP LAW BOC TAXATION 2
(e) An article locally purchased or imported by
an exempt person, such as, but not limited
to, vehicles, capital equipment, machineries
and spare parts, has been sold, traded or
transferred to a non-exempt person. [Sec.
228, NIRC]
In the above-cited cases, a FLD/FAN shall be
issued outright.
FOURTH STEP: ISSUANCE OF FORMAL
LETTER OF DEMAND AND FINAL
ASSESSMENT NOTICE
(a) A Final Assessment Notice (FAN) is a
declaration of deficiency taxes issued to a
taxpayer who:
(1) fails to respond to a pre-assessment
notice within the prescribed period of
time, or
(2) whose reply to the PAN was found to be
without merit.
(b) Sec 228: The taxpayer shall be informed in
writing of the law and the facts on which the
assessment is made; otherwise the
assessment shall be void
(c) An assessment contains not only a
computation of tax liabilities, but also a
demand for payment within a prescribed
period.
Effects of Issuance of FAN and LD
1. Creation of Tax Liabilities
2. Taxpayer does not have to pay deficiency tax
assessment yet BUT 20% deficiency interest
per annum starts
3. Business of the taxpayer does not become
illegal by reason of non-payment. (as opposed
too non-payment of local business deficient
taxes, where the business becomes illegal)
FIFTH STEP: DISPUTED ASSESSMENT
The taxpayer or his duly authorized
representative may protest administratively
against the formal letter of demand and
assessment notice within thirty days (30) from
149
TAXATION LAW
date of receipt. The taxpayer may either file a
reconsideration or reinvestigation.
Note: Failure to file protest within 30 days
shall make the assessment become final,
executor and demandable.
Protesting Assessment [Sec 228, NIRC; RR 12-
99]
(a) Protest of assessment by taxpayer
(1) Made within thirty (30) days from receipt
of the assessment.
(2) Protest is either a request for
reconsideration or a request for
reinvestigation, or both
(3) A protest is considered validly made if it
satisfies the following conditions:
i. it is made in writing, and
addressed to the Commissioner of
Internal Revenue,
ii. it contains the information
required by the rule,
iii. It states the FACTS, applicable
LAW, RULES and REGULATIONS
or JURISPRUDENCE on which his
protest is based, otherwise the
protest shall be considered void
and without force and effect and
iv. It is filed within the period
prescribed by law
(b) In case of a request for reinvestigation,
submission of documents within 60 days
from filing of protest
(1) Within sixty (60) days from filing of the
protest, all relevant supporting
documents must be submitted,
otherwise the assessment shall
become final. [Sec. 228] This will toll
the prescriptive period for assessment
or collection.
(2) In case of a request for reconsideration,
no additional documents need be
submitted. Further, the prescriptive
period will not be suspended. (See the
difference between the two above)
UP LAW BOC TAXATION 2
(c) Effect of failure to protest: the assessment
shall become final, executory and
demandable.
(d) Period provided for protest to be acted upon:
Protest should be acted upon within 180
days from submission of documents.
SIXTH STEP: ADMINISTRATIVE
DECISION ON A DISPUTED ASSESSMENT
The power to decide disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties imposed in relation thereto,
or other matters is vested in the Commissioner,
subject to the exclusive appellate jurisdiction
of the Court of Tax Appeals. The CIR may deny,
approve or not act upon the protest.
DENIAL
The CIR must state the facts and laws upon
which such protest was denied. Denial may be
made by the CIR or any of his authorized
representatives.
Rendition of Decision by Commissioner
CIR’s actions deemed equivalent to denial of
protest:
(a) Filing of collection suit against taxpayer
[CIR v. Union Shipping]
(b) Issuing a warrant of distraint and levy
[Commissioner v. Algue]
(c) Where there is a request for reconsideration,
final demand letter from BIR [CIR v. Isabela
Cultural Corp]
(d) Notice of delinquency [CIR v. Ayala
Securities]
(e) Inaction by Commissioner - If the protest is
not acted upon within one hundred eighty
(180) days from submission of documents,
the inaction by the Commissioner is
considered as a denial of protest.
(f) Referral of case for collection.
REMEDIES OF TAXPAYER TO ACTION BY
COMMISSIONER
(a) In case of denial of protest
150
TAXATION LAW
If the CIR or his authorized agent DENIES THE
PROTEST filed by the taxpayer, the latter may
either:
1. appeal to the CTA within 30 days from
receipt of the decision denying the protest
(Sec. 228, NIRC)
 The 30-day period starts when the
taxpayer receives the decision of the
Commissioner denying the protest.
 The decision of the Commissioner must
categorically state that his action on
the disputed assessment is final,
otherwise period to appeal will not
commence to run. (Advertising
Associates Vs. CA)
2. File a motion for reconsideration to CIR, if
decided by CIR; OR elevate his protest
through a request for reconsideration to the
CIR, if the denial is made by the authorized
representative. Within 30 days from receipt of
the decision denying the protest.
Note that a Motion for Reconsideration on the
CIR’s denial of the protest or administrative
appeal shall not toll the 30-day period to
appeal to the CTA [RR 18-2013]
Note: A Division of the CTA shall hear the
appeal. [Sec. 11, RA 1125 as amended by
RA 9282 (2004)]
(b) In case of inaction by Commissioner within
180 days from submission of documents
If the Commissioner or his duly authorized
representative did NOT ACT UPON THE
PROTEST within 180 days from the time the
documents were submitted, the taxpayer may
either:
(1) Appeal to the CTA within (30) thirty days
from the lapse of the 180-day period OR
(2) Wait until the Commissioner or his duly
authorized representative decides before
he elevates the case to the CTA.
UP LAW BOC
RCBC v. CIR (2007): In case the Commissioner
failed to act on the disputed assessment within
the 180-day period from date of submission of
documents, a taxpayer can either:
(1) file a petition for review with the Court of
Tax Appeals within 30 days after the
expiration of the 180-day period; OR
(2) await the final decision of the
Commissioner on the disputed
assessments and appeal such final
decision to the Court of Tax Appeals
within 30 days after receipt of a copy of
such decision.
However, these options are mutually
exclusive, and resort to one bars the
application of the other.
Remedy if the taxpayer is not satisfied with the
CTA Division’s ruling:
FIRST, he may file a motion for reconsideration
before the same Division of the CTA within
fifteen (15) days from notice thereof. (Sec. 11,
RA 1125 as amended by RA 9282 [2004])
THEN, a party adversely affected by a
resolution of a Division of the CTA on a motion
for reconsideration may file a petition for
review with the CTA en banc. [Sec. 18, RA 1125
as amended by RA 9282 (2004)]
Remedy if the taxpayer is not satisfied with the
decision of the CTA en banc:
A party adversely affected by a decision or
ruling of the CTA en banc may file with the
Supreme Court a verified petition for review on
certiorari pursuant to Rule 45 of the 1997 Rules
of Court. (Sec. 19, RA 1125 as amended by RA
9282 [2004])
(c) Effect of failure to appeal
If the taxpayer fails to file an appeal, the
assessment shall become final, executory and
demandable.
COLLECTION
TAXATION 2 TAXATION LAW
When the government may avail of the
remedies of collection:
General Rule: When the assessment shall have
become final, executory and demandable.
Exception: In case of false or fraudulent return
with intent to evade tax or of failure to file a
return, a proceeding in court for collection may
be filed without assessment within 10 years
from discovery of falsity, fraud or omission.
[Sec. 222(a), NIRC]
Injunction not available
No court may grant injunction to restrain the
collection of any national internal revenue tax,
fee or charge. [Sec. 218, NIRC]
Exception:
When the all of the following conditions
concur:
(1) It is an appeal to the CTA from a decision of
the CIR, or Commissioner of Customs or the
RTC, provincial, city or municipal treasurer
or the Secretary of Finance, the case may be,
AND
(2) In the opinion of the Court of Tax Appeals,
the collection may jeopardize the interest of
the Government and/or the taxpayer. [Sec.
11, R.A. 1125 as amended by R.A. 9282]
Requisite before availing of injunction
(1) Taxpayer has to deposit the amount
claimed; OR
(2) File an injunction bond with the Court for
not more double the amount [R.A. 1125]
Prescriptive periods
Where no
Where return
return filed, or
filed was
the return was
NOT false or
false or
fraudulent:
fraudulent:
Collection should be should be
with prior made within made within 5
assessment 5 years from years from the
151
UP LAW BOC TAXATION 2 TAXATION LAW

Where no
Where return Administrative
return filed, or
filed was (1) Distraint of Personal Property including
the return was garnishment deposit
NOT false or
false or (2) Summary remedy of levy on real property
fraudulent: (3) Forfeiture to the government for want of
fraudulent:
bidder
the date of date of
(4) Further Distraint or Levy
assessment assessment (5) Tax Lien
of the tax. (based on Sec. (6) Compromise and Abatement
(Sec. 203 in 222(c), NIRC) (7) Penalties and Fines
relation to
Judicial
Sec. 222,
(1) Civil
NIRC) by distraint or (2) Criminal
levy, or by
by distraint or judicial
levy, or by proceedings DISTRAINT OF PERSONAL
judicial PROPERTY
proceedings Distraint – remedy enforced on the goods,
Collection should be should be chattels, or effects, and other personal
without prior made within made within property of whatever character including
assessment 3 years from ten years after stocks and other securities, debts, credits,
the date of the discovery bank accounts, and interest in and rights to
filing of of the falsity, personal property [Sec. 205(a), NIRC]. When
return or date fraud or the distraint proceedings validly begins, the
return is due, omission to prescription of collection is suspended.
whichever is file a return.
LATER
(based on by judicial
Sec. 203, proceedings Kinds of Distraint:
NIRC) (1) Constructive Distraint
(2) Actual Distraint
by judicial
proceedings Constructive Distraint - may be placed by the
Commissioner on any taxpayer to safeguard
Waiver of prescriptive period the interest of the Government [Sec. 206,
If tax was assessed within the different period NIRC]. Delinquency of the taxpayer is not
agreed upon by the Commissioner and the necessary.
taxpayer, it may be collected by distraint or
levy or by a proceeding in court within the Grounds for Constructive Distraint:
period agreed upon in writing before the When in the opinion of the Commissioner,
expiration of the 5-yr period. [Sec. 222d, NIRC] (1) the taxpayer is retiring from any business
subject to tax; or
Remedies of the Government in Collection (2) the taxpayer is intending to leave the
Philippines; or

152
UP LAW BOC TAXATION 2
(3) the taxpayer is intending to remove his
property from the Philippines or to hide or
conceal his property; or
(4) the taxpayer is planning to perform any act
tending to obstruct the proceedings for
collecting the tax due or which may be due
from him (Sec. 206, NIRC)
How constructive distraint is effected:
(1) Signing of receipt by the taxpayer
By requiring the taxpayer or any person having
possession or control of such property to sign a
receipt covering the property distrained and
obligate himself to preserve the same intact
and unaltered and not to dispose of the same
in any manner whatever, without the express
authority of the Commissioner
(2) If the taxpayer refuses to sign the receipt:
signing of receipt by revenue officer in the
presence of two witnesses
In case the taxpayer or the person having the
possession and control of the property refuses
or fails to sign the receipt, the revenue officer
effecting the constructive distraint shall
proceed to prepare a list of such property and,
in the presence of two (2) witnesses, leave a
copy thereof in the premises where the
property distrained is located (Sec. 206, NIRC)
Note: In constructive distraint, the property is
not actually confiscated or seized by the
revenue officer.
Actual distraint - placed on a person who owes
any delinquent tax or delinquent revenue (see
Sec. 207, NIRC); involves actual seizure of the
property. In his kind of distraint, taxpayer
should have already been delinquent.
Garnishment– taking of personal properties,
usually cash or sums of money, owned by a
delinquent taxpayer which is in the possession
of a third party
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TAXATION LAW
DISTRAINT OF INTANGIBLE
PROPERTIES [SEC. 208, NIRC]
(1) Stocks and other securities: by serving a
copy of the warrants of distraint on the
taxpayer, AND upon the president, manager,
treasurer or other responsible officer of the
corporation, company or association which
issued the stocks or securities.
(2) Debts and credits: by leaving with the
person owing the debts or having in his
possession or under his control such credits,
or with his agent, a copy of the warrant of
distraint. The person owing the debts shall
then pay the Commissioner instead of his
creditor (taxpayer) on the strength of such
warrant.
(3) Bank accounts: by serving a warrant of
garnishment upon the taxpayer AND upon
the president, manager, treasurer or other
responsible officer of the bank. The bank
shall then turn over to the Commissioner so
much of the bank accounts as may be
sufficient to satisfy the claim of the
Government. (NOTE: Distraint of bank
accounts is called GARNISHMENT)
PROCEDURE FOR ACTUAL DISTRAINT
(A) Commencement of Distraint Proceedings
Who issues the warrant of distraint:
(1) Commissioner or his duly authorized
representative – where the amount
involved is more than P1M
(2) Revenue District Officer – where the
amount involved is P1M or less [Sec. 207(A),
NIRC]
(B) Service of Warrant of Distraint
How actual distraint is effected:
The proper officer 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 the taxpayer
in sufficient quantity to satisfy the tax,
UP LAW BOC
expenses of distraint and the cost of the
subsequent sale. [Sec. 207(A), NIRC]
(C) Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to
the Revenue Regional Director.
(D) Power of the CIR or proper officer to lift the
order of distraint
The taxpayer may request that the warrant be
lifted. The commissioner may, in his discretion,
allow the lifting of the order of distraint. He
may ask for a bond as a condition for the
cancellation of the warrant. [Sec. 207(A),
NIRC]
(E)Notice of Sale of Distrained Properties
(1) The Revenue District Officer or his duly
authorized representative (not the officer
who served the warrant), shall cause a
notification of the public sale to be posted in
not less than two (2) public places in the
municipality or city (one of which is the
Office of the Mayor) where the distraint was
made.
(2) The notice shall specify the time and place
of the sale. The time of sale shall not be
less than twenty (20) days after notice to
the owner and the publication or posting of
such notice. [Sec. 209, NIRC]
(F)Sale at Public Auction
(1) At the time of the public sale, the revenue
officer shall sell the goods, chattels, or
effects, or other personal property,
including stocks and other securities so
distrained at a PUBLIC AUCTION, to the
HIGHEST BIDDER for CASHor with the
approval of the Commissioner, through a
DULY LICENSED COMMODITY or STOCK
EXCHANGES.
(2) Any residue over and above what is required
to pay the entire claim, including expenses
of sale and distraint, shall be RETURNED to
the owner of the property sold. Expenses
TAXATION 2 TAXATION LAW
shall be limited to actual expenses of
SEIZURE and PRESERVATION of the
property pending the sale, no charge shall
be imposed for the services of the local
internal revenue officer or his deputy. [Sec.
209, NIRC]
(3) If the proceeds from the sale of the
distrained properties are not sufficient to
satisfy the 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. [Sec.
207(B), NIRC]
(G) Release of the Properties from Distraint
If at any time prior to the consummation of the
sale all proper charges are paid to the officer
conducting the sale, the goods or effects
distrained shall be restored to the owner. [Sec.
210, NIRC]
(H) Purchase by the government at sale upon
distraint
If the amount offered by the highest bidder is
not equal to the amount of the tax or is very
much less than the actual market value of the
articles offered for sale, the Commissioner or
his deputy may purchase the same in behalf of
the National Government for the amount of
taxes, penalties and costs due. The property
so purchased may be resold by the
Commissioner or his deputy. [Sec. 212, NIRC]
(I) Report of sale to BIR
Within two (2) days after the sale, the officer
making the same shall make a report of his
proceedings in writing to the Commissioner
and shall himself preserve a copy of such
report as an official record. [Sec. 211, NIRC]
SUMMARY REMEDY OF LEVY ON
REAL PROPERTY
Levy– seizure of real property, an interest in or
rights to such property in order to enforce the
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UP LAW BOC TAXATION 2
payment of taxes. [Sec. 205, NIRC] The real
property under levy shall be sold in a public
sale, if the taxes involved are not voluntarily
paid following such levy.
When levy may be effected: after the expiration
of time required to pay the delinquent tax, real
property may be levied upon, before,
simultaneously or after the distraint of
personal property belonging to the delinquent.
[Sec. 207(B), NIRC]
In case the warrant of levy is NOT issued before
or simultaneously with the warrant of distraint
on the personal property AND the personal
property of the taxpayer is not sufficient to
satisfy his tax delinquency: the CIR or his duly
authorized representative shall within 30 days
after execution of the distraint, proceed with
the levy on the taxpayer’s real property. [Sec.
207(B), NIRC]
PROCEDURE FOR LEVY
(A) Issuance of Warrant of Levy
(1) The IR 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 tax and penalty due
from him.
(2) This certificate shall operate with the
force of LEGAL EXECUTION
throughout the Philippines.
(3) The certificate shall contain a
description of the property upon which
levy is made. (Sec. 207(B), NIRC)
(B) Service of the Warrant
(1) Levy shall be effected by writing upon
said certificate a description of the
property upon which levy is made.
(2) At the same time, written notice of the
levy shall be mailed to or served upon
the Register of Deeds of the province or
155
TAXATION LAW
city where the property is located and
upon the taxpayer (If he is absent from
the Philippines: to his agent or
manager of business in respect to
which the liability arose or to the
occupant of the property in question).
[Sec. 207(B), NIRC]
(C) Advertisement of the Sale
(1) Within twenty (20) days after the levy,
the officer conducting the proceedings
shall proceed to advertise for SALE the
property or a portion as may be
necessary to satisfy the claim and costs
of sale. Such advertisement shall cover
a period of at least thirty (30) days.
The notice shall be posted at the main
entrance of the city or municipal all
AND in a public and conspicuous place
in the barrio or district where the real
property lies. The notice must also be
published in a newspaper of general
circulation in the place where the
property is located, once a week for
three (3) weeks.
(2) CONTENTS of notice: statement of
amount of taxes, and penalties due,
time and place of sale, name of
taxpayer, short description of property.
[Sec. 213, NIRC]
(D) Sale
The sale shall be held either at the main
entrance of the municipal or city hall or on the
premises to be sold. Property will be awarded
to the highest bidder. In case the proceeds of
the sale exceeds the claim and costs of sale,
the excess shall be turned over to the owner of
the property. [Sec. 213, NIRC]
(E) Forfeiture in Favor of the Government
If there is no bidder for the real property OR if
the highest bid is not sufficient to pay the taxes,
penalties and costs, the IR Officer conducting
the sale shall declare the property FORFEITED
UP LAW BOC TAXATION 2
to the GOVERNMENT in satisfaction of the
claim. [Sec. 215, NIRC]
(F) Redemption of Property Sold
(1) At any time before the day fixed for the sale,
the taxpayer may discontinue all proceeding
by paying the taxes, penalties and interest.
[Sec. 213, NIRC]
(2) Within one (1) year from the date of sale, the
taxpayer or anyone for him, may pay to the
Revenue District Officer the total amount of
the following: public taxes + penalties +
interest from the date of delinquency to the
date of sale + interest on said purchase
price at the rate of fifteen percent (15%) per
annum from the date of sale to the date of
redemption. [Sec. 214, NIRC]
Note:If the property was forfeited in favor of
the government, the redemption price shall
include only the taxes, penalties and interest
plus costs of sale – no interest on purchase
price since the Government did not
“purchase” the property anyway, it was
forfeited)
Note:The taxpayer-owner shall not be
deprived of possession of the said property
and shall be entitled to rents and other
income until the expiration of the period for
redemption [Sec. 214, NIRC]
(G) Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
Forfeiture to Government for Want of Bidder
Forfeiture implies a divestiture of property
without compensation in consequence of a
default or offense. The effect of forfeiture is to
transfer the title of the specific thing from the
owner to the government. (De Leon, NIRC
Annotated, p. 412)
Instances when forfeiture is appropriate
156
TAXATION LAW
(1) All chattels, machinery, and removable
fixtures of any sort used in the unlicensed
production of articles (Sec. 268, NIRC)
(2) Dies and other equipment used for the
printing or making of any internal revenue
stamp, label or tag which is in imitation of
or purports to be a lawful stamp, label or
tag. (Sec. 268, NIRC)
(3) Liquor or tobacco shipped under a false
name or brand (Sec. 262, NIRC)
Remedy of enforcement of forfeitures
(1) Forfeiture of chattels and removable
fixtures: enforced by the seizure, sale or
destruction of the specific forfeited property.
(2) Forfeiture of real property: enforced by a
judgment of condemnation and sale in a
legal action or proceeding civil or criminal
as the case may require (Sec. 224, NIRC)
When property to be sold or destroyed
(1) Forfeited chattels and removable fixtures –
sold in the same manner and under the
same conditions as the public notice and
the time and manner of sale as are
prescribed for sales of personal property
distrained for the non-payment of taxes
(2) Distilled spirits, liquors, cigars, cigarettes,
other manufactured products of tobacco
and all apparatus used in or about the illicit
production of such articles – destroyed by
the order of the Commissioner when the
sale or use would be injurious to public
health pr prejudicial to the enforcement of
the law
(3) All other articles subject to excise tax
manufactured or removed in violation of the
Code, dies for the printing or making of
internal revenue stamps and labels – sold
or destroyed in the discretion of the
Commissioner
(4) Forfeited property shall not be destroyed
until at least 20 days after seizure. (Sec.
225, NIRC)
UP LAW BOC TAXATION 2
Resale of real estate taken for taxes [RR No. 22-
2002]
(1) All acquired/forfeited properties
transferred in the name of the Republic of
the Philippines, having passed the one-
year redemption period, shall be converted
into cash from the date of acquisition or
forfeiture.
(2) The sale of acquired/forfeited real
properties shall be by sealed bids in a
public auction to be witnessed by a
representative of the COA.
(3) The Notice of Sale of the acquired real
properties shall be published once a week
for two (2) consecutive weeks in a
newspaper of general circulation in the
Philippines which must be completed at
least 20 days prior to the date of such
public auction.
(4) Unless the Commissioner of Internal
Revenue provides otherwise, the Minimum
Bid Price/Floor Price shall be the latest fair
market value as determined by the
Commissioner or the fair market value
shown in the latest tax declaration issued
by the provincial, city or municipal assessor,
whichever is higher, pursuant to Sec. 6(E)
of the Tax Code.
(5) Anyone could bid except foreign nationals,
corporate or otherwise, and those qualified
under existing laws, rules and regulations,
including employees of the Bureau of
Internal Revenue.
(6) Bidders shall be required to post a bond in
cash or manager’s check in an amount
representing 10% of the minimum bid price
at least one day before the scheduled
public auction.
(7) Unless the Commissioner allows extension
of time to pay, in meritorious cases, the
winning bidder shall pay the full amount of
his bid cash or manager’s check within two
days after receipt of notice of award.
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TAXATION LAW
(8) All taxes and expenses relative to the
issuance of title shall be borne by the
winning bidder.
(9) The winning bidder shall be responsible at
his own expense for the ejectment of
squatters and/or occupants, if any, of the
auctioned property.
(10) Negotiated or private sale shall be resorted
to as a consequence of failed public
bidding for two consecutive times.
(11) Negotiated or private sale shall in all cases
be approved by the Secretary of Finance.
(12) Public auction sale shall be approved by
the Commissioner or his authorized
representative.
(13) The Government reserves the right to reject
or cancel any or all bids.
Disposition of funds recovered in legal
proceedings or obtained from forfeiture
All judgments and monies recovered and
received for taxes, costs, forfeitures, fines and
penalties shall be paid to the Commissioner or
his authorized deputies as the taxes
themselves are required to be paid, and except
as specially provided, shall be accounted for
and dealt within the same way. (Sec. 226,
NIRC)
Further distraint or levy
The remedy by distraint of personal property
and levy on realty may be repeated if necessary
until the full amount due, including all
expenses, is collected. [Sec. 217, NIRC]
TAX LIEN
Tax Lien is a legal claim or charge on the
property, real or personal, as security for the
payment of same debt or obligation. It
attaches from the time the tax became due
and payable.
(1) When a taxpayer neglects or refuses to pay
his internal revenue tax liability after
demand, the amount so demanded shall be
UP LAW BOC TAXATION 2
a lien in favor of the government from the
time the assessment was made by the CIR
until paid with interest, penalties, and costs
that may accrue in addition thereto upon
ALL PROPERTY AND RIGHTS TO
PROPERTY BELONGING to the taxpayer.
(2) HOWEVER, the 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. (Sec. 219,
NIRC)
Seizure under forfeiture vs. Seizure to enforce a
tax lien
In the former all the proceeds derived from the
sale of the thing forfeited are turned over to
the Collector of Internal Revenue; in the latter,
the residue of such proceeds over and above
what is required to pay the tax sought to be
realized, including expenses, is returned to the
owner of the property. (BPI v. Trinidad)
COMPROMISE
Authority of the Commissioner to compromise
and abate taxes
Compromise - to reduce the amount of tax
payable. This should not be taken similarly
with compromise penalty.
The CIR has authority to compromise and
abate tax. However, the CIR is not authorized
to accept anything less than what is
adjudicated in favor of the Government.
It should be noted that there should be
consent of BOTH the taxpayer and the CIR,
otherwise it will be void.
Grounds for a compromise:
The Commissioner may compromise the
payment of any internal revenue tax in the
following cases:
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TAXATION LAW
(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. (FINANCIAL INCAPACITY)
Limits of the Commissioner’s power to
compromise:
(1) For cases of financial incapacity: a
minimum compromise rate equivalent to
ten percent (10%) of the basic assessed tax
(2) For other cases: a minimum compromise
rate equivalent to forty percent (40%) of the
basic assessed tax
Note: When 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 must be
approved by the Evaluation Board (composed
of the Commissioner and 4 deputy
commissioners)
All criminal cases may be compromised
except: (i) those already filed in court and (ii)
those involving fraud.
The taxpayer’s offer to compromise shall not
be considered until (RR 9 – 2013)
i. He waives in writing his privilege under
RA 1405 or other special laws
ii. He gave authority to CIR to inquire into
his bank accounts
iii. There is payment of compromise offer.
Abatement- to cancel the entire amount of tax
payable
When the Commissioner may abate or cancel a
tax liability:
(1) The tax or any portion thereof appears to be
UNJUSTLY or EXCESSIVELY ASSESSED; or
(2) The ADMINISTRATION and COLLECTION
COSTS do not justify the collection of the
amount due. (e.g. when the costs of
UP LAW BOC TAXATION 2
collection are greater than the amount of
tax due)
CIVIL AND CRIMINAL ACTIONS
Form and Mode of Proceeding:
Civil and criminal action and proceedings
instituted in behalf of the Government under
the authority of this Code or other law enforced
by the BIR:
(1) shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
(2) shall be CONDUCTED BY LEGAL OFFICERS
OF THE BIR
(3) shall be filed in court with the approval of
the Commissioner. [Sec. 220, NIRC]
Criminal action as a collection remedy:
The judgment in the criminal case shall impose
the penalty; and order payment of the taxes
subject of the criminal case as finally decided
by the Commissioner. [Sec. 205, NIRC]
Assessment not necessary before filing a
criminal charge for tax evasion
An assessment is not necessary before a
criminal charge can be filed. The criminal
charge need only be proved by a prima facie
showing of a wilful attempt to file taxes, such
as failure to file a required tax return. [CIR v.
Pascor Realty, June 29, 1999]
Suit to recover tax based on false or fraudulent
returns
A proceeding in court for the collection of the
tax assessed 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 executor, the fact of fraud
shall be judicially taken cognizance of in the
civil or criminal action for the collection thereof.
[Sec. 222, NIRC]
False Return v. Fraudulent Return
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TAXATION LAW
A false returns is due to mistakes, carelessness
or ignorance and a fraudulent return is filed
with intent to evade taxes.
The fraud contemplated by law is actual and
not constructive, and must amount to
intentional wrongdoing with the sole object of
avoiding the tax. [Aznar v. CTA, 1974]
Payment of tax is not a valid defense.
[Sec .253A]
REFUND
Nature of a claim for refund: It partakes of the
nature of an exemption and is strictly
construed against the claimant. The burden of
proof is on the taxpayer claiming the refund
that he is entitled to the same. (CIR v. Tokyo
Shipping, 1995)
Please note that Sections 229 and 204
appeared several times in previous Bar
examinations.
Grounds for Refund:
(1) Tax erroneously or illegally assessed or
collected [Sec. 229, NIRC]
(2) Penalty claimed to have collected without
authority [Sec. 229, NIRC]
(3) Any sum alleged to have been excessively or
in any manner wrongfully collected [Sec.
229, NIRC]
(4) Value of internal revenue Stamps when they
are returned in good condition by the
purchaser [Sec. 204, NIRC]
(5) Unused stamps that have been rendered
unfit for use (Commissioner may redeem,
change or refund their value upon proof of
destruction) [Sec. 204, NIRC]
Requirements for refund as laid down by cases:
(1) Necessity of written claim for refund
(2) Claim containing a categorical demand for
reimbursement
(3) Filing of administrative claim for refund and
the suit/proceeding before the CTA within 2
UP LAW BOC TAXATION 2
years from date of payment regardless of
any supervening cause
General Rule:The taxpayer must file a written
claim for refund stating a categorical demand
for reimbursement before the Commissioner
within two years from the date of payment.
[Sec. 229, NIRC]
When it comes to recovery of unutilized input
VAT, Section 112, and not Section 229 of the
1997 Tax Code, is the governing law. Second,
prior to 8 June 2007, the applicable rule is
neither Atlas nor Mirant, but Section 112(A).
The Atlas doctrine, which held that claims for
refund or credit of input VAT must comply with
the two-year prescriptive period under Section
229, should be effective only from its
promulgation on 8 June 2007 until its
abandonment on 12 September 2008 in Mirant.
[CIR v. San Roque]
Exceptions to requirement of a written claim:
(1) When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid (e.g.
mathematical errors), the Commissioner
may refund or credit the tax even without a
written claim therefore. (Sec. 229, NIRC)
(2) A return filed showing an overpayment shall
be considered as a written claim for credit
or refund. (Sec. 204(C), NIRC)
Note: Under Sec. 229, there is no exception to
the 2-year prescriptive period.
Legal Basis of Tax Refunds
(a) Tax refunds are based on the principle of
quasi-contract or solutio indebiti and the
pertinent laws governing this principle are
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TAXATION LAW
found in Art. 2142 and Art. 2154 of the NCC.
When money is paid to another under the
influence of a mistake of fact, on the
mistaken supposition of the existence of a
specific fact, where it would not have been
known that the fact was otherwise, it may
be recovered. The ground upon which the
right of recovery rests is that money paid
through misapprehension of facts belongs
in equity and in good conscience to the
person who paid it.
(b) The government comes within the scope of
solutio indebiti principle, where that:
“enshrined in the basic legal principles is
the time honoured doctrine that no person
shall unjustly enrich himself at the expense
of another. It goes without saying that the
Government is not exempt from the
application of this doctrine.
Statutory Basis for Tax Refund
Scope of Claims for Refund [Sec. 204, NIRC]
The Commissioner may:
(a) Credit or refund taxes erroneously or
illegally received or penalties imposed
without authority;
(b) Refund the value of internal revenue
stamps when they are returned in good
condition by the purchaser; and
(c) In the Commissioner’s discretion, redeem or
change unused stamps that have been
rendered unfit for use and refund their value
upon proof of destruction.
Necessity of Proof for Claim or Refund
(1) 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. [Sec. 204,
NIRC]
(2) A return filed showing an overpayment shall
be considered as a written claim for credit
or refund.[Sec. 204, NIRC]
UP LAW BOC TAXATION 2
Burden of Proof for Claim of Refund
Tax refunds, like tax exemptions, are construed
strictly against the taxpayer and liberally in
favor of the taxing authority. [United Airlines,
Inc. v. CIR, G.R. No. 178788, Sept. 29, 2010]
Nature of erroneously paid tax/illegally
assessed collected
Taxes are erroneously paid when a taxpayer
pays under a mistake of fact, such as, he is not
aware of an existing exemption in his favor at
the time that payment is made. Taxes are
illegally collected when payments are made
under duress.
Tax refund vis-à-vis tax credit
REFUND takes place when there is actual
reimbursement while TAX CREDIT takes place
upon the issuance of a tax certificate or tax
credit memo, which can be applied against any
sum that may be due and collected from the
taxpayer.
Essential requisites for claim of refund
[Comm. v. CA and Citytrust, cited in United
Airlines Inc. v. CIR, 2010]: The grant of a refund
is founded on the assumption that the tax
return is valid, that is, the facts stated therein
are true and correct. The deficiency
assessment, although not yet final, created a
doubt as to and constitutes a challenge
against the truth and accuracy of the facts
stated in said return which, by itself and
without unquestionable evidence, cannot be
the basis for the grant of the refund…To grant
the refund without determination of the proper
assessment and the tax due would inevitably
result in multiplicity of proceedings or suits. If
the deficiency assessment should
subsequently be upheld, the Government will
be forced to institute anew a proceeding for
the recovery of erroneously refunded taxes
which recourse must be filed within the
prescriptive period of ten years after discovery
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TAXATION LAW
of the falsity, fraud or omission in the false or
fraudulent return involved.
Who may claim/apply for tax refund/tax credit
The proper person to claim refund or tax credit
is the person on whom the tax is imposed by
the statute.
Taxpayer/withholding agents of non-resident
foreign corporation - the withholding agent is
directly and independently liable for the
correct amount of tax that should be withheld
and for deficiency assessments, surcharges
and penalties.
Prescriptive Period for Recovery of Tax
Erroneously or Illegally Collected
Two-year period when counted: From the date
that tax was paid.
How date of payment determined:
(1) If the income tax is withheld at source –
payment is at the end of the taxable year.
(2) If the income is paid on a quarterly basis –
payment is from the time of filing the final
adjustment return.
[CIR vs. TMX Sales, January 16, 199]: When a
tax is paid in installments, the prescriptive
period should be counted from the date of final
payment or the last installment. This rule
proceeds from the theory that there is no
payment until the entire tax liability is
completely paid. Installments should be
treated as advances or portions of the annual
tax due.
Other Consideration Affecting Tax Refunds
Remedy of the taxpayer upon denial or
inaction on the claim for refund:
(1) CIR denies claim - appeal to the CTA within
thirty (30) days from the receipt of the
Commissioner’s decision and within two
years from the date of payment.
UP LAW BOC TAXATION 2
(2) CIR does not act on the claim and the 2-year
period is about to lapse - file a claim before
the CTA before the 2-year period lapses.
Otherwise, he may no longer file a claim
before the CTA in case the Commissioner
renders an adverse decision beyond the 2-
year period. [Revised Rules of the CTA, as
amended]
Period for claiming refund once granted:
Within five years from the date such warrant or
check was mailed or delivered, otherwise it
shall be forfeited in favor of the government
and the amount thereof shall revert to the
general fund. [Sec. 230, NIRC]
Period for using the Tax Credit Certificate
(TCC):
Tax credit certificates (TCCs) can be applied
against all internal revenue taxes, excluding
withholding tax. TCCs which remain unutilized
after five years from the date of issue shall be
considered as invalid, unless revalidated. If
not revalidated, the amount covered by the
TCC shall revert to the general fund. [Sec. 230,
NIRC]
GOVERNMENT REMEDIES
ADMINISTRATIVE REMEDIES
(1) Tax lien
(2) Levy and sale of real property
(3) Forfeiture of real property to the
government for want of bidder
(4) Further distraint and levy
(5) Suspension of business operation
(6) Non-availability of injunction to
restrain collection of tax
(1) Tax lien (supra)
(2) Levy and sale of real property (supra)
(3) Forfeiture of real property to the government
for want of bidder (supra)
(4) Further distraint and levy (supra)
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TAXATION LAW
(5) Suspension of business operation
The Commissioner or his authorized
representative is empowered to suspend the
business operations and temporarily close
the business establishment of any person
for any of the following violations:
(a) In the case of a VAT-registered Person.
(1) Failure to issue receipts or invoices;
or
(2) Failure to file a value-added tax
return as required under Section
114; or
(3) Understatement of taxable sales or
receipts by thirty percent (30%) or
more of his correct taxable sales or
receipts for the taxable quarter.
(b) Failure of any Person to Register as
Required under Section 236.
The temporary closure of the
establishment shall be for the duration
of not less than five (5) days and shall be
lifted only upon compliance with
whatever requirements prescribed by the
Commissioner in the closure order. [Sec.
115, NIRC]
(6) Non-availability of injunction to restrain
collection of tax
No court shall have the authority to
grant an injunction to restrain the collection
of any national internal revenue tax, fee or
charge imposed by the National Internal
Revenue Code. [Sec. 218, NIRC]
JUDICIAL REMEDIES
(1) Civil Action
(2) Criminal Action
Form and Mode of Proceeding (supra)
Civil Action
Two ways by which civil liability is enforced:
(1) by filing a civil case for the collection of sum
of money with the proper regular court; and
UP LAW BOC TAXATION 2 TAXATION LAW

(2) by filing an answer to the petition for review

filed by the taxpayer with the Court of Tax Offender Penalty
Appeals. [Mamalateo, 2008]
public office, and
Criminal Action perpetually disqualified
Any person convicted of a crime under the from holding any public
Code shall: office, to vote, and to
(1) be liable for the payment of the tax, and participate in any
(2) be subject to the penalties imposed under election
the Code. [Sec. 253(A), NIRC] CPA his license shall be
automatically revoked or
Payment of tax not defense: cancelled once he is
Payment of the tax due after a case has been convicted
filed shall not constitute a valid defense in any Corporations, imposed on the partner,
prosecution for violation of the provisions associations, president, general
under the Code. [Sec. 253(A), NIRC] partnerships etc. manager, branch
manager, treasurer,
Liability of person who aids or abets: officer-in-charge and
Any person who wilfully aids or abets in the employees responsible
commission of a crime penalized under the for the violation (Sec.
Code or who causes the commission of any 253, NIRC)
such offense by another shall be liable in the
same manner as the principal. [Sec. 253(B), Minimum amount of fine:
NIRC] The fines imposed for any violation of the Code
shall not be lower than the fines imposed
herein or twice the amount of taxes, interests
Offender Penalty and surcharges due from the taxpayer,
whichever is higher. [Sec. 253, NIRC]
Not a citizen of he shall be deported Prescriptive period for criminal action:
the Philippines immediately after All violations of any provision of the Code shall
serving the sentence prescribe after five (5) years. (Sec. 281, NIRC)
A public officer or the maximum penalty
employee prescribed for the
offense shall be imposed
on him
shall be dismissed from

CRIMINAL OFFENSES

Offense Who is liable Penalty

Willful attempt to evade or Any person who willfully Fine: P30,000 -

defeat tax. (Sec. 254) attempts in any manner to P100,000
evade or defeat any tax or the AND
payment thereof. Imprisonment: 2-4 years

163
UP LAW BOC
Offense
Failure to File Return, Supply
Correct and Accurate
Information, Pay Tax, Withhold
and Remit Tax and Refund
Excess Taxes Withheld on
Compensation (Sec. 255)
Making false entries, records,
or reports, or using falsified or
fake accountable forms (Sec.
257)
Unlawful pursuit of business
(Sec. 258)
Illegal Collection of Foreign
Payments (Sec. 259)
Unlawful Possession of
Cigarette Paper in Bobbins or
Rolls, Etc. (Sec. 260)
Unlawful Use of Denatured Any person who for the purpose Fine:
TAXATION 2 TAXATION LAW
Who is liable Penalty
Plus other penalties
Any person required to pay any Fine: P10,000 or more
tax, make a return, keep any AND
record, or supply correct and Imprisonment:1-10 years
accurate information Plus other penalties
Any person who attempts to Fine - P10,000 - P20,000
make it appear for any reason AND
that he or another has in fact Imprisonment: 1-3 years
filed a return or statement, or Plus other penalties
actually files a return or
statement and subsequently
withdraws the same return or
statement
Any financial officer or Fine - P50,000 -
Independent CPA engaged to P100,000
examine and audit books of AND
accounts of taxpayers under Imprisonment: 2-6 years
Sec.232 (A) and any person
under his direction.
Any person who carries on any Fine: P5,000 - P20,000
business for which in annual AND
registration fee is imposed Imprisonment: 6 months-
without paying the tax as 2 years
required by law.
A person engaged in the Fine: P30,000 - P50,000
business of distilling, rectifying, AND
repacking, compounding or Imprisonment: 1-2 years
manufacturing any article
subject to excise tax.
Any person who knowingly Fine: P20,000 - P50,000;
undertakes the collection of AND
foreign payments under Sec. 67 Imprisonment: 1-2 years
without a license or without
complying with the
implementing rules and
regulations.
Any person, manufacturer or
Fine: P20,000 -
importer of cigar or cigarettes
P100,000; AND
Imprisonment - 6 years 1
day - 12 years
P20,000 -
164
UP LAW BOC TAXATION 2 TAXATION LAW

Offense Who is liable Penalty

Alcohol (Sec. 261) of manufacturing any beverage, P100,000; AND

uses denatured alcohol or Imprisonment - 6 years 1
alcohol specially denatured to day - 12 years
be used for motive power or
withdrawn under bond for
industrial uses or alcohol
knowingly misrepresented to be
denatured to be unfit for oral
intake or who knowingly sells or
offers for sale such preparations
containing as an ingredient
such alcohol.

Any person who unlawfully

recovers or attempt to recover
by distillation or other process
any denatured alcohol or who
knowingly sells or offers for
sale, conceals or otherwise
disposes of alcohol as recovered
or redistilled
Shipment or Removal of Any person who ships, Fine: P20,000 – P
Liquor/Tobacco Products transports or removes 100,000; AND
under False Name or Brand or Imprisonment: 6 years 1
as an Imitation of any Existing day - 12 years
or Known Product Name or
Brand (Sec. 262)
Unlawful Possession or Any person who owns or is
Removal of Articles Subject to found in possession of these
Excise Tax W/o Payment of the articles
Tax (Sec. 263) Where: Fine: P1,000 - P2,000
(1) Value of goods < P1,000 AND
Imprisonment: 60-100
days

(2) Fine: P10,000-P20,000 V

alue of goods < P50,000 but AND
>P1000 Imprisonment: 2-4 years

Fine: P30,000 - P60,000

(3) AND V
alue of goods < P150,000, Imprisonment: 4-6 years

165
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Offense Who is liable Penalty

but >P50,000
Fine: P50,000 -
P100,000
(4) AND V
alue of goods > P150,000 Imprisonment: 10-12 years
Failure or Refusal to Issue Any person who, being required Fine: P 1,000 - P50,000
Receipts or Sales or under Section 237 to issue AND
Commercial Invoices, receipts or sales or commercial Imprisonment: 2- 4 years
Violations Related to the invoices
Printing of Such Receipts or
Invoices and Other Violations
(Sec. 264)
Offenses Relating to Stamps Fine: P20,000 - P50,000
(Sec. 265) AND
Imprisonment: 4-8 years
Failure to Obey Summons (Sec. Any person who being duly Fine: P 5,000 - 10,000;
266) summoned to appear to testify, AND
or to appear and produce books Imprisonment:1-2 years
of accounts, records,
memoranda or other papers, or
to furnish information as
required under the pertinent
provisions of this Code.
Declaration under Penalties of Any person who willfully files a Penalty for Perjury under
Perjury (Sec. 267) declaration, return or statement the Revised Penal Code
containing information which is
not true and correct as to every
material matter
Misdeclaration or Any manufacturer subject to Summary cancellation or
Misrepresentation of excise tax withdrawal of the permit
Manufacturers Subject to to engage in business as a
Excise Tax (Sec. 268) manufacturer of articles
subject to excise tax
Use of Property in Unlicensed Any person who conducts an Forfeiture of property
Business or Use of Dies for unlicensed business or uses dies used
Printing False Stamps, Etc. for printing false stamps
(Sec. 268)
Illegal Storage or Removal of Any person subject to excise tax Forfeiture of goods
Goods (Sec. 268) who fails to store the goods in
proper place, or removes goods
without payment of excise tax
Penalty for Second and Maximum of the penalty

166
UP LAW BOC TAXATION 2 TAXATION LAW

Offense Who is liable Penalty

Subsequent Offenses (Sec. prescribed for the offense

274)
Violation of Other Provisions of
Any person who violates any Fine: P1000 or less
the Tax Code or Rules or provision of this Code or any OR
Regulations in General (Sec. rule or regulation promulgated Imprisonment: 6 months
275) by the Department of Finance or less
for which no specific penalty is OR Both
provided by law
Penalty for Selling, Any taxpayer, whose property Fine: at least P5,000
Transferring, Encumbering or has been placed under AND
in any way disposing of constructive distraint at least twice the value of
property Placed under the property
Constructive Distraint (Sec. OR
276) Imprisonment: 2 years 1
day - 4 years
OR Both
Failure to Surrender Property Any person having in his Fine: P 5,000 or more
Placed under Distraint and possession or under his control OR
Levy (Sec. 277) any property or rights to Imprisonment: 6 months 1
property, upon which a warrant day - 2 years,
of constructive distraint or OR Both
actual distraint and levy has
been issued
Procuring Unlawful Divulgence Any person procures an officer Fine: not more than P
of Trade Secrets (Sec. 278) or employee of the BIR to 2,000
divulge any confidential OR
information regarding the Imprisonment: 6 months -
business, income or inheritance 5 years
of any taxpayer, knowledge of OR Both
which was acquired by him in
the discharge of his official
duties, and which it is unlawful
for him to reveal, and any
person who publishes or prints
in any manner whatever, not
provided by law, any income,
profit, loss or expenditure
appearing in any income tax
return
The law imposes a fine of not less than
Penalties Imposed on Public Officers [Sec. 269, P50,000 nor more than P100,000 or
NIRC] imprisonment for not less than 10 years nor

167
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more than fifteen years on every official, agent
or employee of the BIR or of any agency or
employee of the Government charged with the
enforcement of the Tax Code, who shall:
(CONED- FRAP)
(a) Extort or willfully oppress under color of
law;
(b) knowingly Demand other or greater sums
than are authorized by law or receive any
fee, compensation or reward, except as by
law prescribed, for the performance of any
duty;
(c) willfully Neglect to give receipts, as by law
required, for any sums collected in the
performance of duty, or who willfully
neglect to perform any of the duties
enjoined by law;
(d) Conspire or collude with another or others
to defraud the revenues or otherwise violate
the law;
(e) willfully make Opportunity for any person to
defraud the revenues, or who do or omit to
do any act with intent to enable any other
person to defraud the revenues;
(f) negligently or by design Permit the violation
of the law by any other person;
(g) make or sign any False certificate or return
in any case where the law requires the
making by them of such entry, certificate or
return;
(h) having knowledge or information of a
violation of any provision of the Code or of
any fraud committed on the revenues
collectible by the BIR, fail to Report such
knowledge or information to their superior
officer, or to report as otherwise required by
law; or
(i) without the authority of law, demand or
Accept or attempt to collect, directly or
indirectly, as payment or otherwise, any
sum of money or other thing of value for the
compromise, adjustment or settlement of
any charge or complaint for any violation or
alleged violation of law.
168
TAXATION LAW
Informer’s Reward[Sec. 282, NIRC]
To whom given:
Persons instrumental in the discovery of
violations of the NIRC and in discovery and
seizure of smuggled goods.
Amount of reward:
10% of the revenues, surcharges or fees
recovered and/or fine/penalty imposed, or
P1,000,000, whichever is LOWER.
(a) The same amount shall be given if the
offender offered to compromise and such
offer has been accepted and collected by
the Commissioner.
(b) If no revenue, surcharge or fees be actually
collected, such person is not entitled to a
reward
(c) For discovery and seizure of SMUGGLED
GOODS: The cash reward is 10% of the FMV
of the smuggled and confiscated goods, or
P1,000,000, whichever is LOWER.
STATUTORY OFFENSES AND PENALTIES
Civil Penalties
(1) Surcharge
(2) Interest
SURCHARGE
Surcharge - penalty imposed in addition to the
tax required to be paid [Sec. 248(A), NIRC]
Rates of Surcharge (25% or 50%)
(1) 25% of the amount due in the following
cases:
(a) Failure to file any return and pay the tax
due on the date prescribed; or
(b) Filing a return with an internal revenue
officer other than those with whom the
return is required to be filed unless the
Commissioner authorizes otherwise; or
(c) Failure to pay the deficiency tax within
the time prescribed for its payment in the
notice of assessment; or
(d) Failure to pay the full or part of the
UP LAW BOC TAXATION 2
amount of tax due on or before the date
prescribed for its payment [Sec. 246 (A),
NIRC]
(2) 50% of the tax or of the deficiency tax in the
following cases:
(a) Willful neglect to file the return within
the period prescribed; or
(b) A false or fraudulent return is willfully
made [Sec. 248(B), NIRC]
Prima facie evidence of a false or fraudulent
return: Substantial underdeclaration of taxable
sales, receipts or income, or a substantial
overstatement of deductions. Failure to report
sales, receipts or income in an amount
exceeding thirty percent (30%) of that declared
per return, and a claim of deductions in an
amount exceeding (30%) of actual deductions,
shall render the taxpayer liable for substantial
underdeclaration or for overstatement. (Sec.
248(B), NIRC)
INTEREST
In General
20% per annum on the unpaid amount of tax,
interest at the rate of twenty percent (20%) per
annum from the date prescribed for payment
until the amount is fully paid. (Sec. 249(A),
NIRC)
Deficiency Interest
20% per annum on any deficiency in the tax
due from the date prescribed for its payment
until the full payment thereof. (Sec. 249(B),
NIRC)
Delinquency interest
20% per annum on the unpaid amount in case
of failure to pay:
(a) The amount of the tax due on any return
required to be filed; or
(b) The amount of the tax due for which no
return is required; or
169
TAXATION LAW
(c) A deficiency tax, or any surcharge or interest
thereon on the due date appearing in the
letter of demand and assessment notice
(Sec. 249(C), NIRC)
Interest on extended payment
20% per annum on the tax or deficiency tax or
any part thereof unpaid from the date of notice
and demand until it is paid if any person
required to pay the tax is:
(a) Qualified and elects to pay the tax on
installment but fails to pay the tax or any
installment or any part of such amount or
installment or before the date prescribed for
its payment; or
(b) Where the Commissioner has authorized an
extension of time within which to pay a tax
or a deficiency tax or any part thereof
(249(D), NIRC)
COMPROMISE AND ABATEMENT OF
TAXES
(see discussion under Remedies of the
Taxpayer)
Cases which may be compromised: [Sec. 2, R.R.
30-2002]
(1) Delinquent accounts
(2) Cases under administrative protest after
issuance of the Final Assessment Notice to
the taxpayer which are still pending in the
Regional Offices, Revenue District Offices,
Legal Service, Large Taxpayer Service (LTS),
Collection Service, Enforcement Service and
other offices in the National Office
(3) Civil tax cases being disputed before the
courts
(4) Collection cases filed in courts
(5) Criminal violations, other than those
already filed in court or those involving
criminal tax fraud
Cases which cannot be compromised: [Sec. 2,
R.R. 30-2002]
UP LAW BOC TAXATION 2
(1) Withholding tax cases, unless the
applicant-taxpayer invokes provisions of law
that cast doubt on the taxpayer's obligation
to withhold
(2) Criminal tax fraud cases confirmed as such
by the CIR or his duly authorized
representative
(3) Criminal violations already filed in court
(4) Delinquent accounts with duly approved
schedule of installment payments
(5) Cases where final reports of reinvestigation
ore reconsideration have been issued
resulting to reduction in the original
assessment and the taxpayer is agreeable
to such decision by signing the required
agreement form for the purpose. On the
170
TAXATION LAW
other hand, other protested cases shall be
handled by the Regional Evaluation Board
(REB) or the National Evaluation Board
(NEB) on a case to case basis
(6) Cases which become final and executory
after final judgment of a court, where
compromise is requested on the ground of
doubtful validity of the assessment; and
(7) Estate tax cases where compromise is
requested on the ground of financial
incapacity of the taxpayer
UP LAW BOC TAXATION 2 TAXATION LAW

Flowchart I: Taxpayer’s Remedies from Tax Assessment-NIRC

START

Commissioner or Revenue Officer (RO)

RO sends notice Taxpayer
Regional Director conducts Audit w/in 120
of informal responds w/in 15
Issues Letter of days. If 120 days lapse
conference days
Authority (LA) LA is revalidated,

Regional
Send Formal Letter Assessment
Is response w/n Taxpayer
of demand and Final NO to Division issues a
15 days? Is it responds w/in
Assessment Notice either Preliminary
meritorious? 15 days
(FAN) is issued Assessment Notice
(PAN)
Yes to ASSESSMENT
both ENDS

File protest w/n 30 Protest made w/in

days from receipt of 30 days?
YES to Commissioner decides on
assessment. Submit Supporting papers
both protest within 180 days
supporting papers wi/in submitted w/in 60
60 days from protest days?

Assessment becomes
NO to
Final, Warrant of Distraint
either
& Levy Issued

Decision Commissioner
YES favorable to YES decides w/n
taxpayer? 180 days?

ASSESSMENT
ENDS NO NO

Appeal to the Court of Tax Appeal to the Court of Tax

appeals within 30 days OR file Appeals w/in 30 days after
motion for reconsideration lapse of 180 days OR wait for
within 30 days. MR tolls 30 a decision by the BIR
day period to appeal to CTA (Lascona Land oil vs. CIR)

If MR is denied, appeal to
the CTA within remainder
of the 30 days

Assessment
CTA decides on Appeal made becomes Final,
YES NO
the appeal on time? Warrant of Distraint
& Levy Issued

If CTA decision is unfavorable to

taxpayer, file MR with CTA Appeal to
END
Division w/in 15 days. Appeal to Supreme Court
CTA en banc if MR denied.

171
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Flowchart II: Procedures for Distraint and Levy-NIRC
START
Person owing any
delinquent tax to
fails to pay w/in
the time required
RDO posts notice in at least 2 public
places in the municipality/city where
the distraint is made. One place of
posting must be at the mayor’s office.
Time of sale shall not be less than 20
days after the notice (Sec. 209)
Goods shall be restored to owner,
if charges are paid (Sec. 210)
W/in 5 days after sale,
distraining officer shall enter
return of proceedings in the
records of RCO, RDO and
RRD (Sec. 213)
Real property may be levied
on before, simultaneously, or
after the distraint of personal
property (207 (B))
W/n 10 days after receipt of the
warrant, levying officer shall
report to the Commissioner who
shall have the authority to lift the
warrant of levy (Sec. 207 B)
W/n 1 year from forfeiture,
the taxpayer, may redeem
said property by paying full
amount of the taxes and
charges (Sec. 215)
The Commissioner may,
after 20 days notice, sell
property at public auction
or at private sale with
approval of the SoF.
Proceeds shall be
deposited with the National
Treasury (Sec. 216)
TAXATION 2 TAXATION LAW
RCO - Revenue Collection Officer RDO - Revenue District officer
RRD - Revenue Regional Director LGU- Local Government Unit
Commissioner seizes sufficient
Delinquent tax personal property to satisfy the
Yes
more than 1M? tax, charge & expenses of seizure
(Sec. 207 (A))
RDO seizes sufficient
personal property to satisfy
No
the tax, charges & expenses
Property may be resold and
of seizure (Sec. 207 (A))
the net proceeds shall be
remitted to the National
Treasury as internal revenue.
Distraining Officer accounts for (Sec. 212)
the goods distrained (Sec. 208)
Bid less than
Officer Commissioner may purchase
amount of tax/
conducts Yes property for the National
FMV of goods
public auction Government (Sec. 212)
distrained?
No, bid just right
W/in 2 days after Excess of proceeds over the Officer sells the goods to the
the sale, officer entire claim, shall be returned highest bidder for cash or
shall report to the to the owner. No charge shall with the Commissioner’s
Commissioner. be imposed for the services of approval, through commodity/
(Sec. 211) the officer (Sec. 209) stock exchanges. (Sec. 209)
Internal revenue officer,
Levy shall be affected by writing upon said certificate a
designated by the Commissioner,
description of the property. Notice of the levy shall be
shall prepare a certificate with the
served upon the Register of Deeds of LGU where the
force of a nationwide legal
property is located and upon the owner (Sec. 207 B)
execution (Sec. 207 B)
W/n 20 days after levy, officer shall post
notice at the main entrance of the Sale shall be held at the
municipal/city hall & in public place in the main entrance of the
barrio/district where the real estate lies for municipal/city hall, or on the
at least 30 days by AND publish it once a premises of the levied
week for 3 weeks. Owner may prevent property. (Sec. 213)
sale by paying all charges (Sec. 213)
W/n 2 days, he shall make a return
Officer conducting the
of the forfeiture. Register of Deeds, No bidder or
sale shall forfeit the
upon registration of forfeiture shall Yes highest bid
property to the
transfer title to the Government w/o insufficient?
Government (Sec. 215)
court order. (Sec. 215)
No, bid ok
W/n 1 year from sale, the W/n 5 days after the sale, Excess of proceeds
owner may redeem, by paying levying officer shall enter of the sale over claim
to the RDO the amount of the return of the proceedings and cost of sale shall
taxes, penalties, and interest upon the records of the RCO, be turned over to the
thereon from the date of RDO and RRD (Sec. 213) owner (Sec. 213)
delinquency to the date of sale,
and 15% per annum interest on
purchase price from the date
Owner shall not be
of purchase to the date of Levy and distraint
deprived of the
redemption. (Sec. 214) may be repeated until
possession and shall
the full amount due,
be entitled to the
and all expenses are
fruits until 1 year
collected. (Sec. 217)
expires (Sec. 214)
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VII. Organization and (3) Understatement of taxable sales or

receipts by thirty percent (30%) or more
Function of the BIR of his correct taxable sales or receipts for
the taxable quarter.

RULE-MAKING AUTHORITY OF THE B. Failure of any person to register as required

SECRETARY OF FINANCE under section 236. -
The temporary closure of the establishment
Authority of secretary of finance to promulgate shall be for the duration of not less than five
rules and regulations (5) days and shall be lifted only upon
[Sec. 244, NIRC] compliance with whatever requirements
The Secretary of Finance, upon prescribed by the Commissioner in the
recommendation of the Commissioner, shall closure order.
promulgate all needful rules and regulations
for effective enforcement of the provisions of
the Code.

Non-retroactivity of rulings [Sec. 246, NIRC]

General Rule:No retroactive application if the
revocation, modification or reversal of rules
and regulations, rulings or circulars will be
prejudicial to the taxpayers

Exceptions:
(a) Where the taxpayer deliberately misstates
or omits material facts from his return or
any document required of him by the BIR;
(b) Where the facts subsequently gathered by
the BIR are materially different from the
facts on which the ruling is based; or
(c) Where the taxpayer acted in bad faith.

POWER OF THE COMMISSIONER TO SUSPEND

THE BUSINESS OPERATION OF A TAXPAYER [Sec
115, NIRC]

The Commissioner or his authorized

representative is empowered to suspend the
business operations and temporarily close the
business establishment of any person for any
of the following violations:
A. In the case of a vat-registered person. -
(1) Failure to issue receipts or invoices;
(2) Failure to file a value-added tax return
as required under Section 114; or

173
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174
UP LAW BOC TAXATION 2
VIII. LOCAL
GOVERNMENT CODE
OF 1991, AS AMENDED
LOCAL GOVERNMENT TAXATION
NATURE AND SOURCE OF TAXING
POWER
(A) Grant of local taxing power under the Local
Government Code
(1) Each LGU shall exercise its power to
a. create its own sources of revenue
b. levy taxes, fees, and charges.
(2) Both are subject to the provisions in the
LGC and consistent with local autonomy
(3) Taxes, fees and charges levied accrue
exclusively to the local government units.
[Sec. 129, LGC]
(B) Authority to prescribe penalties for tax
violations
The sanggunian may impose
(1) a surcharge not exceeding twenty-five
percent (25%) of the amount of taxes,
fees or charges not paid on time and
(2) 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
interest on the unpaid amount or
portion thereof exceed thirty-six (36)
months. [Sec. 168, LGC]
(C) Authority to grant local tax exemptions
LGUs may, through ordinances duly
approved, grant tax exemptions, incentives
or reliefs under such terms and conditions
as they may deem necessary. [Sec. 192,
LGC]
(D) Withdrawal of exemptions
175
TAXATION LAW
Unless otherwise provided, tax exemptions
or incentives granted to, or presently
enjoyed by all persons, whether natural or
judicial, including government-owned or
controlled corporations, except local water
districts, cooperatives duly registered under
R.A. No. 6938, non-stock and non-profit
hospitals and education institutions, are
withdrawn upon the effectivity of the Code.
(Sec. 193, LGC)
(E) Authority to adjust local tax rates
LGUs shall have the authority to adjust the
tax rates as prescribed not oftener than once
every five (5) years, but in no case shall the
adjustment exceed ten percent (10%) of the
rates fixed by the Code. (Sec. 191, LGC)
(F) Residual taxing power of local governments
LGU may exercise the power to levy taxes or
charges on ANY base or subject
Required:
Not otherwise specifically enumerated in
the LGC or taxed under NIRC or other
applicable laws
(1) Not unjust, excessive, oppressive,
confiscatory or contrary to declared
national policy
(2) Pursuant to an ordinance enacted with
public hearing conducted for the purpose.
[Sec. 186, LGC]
(g) Authority to issue local tax ordinances
The power to impose a tax, fee, or charge, or
to generate revenue under this Code shall
be exercised by the sanggunian of the local
government unit concerned through an
appropriate ordinance. [Sec. 132, LGC]
LOCAL TAXING AUTHORITY
(a) Power to create revenues exercised thru
LGUs
UP LAW BOC TAXATION 2 TAXATION LAW

(a) Each LGU shall exercise its power to

create its power to create its own sources
of revenue and to levy taxes, fees and
charges. [Sec. 128, LGC]
(b) Exercised by the Sanggunian concerned
through an appropriate ordinance. [Sec.
132, LGC]
(c) Ordinances may be vetoed by local chief
executives of the LGUs, except the
Punong Barangay, on the ground that it
is ultra vires or prejudicial to public
welfare. His reasons shall be stated in
writing. [Sec. 55 (a) and (b), LGC]

(b) Procedure for approval and effectivity of tax

ordinances
(1) A public hearing must be conducted
prior to the enactment of a tax ordinance.
[Sec. 187, LGC]
(2) Within ten (10) days after the approval of
the ordinance, certified true copies of all
tax ordinances or revenue measures
shall be published in full for three (3)
consecutive days in a newspaper of local
circulation. In provinces, cities and
municipalities where there are no
newspapers of local circulation, it must
be posted in at least two (2) conspicuous
and publicly accessible places. [Sec. 188,
LGC]

SPECIFIC TAXING POWER OF LOCAL GOVERNMENT UNIT (LGUS)

Power Province Municipality City Barangay

Tax on Transfer of Real Property  (135)  (151)

Tax on Business of Printing and
 (136) 
Publication
Franchise tax  (137) 
Tax on sand, gravel and other
 (138) 
quarry resources
Professional tax  (139) 
Amusement tax  (140) 
Annual Fixed Tax For Every  (141) 

176
UP LAW BOC TAXATION 2 TAXATION LAW

Delivery Truck or Van of

Manufacturers or Producers,
Wholesalers of, Dealers, or
Retailers in, Certain Products
Tax on Business  (143) 
Fees and charges on
regulation/licensing of business  (147) 
and occupation
Fees for Sealing and Licensing of
 (148) 
Weights and Measures
Fishery Rentals, Fees and
 (149) 
Charges
Community Tax  
Tax on Gross Sales or Receipts of
 (152a)
Small-Scale Stores/Retailers
Service Fees on the use of
 (152b)
Barangay-owned properties
Barangay Clearance  (152c)
Other Fees and Charges (on
commercial breeding of fighting
cocks, cockfights, cockpits;  (152d)
places of recreation which charge
admission fees; outside ads)
Service Fees and Charges (153)    
Public Utility Charges (154)    
Toll Fees or Charges (155)    
  
Real Property Tax
(within Metro Manila)
2007):
Yamane vs. Lepanto Condo Corp. (Oct. 23, Business tax must be based on gross receipts,
1995): it being different from gross revenue. The right
Condominium corporations are not business to receive income, and not the actual receipt
entities, and are thus not subject to local determines when to include the amount in
business tax. Even though the corporation is gross income.
empowered to levy assessments or dues from
the unit owners, these amounts are not Common revenue raising powers
intended for the incurrence of profit by the (1) Service fees and charges
corporation, but to shoulder the multitude of LGUs may impose and collect such
necessary expenses for maintenance of the reasonable fees and charges for services
condominium. rendered. [Sec. 153, LGC]

(2) Public utility charges

LGUs may fix the rates for the operation of
public utilities owned, operated and
Ericsson Telecoms vs. City of Pasig. (Nov

177
UP LAW BOC TAXATION 2
maintained by them within their jurisdiction.
[Sec. 154, LGC]
(3) Toll fees or charges
(a) The sanggunian may prescribe the terms
and conditions and fix the rates for the
imposition of toll fees or charges for the
use of any public road, pier, or wharf,
waterway, bridge, ferry or
telecommunication system funded and
constructed by the local government unit
concerned.
(b) The sanggunian may also discontinue
the collection of the tolls when public
safety and welfare requires.
(c) NO toll fees or charges shall be collected
from:
(i) Officers and enlisted men of the AFP
and members of the PNP on mission
(ii) Post office personnel delivering mail
(iii) Physically-handicapped
(iv) Disabled citizens who are sixty-five (65)
years or older. [Sec. 155, LGC]
Common limitations on the taxing powers of
LGUs
Unless otherwise provided, the following
cannot be levied by the local governments:
(IDEC-GAPEP-GRR-ECN):
(1) Income tax, except when levied on banks
and other financial institutions;
(2) Documentary stamp tax;
(3) Estate tax, inheritance, gifts, legacies and
other acquisitions mortis causa, except as
otherwise provided;
(4) 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 LGU concerned;
(5) Taxes, fees or charges on Goods carried
into or out of, or passing through, the
territorial jurisdictions of local government
units in the guise of charges for wharfage,
178
TAXATION LAW
tolls for bridges or otherwise, or other
taxes, fees, or otherwise
(6) Taxes, fees or charges on Agricultural and
aquatic products when sold by marginal
farmers or fishermen;
(7) Taxes on business enterprises certified to
by the Board of Investments as Pioneer or
non-pioneer for a period of 6 and 4 years,
respectively from the date of registration;
(8) Excise taxes on articles enumerated under
the NIRC, as amended, and taxes, fees or
charges on petroleum products;
(9) Percentage or VAT on sales, barters or
exchanges or similar transactions on goods
or services except as otherwise provided
herein;
(10) 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 the Code;
(11) Taxes on premiums paid by way or
Reinsurance or retrocession;
(12) 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;
(13) Taxes, fees, or other charges on Philippine
products actually Exported, except as
otherwise provided;
(14) Taxes, fees, or charges, on Countryside and
Barangay Business Enterprises and
Cooperatives duly registered under the
Cooperative Code of the Philippines; and
(15) Taxes, fees or charges of any kind on the
National Government, its agencies and
instrumentalities, and local government
units. [Sec. 133, LGC]
TAXPAYER’S REMEDIES
UP LAW BOC TAXATION 2
(a) Periods of assessment and collection of local
taxes, fees or charges
(a) Assessment: Within 5 years from the
date they become due
(b) In case of Fraud or Intent to Evade Tax:
Within 10 years from discovery of fraud or
intent to evade payment. (Sec. 194, LGC)
(c) Collection: 5 years from the date of
assessment by administrative or judicial
action.
Instances When Running of Prescription
Periods is Suspended
(1) When the treasurer is legally prevented
from making the assessment or
collection
(2) When taxpayer requests for
reinvestigation and executes a waiver in
writing before lapse of the period for
assessment or collection.
(3) When the taxpayer is out of the country
or otherwise cannot be located (Sec. 194
(d), LGC)
(b) Protest of assessment
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 it
shall become final and executory. (Sec. 195,
LGC)
(c) Claim for refund of tax credit for erroneously
or illegally collected tax, fee or charge
(a) Requires a written claim for refund or
credit to be filed with local treasurer
before protest is entertained
(b) Must be brought within 2 years from
payment of tax or from the date the
taxpayer became entitled to refund or
credit (Sec. 196, LGC)
CIVIL REMEDIES BY THE LGU FOR
COLLECTION OF REVENUES
179
TAXATION LAW
(a) Local government’s lien for delinquent taxes,
fees or charges
(1) Non-payment of a tax, fee or charge
creates a lien superior to all liens or
encumbrances in favor of any other
person, enforceable by administrative or
judicial action
(2) The lien may only be extinguished upon
full payment of the delinquent local
taxes, fees, and charges including
related surcharges and interests. [Sec.
173, LGC]
(b) Civil remedies, in general
(1) Administrative action
(2) Judicial action
(c) Procedure for administrative action
(1) Distraint of personal property
Personal properties subject to distraint:
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
PROCEDURE: [Sec. 175, LGC]
(a) Seizure of personal property
(b) Accounting of distrained goods
(c) Publication of time and place of sale
and the articles distrained
(d) Release of distrained property upon
payment prior to sale
(e) Procedure of sale
(f) Disposition of proceeds
(2) Levy of real property, procedure
Levy upon real property and interest in or
rights to real property
PROCEDURE [Sec. 176, LGC]
UP LAW BOC TAXATION 2 TAXATION LAW

(a) Preparation of a duly authenticated

certificate by the LGU Treasurer (5) Penalty on local treasurer for failure to
effecting the levy on the real property issue and execute warrant of distraint or
(b) Service of written notice of levy to the levy
assessor and Register of Deeds Automatically dismissed from the service
(c) Annotation of the levy on the tax after due notice and hearing (Sec. 177,
declaration and the certificate of title LGC)
(d) Advertisement and Sale [Sec. 178,
LGC] (d) Procedure for judicial action
(1) The local government may institute an
(3) Further distraint or levy ordinary civil action with regular courts of
The remedies by distraint or levy may be proper jurisdiction for the collection of
repeated if necessary until the full delinquent taxes, fees, charges or other
amount due, including all expenses, is revenues.
collected (Sec. 184, LGC) (2) The civil action shall be filed by the local
treasurer. (Sec. 183, LGC)
(4) Exemption of personal property from
distraint or levy Valley Trading Co. vs. CFI of Isabela, (1989);
(ToB-CUPLA) Angeles City v. Angeles City Electric
(a) Tools and implements necessarily Corporation, (2010):
used by the taxpayer in his trade or LGC does not contain a provision prohibiting
employment courts from enjoining the collection of local
(b) one horse, cow, carabao, or other taxes. Such lapse may have allowed
Beast of burden, such as the preliminary injunction under Rule 58, ROC
delinquent taxpayer may select and where local taxes are involved.
necessarily used by him in his ordinary
occupation
(c) his necessary Clothing, and that of all
his family
(d) household furniture and utensils
necessary for housekeeping and used
for that purpose by the delinquent
taxpayer, such as he may select, of a
value not exceeding P10,000
(e) Provisions, including crops, actually
provided for individual or family use
sufficient for 4 months
(f) the professional Libraries of doctors,
engineers, one fishing boat and net,
not exceeding the total value of
P10,000 by the lawful use of which a
fisherman earns his livelihood
(g) any material or Article forming part of
a house or improvement of any real
property

180
UP LAW BOC TAXATION 2
REAL PROPERTY TAXATION
FUNDAMENTAL PRINCIPLES
(CAPUE)
(1) Current fair market value is the basis for
assessment
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. (Sec.
201, LGC)
(2) Actual use shall be the basis of
classification for assessment
(a) Real property shall be classified, valued
and assessed on the basis of its actual
use regardless of where located, whoever
owns it, and whoever uses it.
(b) Actual Use- refers to the purpose for
which the property is PRINCIPALLY or
PREDOMINANTLY utilized by the person
in possession thereof [Sec. 199(b), LGC]
(c) MCIAA v. Marcos [G.R. No. 120082, Sept.
11, 1996]- “Usage means direct,
immediate and actual application of the
property
(3) Private persons cannot be left to the
appraisal, assessment, levy and collection
of real property tax.
(4) Uniform classification within each local
government unit shall be observed.
(5) Equitable appraisal and assessment is
required. (Sec. 197, LGC)
Imposition of Real Property Tax
Coverage
For a Province, or a City or Municipality within
Metro Manila
(a) Land
(b) Building
(c) Machinery
181
TAXATION LAW
(d) Other improvements not specifically
exempted [Sec. 232, LGC]
The rate shall be as follows:
(a) Province: not exceeding one percent (1%) of
the assessed value of real property; and
(b) City or municipality within Metro Manila:
not exceeding two percent (2%) of the
assessed value of real property. (Sec. 233,
LGC)
Special Levy on Idle Lands
(a) A province, or city or municipality within
Metro Manila may levy an annual tax on idle
lands at the rate not exceeding five percent
(5%) of the assessed value of the property in
addition to the basic tax
(b) Lands covered
(1) Agricultural Lands
More than one (1) hectare in area suitable
for cultivation, dairying, inland fishery,
and other agricultural uses, one-half
(1/2) of which remain uncultivated or
unimproved
(2) Other than Agricultural
More than one thousand (1000) square
meters in area one half (1/2) of which
remain unutilized or unimproved (Sec.
236 and 237, LGC)
(c) Exempt Idle Lands
Lands exempt by reason of force majeure,
civil disturbance, natural calamity or any
cause or circumstance which physically or
legally prevents improving, utilizing or
cultivating the same. (Sec. 238, LGC)
Special Levy for Public Works
(a) A tax ordinance shall describe with
reasonable accuracy the nature, extent and
location of the public works to be
undertaken, the estimated cost, the metes
and bounds by monuments and lines and
the number of annual installments which
should not be less than five (5) nor more
than ten (10) years.
UP LAW BOC TAXATION 2 TAXATION LAW

(b) The sanggunian may fix different rates for

different parts or sections thereof, GOCCs
depending on whether such land is more or Philippine Ports Authority vs. City of Iloilo (G.R.
less benefited by the proposed work. (Sec. No. 109791, July 14, 2003):GOCCs are NOT
241, LGC) covered by the exemption since the exemption
only refers to instrumentalities without
Special Education Fund (SEF) personalities distinct from the government.
A province, or city or municipality within Metro
Manila may levy and collect an annual tax of Mactan Airport v. MIAA cases
one percent (1%) on the assessed value of real Provision SC Ruling
property which shall be in addition to the basic involved
real property tax. Mactan Sec 133 (o), Airport
Airport LGC. LGUs Authority is a
Exemption from real property tax Authorit not allowed GOCC, not
(1) Owned by the Republic of the Philippines or y vs. to levy… (o) exempt from
any of its political subdivisions except when Marcos taxes/fees/ch RPT.
beneficial use is granted for a consideration (1996) arges of any Legislature in
or to a taxable person. kind on theamending the
(2) Charitable institutions, churches, national law
parsonages, or convents appurtenant gov’t, its
specifically
thereto, mosques, non-profit or religious agencies, deleted
cemeteries, and all lands, buildings, and instrumentalit
GOCCS from
improvements actually, directly and ies and LGUs.
the
exclusively used for religious, charitable, or enumeration
educational purposes. Sec 234 (a), in Sec 234(a).
(3) Machinery and equipment actually, directly LGC.
and exclusively used by local Water utilities Properties
and GOCCs engaged in the supply and exempt from
distribution of water and/or generation and RPT: (a) real
transmission of electric power. properties
(4) Real property owned by duly registered owned by the
Cooperatives as provided for under Republic Republic or
Act No. 6938 (Cooperative Code of the any of its
Philippines). political
(5) Machinery and equipment used for subdivisions…
Pollution control and Environmental Manila Sec 133 (o), MIAA falls
protection. (Sec. 234, LGC) Airport LGC under the
Authorit term
Provincial Assessor of Marinduque v. CA [G.R. y vs. CA Sec 234 (a), “instrumenta
No. 170532, Apr. 30, 2009]-A claim for (2006) LGC) lity” outside
exemption under Sec. 234(e) should be the scope of
supported by evidence that the property LGS’s local
sought to be exempt is actually, directly and taxing
exclusively used for pollution control and powers
environmental protection. under Sec

182
UP LAW BOC TAXATION 2
Provision SC Ruling
involved
133(o).
Charitable Institutions
LUNG CENTER of the PHILS vs. QUEZON CITY
(G.R. No. 144104, June 29, 2004): A charitable
institution doesn't lose its character and its
exemption simply because it derives income
from paying patients so long as the money
received is devoted to the charitable object it
was intended to achieve, and no money inures
to the benefit of persons managing the
institution.
Property leased to private entities is NOT
exempt from RPT, as it is not actually, directly
and exclusively used for charitable purposes.
Portions of the land occupied by the hospital
and portions used for its patients, whether
paying or non-paying, are EXEMPT from real
property taxes.
REMEDIES OF LGUS FOR
COLLECTION OF REAL PROPERTY
TAX
ADMINISTRATIVE
Local Government’s Lien—
The basic real property tax shall constitute a
lien on the property subject to tax, superior to
all liens, charges or encumbrances in favour 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. [Sec. 257,
LGC]
Levy
Upon the failure to pay the tax when due, the
local treasurer shall issue a warrant levying the
real property subject to tax. The warrant shall
183
TAXATION LAW
include a duly authenticated certificate
showing the name of the owner or person
having legal interest therein, description of the
property, amount of the tax due and interest
thereon.
(a) Warrant must be mailed or served to owner
or person having legal interest in the
property
(b) Written notice of levy must be mailed or
served to the assessor and the Register of
Deeds where the property is located
(c) The Register of Deeds must annotate the
levy on the tax declaration and certificate of
title [Sec. 258, LGC]
Failure to issue or execute the warrant of levy
within one year from the time the tax becomes
delinquent or within thirty days from the date
of the issuance thereof shall be dismissed from
service [Sec. 259, LGC]
Judicial
The LGU may enforce the collection by civil
action in any court of competent jurisdiction.
Must be filed by local treasurer within five (5)
to ten (10) years. [Sec. 266 in relation to Sec.
270, LGC]
TAXPAYER’S REMEDIES
ADMINISTRATIVE
(a) Protest
Appeal to the Local Board of Assessment
Appeals (LBAA)
Appeal must be filed within 60 days from the
date of receipt of the written notice of
assessment
(a) By filing a petition under oath in the
form prescribed for the purpose
(b) Copies of tax declarations and other
affidavits or documents must be
submitted [Sec. 226, LGC]
 UP LAW BOC TAXATION 2
The LBAA shall decide the appeal within 120
days from the date of receipt of such appeal
(a) The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue
subpoena duces tecum and/or subpoena
(b) The LBAA must furnish the appellant a copy
of the decision of the board. [Sec. 229, LGC]
Fels Energy v. Province of Batangas (G.R. No.
168557, Feb. 16, 2007)- Under Section 226 of
R.A. No 7160, the last action of the local
assessor on a particular assessment shall be
the notice of assessment; it is this last action
which gives the owner of the property the right
to appeal to the LBAA. The procedure likewise
does not permit the property owner the remedy
of filing a motion for reconsideration before the
local assessor.
Victorias Milling v. CTA (G.R. No. L-24213, Mar.
13, 1968)- The failure to appeal within the
statutory period renders the assessment final
and unappealable.
Appeal to the Central Board of Assessment
Appeals (CBAA)
Appeal must be filed within 30 days from the
receipt of the decision of LBAA [Sec. 229, LGC]
Effect of payment of tax
Appeal on assessments of real property shall
NOT SUSPEND the collection of the
corresponding realty taxes on the property
involved as assessed by the provincial or city
assessor without prejudice to the subsequent
readjustment depending upon the final
outcome of the appeal. [Sec. 231, LGC]
(b) Payment of real property under protest
File protest with local treasurer
No protest shall be entertained unless the tax
is first paid. The protest must be in writing and
filed within 30 days from payment of the tax to
the local treasurer.
184
TAXATION LAW
Meralco v. Nelia Barlis (G.R. No. 114231, May 18,
2001): The trial court has no jurisdiction to
issue a writ of prohibition which seeks to set
aside the warrant of garnishment over
petitioner’s bank deposit in satisfaction of real
property taxes without paying first under
protest the tax assessed and without
exhausting available administrative remedies.
The local treasurer shall decide the protest
within 60 days from receipt.
Appeal to the LBAA
Appeal must be filed within 60 days from the
date of receipt of denial of protest or upon
lapse of 60 days to decide
(a) By filing a petition under oath in the form
prescribed for the purpose
(b) Copies of tax declarations and other
affidavits or documents must be submitted
[Sec. 226, LGC]
The LBAA shall decided the appeal within 120
days from the date of receipt of such appeal
[Sec. 229, LGC]
Appeal to the CBAA
Appeal must be filed within 30 days from the
receipt of the decision of LBAA [Sec. 229, LGC]
Appeal to the CTA En Banc
Appeal must be filed through a petition for
review within 30 days from the receipt of the
decision of CBAA [Sec. 11, R.A. 1125 as
amended]
Appeal to the SC
Appeal must be filed within fifteen (15) days
from receipt of decision of the CTA [Rule 45,
Rules of Court]
JUDICIAL
(1) Question on the legality of a tax ordinance
UP LAW BOC TAXATION 2
(a) Any question on the constitutionality or
legality of a tax ordinance may be raised
on appeal within thirty (30) days from
effectivity to the Secretary of Justice who
shall render a decision within sixty (60)
days from the date of receipt of the
appeal.
(b) The appeal shall not have the effect of
suspending the effectivity of the tax
ordinance and the accrual and payment
of the tax.
(c) 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
185
TAXATION LAW
party may file appropriate proceedings
with a court of competent jurisdiction.
(Sec. 187, LGC)
(2) Assailing the validity of a tax sale
No court shall entertain any action assailing
the validity of any sale at public auction
until the taxpayer shall have deposited with
the court the amount for which the real
property was sold, together with interest of
two percent (2%) per month from the date
of sale to the time of the institution of the
action. [Sec. 267, LGC]
UP LAW BOC TAXATION 2 TAXATION LAW

Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-Local Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

Owner declares real
property once every 3
START
years (sec. 202) w/n
Jan 1 to June 30
Assessor prepares
Assessor declares
assessment rolls
real property if owner/
wherein real property
administrator fails to
shall be listed, valued
do so (sec. 204)
and assessed (sec. 205)

Submit documents
Owner may claim
supporting exemption w/ Is real property
for tax exemption Yes
in 30 days from tax exempt?
Required (sec. 206)
declaration (sec. 206)
Documents
submitted w/in
30 days? Property shall be
Property dropped from
Yes proven as tax Yes
assessment roll
No exempt? (sec. 206)
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206) END

Within 30 days from

assessment, assessor
sends notice to owner
(sec. 223)
Owner may protest
assessment within 60
days from receipt of notice
to the Local Board of
Assessment Appeals
(LBAA) (Sec. 226)
No
If LBAA rejects protest, owner
LBAA must decide
may appeal to the Central
within 120 days
Board of Assessment Appeals
from receipt of
(CBAA) w/in 30 days from
appeal (sec. 229)
receipt of notice (Sec. 229)

If CBAA rejects protest,

Appeal to the owner may appeal to
END Supreme Court w/ the CTA en banc within
in 15 days 30 days from receipt of
decision

186
UP LAW BOC TAXATION 2 TAXATION LAW

Flowchart VI: Taxpayer’s Remedies Involving Collection of Real Property

Tax-Loc Gov’t Code
For purposes of this flowchart owner means owner or administrator of real property or any person having legal interest thereto

LT- Local Treasurer

LGU - Local Government Unit
LBAA- Local Board of Assessment Appeals
CBAA- Central Board of Assessment Appeals
START CTA- Court of Tax Appeals

LT posts notice of deadline for

Owner pays the tax.
Assessor submits payment at a conspicuous place at LT collects the tax
Written protest must be
assessment roll to the LGU hall OR publish the same starting Jan 1 of
filed with the local
local treasurer in a newspaper of general the calendar year.
treasurer w/in 30 days
(sec. 248) circulation in the LGU 1x a week for (Sec. 257)
from payment. (sec. 252)
2 consecutive weeks (sec. 249)

Amount of tax
LT must decide w/
protested shall be
LT grants LT decides w/in in 60 days from
refunded or Yes Yes
protest? 60 days? receipt of protest
applied as tax
(sec. 252)
credit (Sec. 252)

No

Refund or tax credit must Taxpayer may appeal within within 60

No days from receipt of notice (or expiration
be claimed with the local
treasurer w/in 2 years from of 60 days) to the LBAA (Sec. 226)
the date taxpayer is entitled
to such (sec. 253) LBAA must decide
within 120 days
from receipt of
appeal (sec. 229)
LT acts on claim
LT grants
for refund/tax Taxpayer happy.
Yes refund/tax Yes END
credit w/in 60
credit?
days?

If LBAA rejects protest/

No
Taxpayer may appeal
w/in 60 days from
No receipt of notice (or
expiration of 60 days)
to LBAA (Sec. 226)
END
refund, owner may
appeal to the CBAA w/
in 30 days from receipt
of notice (Sec. 229)
If CBAA rejects protest/
Appeal to the refund, owner may appeal to
Supreme Court w/ the CTA en banc within 30
in 15 days days from receipt of decision
(Rule 43, ROC)

187
UP LAW BOC
Flowchart VII: Procedure for Levy for Purposes of Satisfying Real
Property Taxes-Local Gov’t Code
START
Tax constitutes a lien on the
property superior to all liens
& may only be extinguished
upon payment of the tax and
charges. (sec. 257)
Before the date of sale,
the owner may stay the
proceedings by paying the
delinquent tax, interest &
the expenses of sale.
Sale is held:
1. at the main entrance
of the LGU building, OR
2. on the property to be
sold, OR at
3. any other place
specified in the notice
Is there a
bidder?
Yes
Bidder pays & 30 days
after the sale, the LT
shall report the sale to
the sanggunian
LT shall deliver to
purchaser certificate
of sale
Proceeds of sale in
excess of delinquent
tax, interest & conveyance to the
expenses of sale
remitted to the owner
(sec. 260)
TAXATION 2 TAXATION LAW
For purposes of this flowchart owner means owner or administrator of real property or any
person having legal interest thereto
Warrant of Levy issued
by the Local Treasurer Warrant is mailed
Time for payment
(LT), which has the force to or served upon
of real property
of legal execution in the the delinquent
taxes expires
LGU concerned. (sec. owner (sec. 258)
258)
30 days from service of warrant, local
treasurer shall advertise sale of the
property by:
1. posting notice at main entrance of written notice of the levy &
LGU hall/bldg and in a conspicuous the warrant is mailed/served
place in the barangay where prope is upon the assessor and the
located AND Registrar of Deeds of the
2. by publication once a week for 2 LGU (sec. 258)
weeks (sec. 260) (Note: In cases of
levy for unpaid local taxes publication
is once a week for 3 weeks)
LT shall purchase the property in behalf of
the LGU (sec. 263) (Note: in cases of levy
No for unpaid local taxes, LT may purchase if
there is no bidder or if the highest bid is
insufficient-sec. 181)
w/in 1 year from sale, owner may
Registrar of Deeds shall transfer the
redeem upon payment of the
title of the forfeited property to the LGU
1. delinquent tax,
w/o need of a court order (sec. 263)
2. interest due,
3. expenses of sale (from date of
delinquency to date of sale) and
4. add’l interest of 2% per month on W/n 1 year from forfeiture, the
the purchase price from date of sale owner, may redeem the property by
to date of redemption. (sec. 261) paying to the local treasurer the full
Delinquent owner retains amount of the tax and the related
possession and right to the fruits interest and the costs of sale
(sec. 261) otherwise the ownership shall be
vested on the local government unit
concerned. (sec. 263)
LT returns to the
Sanggunian concerned
purchaser/bidder the
may, by ordinance sell
price paid + interest
and dispose of the real
of 2% per month
property acquired under
(sec. 261)
the preceding section at
public auction. (sec. 264)
If property is not
redeemed, the local Levy may be repeated
treasurer shall until the full amount due,
execute a deed of including all expenses, is
collected. (sec. 265)
purchaser (sec. 262)
END
188
UP LAW BOC TAXATION 2
IX. TARIFF AND
CUSTOMS CODE OF
1978, AS AMENDED
TARIFF AND DUTIES, DEFINED
TARIFF
(a) Taxes or list of articles liable to duties
(b) A list or schedule of articles on which a duty
is imposed upon the importation into the
country, with the rates at which they are
severally taxed. And derivatively, the system
of imposing duties or taxes on the
importation of foreign merchandise
CUSTOM DUTIES
(a) Taxes on the importation or exportation of
commodities
(b) Tariff or tax assessed upon the merchandise
imported from or exported to a foreign
country
(1) Export tariff – levied, assessed and
collected an export duty on the gross
FOB value at the time of shipment based
on the prevailing rate on traditional
export products, such as certain wood
products, mineral products, plant and
vegetable products [Sec. 514, TCC]
Note: export tariff had been abolished
except upon logs [Sec. 1, EO 26].
(2) Import tariff – articles, when imported
from any foreign country, shall be subject
to duty upon each importation, even
though previously exported from the
Philippines, except as otherwise
specifically provided under the Code or
special laws [Sec. 100, TCC]
189
TAXATION LAW
General Rule: All imported articles are subject
to duty. importation by the government
taxable.
FLEXIBLE TARIFF CLAUSE
Constitutional Basis: Sec. 28(2), Art. VI, 1987
Constitution:
The President is empowered to:
(1) increase, reduce or remove existing rates
(increase in the rate cannot exceed 100% ad
valorem), including authority to modify the
form of duty
(2) establish import quota or ban import of any
commodity
(3) impose an additional duty not exceeding
10% ad valorem
REQUIREMENTS OF IMPORTATION
Beginning and ending of importation
(a) Importation begins when the carrying
vessel or aircraft enters the jurisdiction of
the Philippines with intention to unload
therein [Sec. 1202, TCC]
(b) Importation is deemed terminated upon
payment of duties, taxes and other
charges due upon the articles, or secured
to be paid, at a port of entry AND the
legal permit for withdrawal shall have
been granted, or in case said articles are
free of duties, taxes and other charges,
until they have legally left the jurisdiction
of the customs. [Sec. 1202, TCC]
Note: The payment of the duties, taxes,
fees and other charges must be in full.
[Papa v. Mago, G.R. No. L-27360,
February 28, 1968]
Import entry
Imported articles must be entered in the
customhouse at the port of entry within fifteen
days from date of discharge of the last package
from the vessel either (a) by the importer, being
holder of the bill of lading, (b) by any other
UP LAW BOC TAXATION 2
holder of the bill of lading in due course, (c) by
a customs broker acting under authority from a
holder of the bill, or (d) by a person duly
empowered to act as agent or attorney-in-fact
for such holder. The Collector may grant an
extension of not more than fifteen days. [Sec.
1301, TCC]
All imported articles, except importation
admitted free of duty, shall be subject to a
formal or informal entry.
Kinds of Import Entry:
(1) Formal Entry
(2) Informal Entry
Types of Formal Entry [Sec. 1302, as amended]:
A formal entry may be:
(a) for immediate consumption, or
(b) under irrevocable domestic letter of
credit, bank guarantee or bond for:
(1) placing the article in customs bonded
warehouse;
(2) Constructive warehousing and
immediate transportation to other
ports of the Philippines upon proper
examination and appraisal; or
(3) Constructive warehousing and
immediate exportation.
Note: Import entries under irrevocable
domestic letter of credit, bank guarantee or
bond shall be subject to the provisions of Title
V, Book 11 of this Code. All importations
entered under formal entry shall be covered by
a letter of credit or any other verifiable
document evidencing payment." [R.A. 9135,
April 27, 2001]
CLASSIFICATION OF GOODS
(1) Taxable importation
All articles, when imported from any foreign
country into the Philippines, shall be subject
190
TAXATION LAW
to duty upon each importation, even though
previously exported from the Philippines,
except as otherwise specifically provided for
in this Code or in other laws. [Sec. 100, TCC]
(2) Prohibited importation [Sec. 101,
TCC](POPP-LAW-DING)
(a) Dynamite, gunpowder, ammunitions and
other explosives, firearm and weapons of
war, and detached parts thereof, except
when authorized by law.
(b) Written or printed article in any form
containing:
(1) any matter advocating or inciting
treason, rebellion, insurrection or
sedition against the Government of
the Philippines
(2) forcible resistance to any law of the
Philippines
(3) containing any threat to take the life
of or inflict bodily harm upon any
person in the Philippines.
(c) Written or printed articles, photographs,
engravings, lithographs, objects,
paintings, drawings or other
representation of an obscene or Immoral
character.
(d) Articles, instruments, drugs and
substances designed, intended or
adapted for preventing human
conception or producing unlawful
abortion, or any printed matter which
advertises or describes or gives directly
or indirectly information where, how or
by whom human conception is prevented
or unlawful abortion produced.
(e) Roulette wheels, Gambling outfits,
loaded dice, marked cards, machines,
apparatus or mechanical devices used in
gambling, or in the distribution of money,
cigars, cigarettes or other articles when
such distribution is dependent upon
chance, including jackpot and pinball
machines or similar contrivances.
UP LAW BOC TAXATION 2
(f) Lottery and sweepstakes tickets,
advertisements thereof and lists of
drawings therein.
Except those authorized by the
Philippine Government
(g) Any article manufactured in whole or in
part of gold silver or other Precious
metal, or alloys thereof, the stamps
brands or marks of which do not indicate
the actual fineness or quality of said
metals or alloys.
(h) Any Adulterated or misbranded article of
food or any adulterated or misbranded
drug in violation of the provisions of the
"Food and Drugs Act."
(i) Marijuana, opium poppies, coca leaves,
or any other Narcotics or synthetic drugs
which are or may hereafter be declared
habit forming by the President of the
Philippines, any compound,
manufactured salt, derivative, or
preparation thereof,
Except when imported by the
Government of the Philippines or any
person duly authorized by the Collector
of Internal Revenue for medicinal
purposes only.
(j) Opium pipes and parts thereof, of
whatever material.
(k) All other articles the importation of
which is Prohibited by law.
Conditionally-free importation [Sec. 105, TCC]
The following articles shall be exempt from the
payment of import duties upon compliance
with the formalities prescribed in, or with, the
regulations which shall be promulgated by the
Commissioner of Customs with the approval of
the Secretary of Finance:
191
TAXATION LAW
(a) Aquatic products (e.g., fishes,
crustaceans, mollusks, marine animals,
seaweeds, fish oil, roe), caught or
gathered by fishing vessels of Philippine
registry: Provided, That they are
imported in such vessels or in crafts
attached thereto: And provided, further,
That they have not been landed in any
foreign territory or, if so landed, they
have been landed solely for
transshipment without having been
advanced in condition;
(b) Equipment for use in the salvage of
vessels or aircrafts, not available locally,
upon identification and the giving of a
bond in an amount equal to one and
one-half times the ascertained duties,
taxes and other charges thereon,
conditioned for the exportation thereof
or payment of the corresponding duties,
taxes and other charges within six (6)
months from the date of acceptance of
the import entry: Provided, That the
Collector of Customs may extend the
time for exportation or payment of duties,
taxes and other charges for a term not
exceeding six (6) months from the
expiration of the original period;
(c) Cost of repairs, excluding the value of the
article used, made in foreign countries
upon vessels or aircraft documented,
registered or licensed in the Philippines,
upon proof satisfactory to the Collector
of Customs (1) that adequate facilities for
such repairs are not afforded in the
Philippines, or (2) that such vessels or
aircrafts, while in the regular course of
her voyage or flight was compelled by
stress of weather or other casualty to put
into a foreign port to make such repairs
in order to secure the safety,
seaworthiness or airworthiness of the
UP LAW BOC TAXATION 2
vessel or aircraft to enable her to reach
her port of destination;
(d) Articles brought into the Philippines for
repair, processing or reconditioning to be
re-exported upon completion of the
repair, processing or reconditioning:
Provided, That the Collector of Customs
shall require the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;
(e) Medals, badges, cups and other small
articles bestowed as trophies or prizes, or
those received or accepted as honorary
distinction;
(f) Personal and household effects
belonging to residents of the Philippines
returning from abroad including jewelry,
precious stones and other articles of
luxury which were formally declared and
listed before departure and identified
under oath before the Collector of
Customs when exported from the
Philippines by such returning residents
upon their departure therefrom and
during their stay abroad; personal and
household effects including wearing
apparel, articles of personal adornment
(except luxury items), toilet articles,
portable appliances and instruments and
similar personal effects, excluding
vehicles, watercrafts, aircrafts, and
animals purchased in foreign countries
by residents of the Philippines which
were necessary, appropriate and
normally used for the comfort and
convenience in their journey and during
their stay abroad upon proof satisfactory
192
TAXATION LAW
to the Collector of Customs that same
have been in their use abroad for more
than six (6) months and accompanying
them on their return, or arriving within a
reasonable time which, barring
unforeseen circumstances, in no case
shall exceed ninety (90) days before or
after the owners' return: Provided, That
the personal and household effects shall
neither be in commercial quantities nor
intended for barter, sale or hire and that
the total dutiable value of which shall
not exceed two thousand pesos
(P2,000.00): Provided further, That the
returning residents have not previously
received the benefit under this section
within one year from and after the last
exemption granted: Provided
furthermore, That a fifty (50) per cent ad
valorem duty across the board shall be
levied and collected on the personal and
household effects (except luxury items)
in excess of two thousand pesos
(P2,000.00): And provided, finally, That
the personal and household effects
(except luxury items) of a returning
resident who has not stayed abroad for
six (6) months shall be subject to fifty
(50)per cent ad valorem duty across the
board, the total dutiable value of which
does not exceed two thousand pesos
(P2,000.00); any excess shall be subject
to the corresponding duty provided in
this Code;
(g) Wearing apparel, articles of personal
adornment, toilet articles, portable tools
and instruments, theatrical costumes
and similar effects accompanying
travelers, or tourists. or arriving within a
reasonable time before and after their
arrival in the Philippines, which are
necessary and appropriate for the wear
and use of such persons according to the
nature of the journey, their comfort and
UP LAW BOC TAXATION 2
convenience: Provided, That this
exemption shall not apply to articles
intended for other persons or for barter,
sale or hire: Provided, further, That the
Collector of Customs may, in his
discretion, require either a written
commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges conditioned for the exportation
thereof or payment of the corresponding
duties, taxes and other charges within
three (3) months from the date of
acceptance of the import entry: And
Provided finally, That the Collector of
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for a term not
exceeding three (3) months from the
expiration of the original period;
(g-1) Personal and household effects and
vehicles belonging to foreign consultants
and experts hired by, and/or rendering
service to, the government, and their
staff or personnel and families,
accompanying them or arriving within a
reasonable time before or after their
arrival in the Philippines, in quantities
and of the kind necessary and suitable to
the profession, rank or position of the
person importing them, for their own use
and not for barter, sale or hire provided
that, the Collector of Customs may in his
discretion require either a written
commitment or a bond in an amount
equal to one and one-half times the
ascertained duties, taxes and other
charges upon the articles classified
under this subsection; conditioned for
the exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months after the
expiration of their term or contract; And
Provided, finally, That the Collector of
193
TAXATION LAW
Customs may extend the time for
exportation or payment of duties, taxes
and other charges for term not exceeding
six (6) months from the expiration of the
original period;
(h) Professional instruments and
implements, tools of trade, occupation or
employment, wearing apparel, domestic
animals, and personal and household
effects belonging to persons coming to
settle in the Philippines or Filipinos
and/or their families and descendants
who are now residents or citizens of
other countries, such parties hereinafter
referred to as Overseas Filipinos, in
quantities and of the class suitable to the
profession, rank or position of the
persons importing them, for their own
use and not for barter or sale,
accompanying such persons, or arriving
within a reasonable time, in the
discretion of the Collector of Customs,
before or after the arrival of their owners,
which shall not be later than February 28,
1979 upon the production of evidence
satisfactory to the Collector of Customs
that such persons are actually coming to
settle in the Philippines, that change of
residence was bona fide and that the
privilege of free entry was never granted
to them before or that such person
qualifies under the provisions of Letters
of Instructions 105, 163 and 210, and that
the articles are brought from their former
place of abode, shall be exempt from the
payment of customs duties and taxes:
Provided, That vehicles, vessels, aircrafts,
machineries and other similar articles for
use in manufacture, shall not be
classified hereunder;
(i) Articles used exclusively for public
entertainment, and for display in public
expositions, or for exhibition or
UP LAW BOC TAXATION 2
competition for prizes, and devices for
projecting pictures and parts and
appurtenances thereof, upon
identification, examination, and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;
Provided, That the Collector of Customs
may extend the time for exportation or
payment of duties, taxes and other
charges for a term not exceeding six (6)
months from the expiration of the
original period; and technical and
scientific films when imported by
technical, cultural and scientific
institutions, and not to be exhibited for
profit: Provided, further, That if any of
the said films is exhibited for profit, the
proceeds therefrom shall be subject to
confiscation, in addition to the penalty
provided under Section Thirty-six
hundred and ten as amended, of this
Code;
(j) Articles brought by foreign film
producers directly and exclusively used
for making or recording motion picture
films on location in the Philippines, upon
their identification, examination and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges thereon, conditioned for
exportation thereof or payment of the
corresponding duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry,
unless extended by the Collector of
Customs for another six (6) months;
photographic and cinematographic films,
194
TAXATION LAW
undeveloped, exposed outside the
Philippines by resident Filipino citizens
or by producing companies of Philippine
registry where the principal actors and
artists employed for the production are
Filipinos, upon affidavit by the importer
and identification that such exposed
films are the same films previously
exported from the Philippines. As used in
this paragraph, the terms "actors" and
"artists" include the persons operating
the photographic cameras or other
photographic and sound recording
apparatus by which the film is made;
(k) Importations for the official use of
foreign embassies, legations, and other
agencies of foreign governments:
Provided, That those foreign countries
accord like privileges to corresponding
agencies of the Philippines;
Articles imported for the personal or
family use of the members and attaches
of foreign embassies, legations, consular
officers and other representatives of
foreign governments: Provided, That
such privilege shall be accorded under
special agreements between the
Philippines and the countries which they
represent: And Provided, further, That
the privilege may be granted only upon
specific instructions of the Secretary of
Finance in each instance which will be
issued only upon request of the
Department of Foreign Affairs;
(l) Imported articles donated to, or for the
account of, any duly registered relief
organization, not operated for profit, for
free distribution among the needy, upon
certification by the Department of Social
Services and Development or the
Department of Education, Culture and
Sports, as the case may be;
UP LAW BOC TAXATION 2
(m) Containers, holders and other similar
receptacles of any material including
kraft paper bags for locally
manufactured cement for export,
including corrugated boxes for bananas,
mangoes, pineapples and other fresh
fruits for export, except other containers
made of paper, paperboard and textile
fabrics, which are of such character as to
be readily identifiable and/or reusable
for shipment or transportation of goods
shall be delivered to the importer thereof
upon identification, examination and
appraisal and the giving of a bond in an
amount equal to one and one-half times
the ascertained duties, taxes and other
charges within six (6) months from the
date of acceptance of the import entry;
(n) Supplies which are necessary for the
reasonable requirements of the vessel or
aircraft in her voyage or flight outside the
Philippines, including articles transferred
from a bonded warehouse in any
collection district to any vessel or aircraft
engaged in foreign trade, for use or
consumption of the passengers or its
crew on board such vessel or aircrafts as
sea or air stores; or articles purchased
abroad for sale on board a vessel or
aircraft as saloon stores or air store
supplies: Provided, That any surplus or
excess of such vessel or aircraft supplies
arriving from foreign ports or airports
shall be dutiable;
(o) Articles and salvage from vessels
recovered after a period of two (2) years
from the date of filing the marine protest
or the time when the vessel was wrecked
or abandoned, or parts of a foreign
vessel or her equipment, wrecked,
abandoned in Philippine waters or
elsewhere: Provided, That articles and
195
TAXATION LAW
salvage recovered within the said period
of two (2) years shall be dutiable;
(p) Coffins or urns containing human
remains, bones or ashes, used personal
and household effects (not merchandise)
of the deceased person, except vehicles,
the value of which does not exceed ten
thousand pesos (P10,000.00), upon
identification as such;
(q) Samples of the kind, in such quantity and
of such dimension or construction as to
render them unsalable or of no
appreciable commercial value; models
not adapted for practical use; and
samples of medicines, properly marked
"sample-sale punishable by law," for the
purpose of introducing a new article in
the Philippine market and imported only
once in a quantity sufficient for such
purpose by a person duly registered and
identified to be engaged in that trade:
Provided, That importations under this
subsection shall be previously authorized
by the Secretary of Finance: Provided,
however, That importation of sample
medicine shall be previously authorized
by the Secretary of Health that such
samples are new medicines not available
in the Philippines: Provided, finally, That
samples not previously authorized
and/or properly marked in accordance
with this section shall be levied the
corresponding tariff duty.
Commercial samples, except those that
are not readily and easily identifiable
(e.g., precious and semi-precious stones,
cut or uncut, and jewelry set with
precious stones), the value of any single
importation of which does not exceed ten
thousand pesos (P10,000.00) upon the
giving of a bond in an amount equal to
twice the ascertained duties, taxes and
UP LAW BOC TAXATION 2
other charges thereon, conditioned for
the exportation of said samples within
six (6) months from the date of the
acceptance of the import entry or in
default thereof, the payment of the
corresponding duties, taxes and other
charges. If the value of any single
consignment of such commercial
samples exceeds ten thousand pesos
(P10,000.00),the importer thereof may
select any portion of same not exceeding
in value of ten thousand pesos
(P10,000.00) for entry under the
provision of this subsection, and the
excess of the consignment may be
entered in bond, or for consumption, as
the importer may elect;
(r) Animals (except race horses), and plants
for scientific, experimental, propagation,
botanical, breeding, zoological and
national defense purposes: Provided,
That no live trees, shoots, plants, moss,
and bulbs, tubers and seeds for
propagation purposes may be imported
under this section, except by order of the
Government or other duly authorized
institutions: Provided, further, That the
free entry of animals for breeding
purposes shall be restricted to animals of
recognized breed, duly registered in the
book of record established for that breed,
certified as such by the Bureau of Animal
Industry: Provided, furthermore, That
certificate of such record, and pedigree
of such animal duly authenticated by the
proper custodian of such book of record,
shall be produced and submitted to the
Collector of Customs, together with
affidavit of the owner or importer, that
such animal is the animal described in
said certificate of record and pedigree:
And Provided, finally, That the animals
and plants are certified by the National
196
TAXATION LAW
Economic and Development Authority as
necessary for economic development;
(s) Economic, technical, vocational,
scientific, philosophical, historical, and
cultural books and/or publications:
Provided, That those which may have
already been imported but pending
release by the Bureau of Customs at the
effectivity of this Decree may still enjoy
the privilege herein provided upon
certification by the Department of
Education, Culture and Sports that such
imported books and/or publications are
for economic, technical, vocational,
scientific, philosophical, historical or
cultural purposes or that the same are
educational, scientific or cultural
materials covered by the International
Agreement on Importation of
Educational Scientific and Cultural
Materials signed by the President of the
Philippines on August 2, 1952, or other
agreements binding upon the Philippines.
Educational, scientific and cultural
materials covered by international
agreements or commitments binding
upon the Philippine Government so
certified by the Department of Education,
Culture and Sports.
Bibles, missals, prayer books, Koran,
Ahadith and other religious books of
similar nature and extracts therefrom,
hymnal and hymns for religious uses;
(t) Philippine articles previously exported
from the Philippines and returned
without having been advanced in value
or improved in condition by any process
of manufacture or other means, and
upon which no drawback or bounty has
been allowed, including instruments and
implements, tools of trade, machinery
UP LAW BOC TAXATION 2
and equipment, used abroad by Filipino
citizens in the pursuit of their business,
occupation or profession; and foreign
articles previously imported when
returned after having been exported and
loaned for use temporarily abroad solely
for exhibition, testing and
experimentation, for scientific or
educational purposes; and foreign
containers previously imported which
have been used in packing exported
Philippine articles and returned empty if
imported by or for the account of the
person or institution who exported them
from the Philippines and not for sale,
barter or hire subject to identification:
Provided, That any Philippine article
falling under this subsection upon which
drawback or bounty has been allowed
shall, upon re-importation thereof, be
subject to a duty under this subsection
equal to the amount of such drawback or
bounty.
(u) Aircraft, equipment and machinery,
spare parts commissary and catering
supplies, aviation gas, fuel and oil,
whether crude or refined, and such other
articles or supplies imported by and for
the use of scheduled airlines operating
under Congressional franchise: Provided,
That such articles or supplies are not
locally available in reasonable quantity,
quality and price and are necessary or
incidental for the proper operation of the
scheduled airline importing the same;
(v) Machineries, equipment, tools for
production, plants to convert mineral
ores into saleable form, spare parts,
supplies, materials, accessories,
explosives, chemicals, and
transportation and communication
facilities imported by and for the use of
new mines and old mines which resume
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TAXATION LAW
operations, when certified to as such by
the Secretary of Agriculture and Natural
Resources upon the recommendation of
the Director of Mines, for a period ending
five (5) years from the first date of actual
commercial production of saleable
mineral products: Provided, That such
articles are not locally available in
reasonable quantity, quality and price
and are necessary or incidental in the
proper operation of the mine; and
aircrafts imported by agro-industrial
companies to be used by them in their
agriculture and industrial operations or
activities, spare parts and accessories
thereof;
(w) Spare parts of vessels or aircraft of
foreign registry engaged in foreign trade
when brought into the Philippine
exclusively as replacements or for the
emergency repair thereof, upon proof
satisfactory to the Collector of Customs
that such spare parts shall be utilized to
secure the safety, seaworthiness or
airworthiness of the vessel or aircraft, to
enable it to continue its voyage or flight;
(x) Articles of easy identification exported
from the Philippines for repair and
subsequently reimported upon proof
satisfactory to the Collector of Customs
that such articles are not capable of
being repaired locally: Provided, That the
cost of the repairs made to any such
article shall pay a rate of duty of thirty
per cent ad valorem;
(y) Trailer chassis when imported by
shipping companies for their exclusive
use in handling containerized cargo,
upon posting a bond in an amount equal
to one and one-half times the
ascertained duties, taxes and other
charges due thereon to cover a period of
UP LAW BOC TAXATION 2
one year from the date of acceptance of
the entry, which period for meritorious
reasons may be extended by the
Commissioner of Customs from year to
year, subject to the following conditions:
(1) That they shall be properly identified
and registered with the Land
Transportation Commission;
(2) That they shall be subject to customs
supervision fee to be fixed by the
Collector of Customs and subject to
the approval of the Commissioner of
Customs;
(3) That they shall be deposited in the
Customs zone when not in use; and
(4) That upon the expiration of the period
prescribed above, duties and taxes
shall be paid, unless otherwise re-
exported
CLASSIFICATION OF DUTIES
(1)ORDINARY/REGULAR DUTIES
Ordinary or regular duties refer to those
that, as a matter of course, are imposed on
dutiable articles [Sec. 104, TCC]
(a) Ad valorem; Methods of valuation
The tax rates are based on the cost
(FMV) or price of the imported articles,
in wholesale quantities in the principal
market of the exporting country or the
country of origin, including expenses
connected with the importation, such as
insurance, freight, packaging, loading
and unloading charges, but excluding
internal excise taxes to be remitted or
rebated; or
(a) In case such value is not
ascertainable, the reports of the
Revenue or commercial attaches; or
(b) If still not ascertainable, the
domestic wholesale market price in
the ordinary course of trade less
import duty and not more than 25%
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TAXATION LAW
for expenses and profits. [Sec. 201,
TCC]
General Rule: The following methods are
sequentially applied
Exception: (CAO 4-2004) Methods 4 and 5
may be reversed at the request of the
importer, subject to the approval of the
Commissioner.
Ground to refuse the request: if the
Commissioner deems that he will
experience real difficulties in determining
the dutiable value using Method 5
(Basis for all Methods of Valuation: Sec. 201,
TCC and CAO 4-2004)
(1) Transaction value
Price actually paid or payable for goods
when sold for export to Philippines
(a) commissions & brokerage fees
(b) cost of containers
(c) cost of packing (labor, materials)
(d) assists (value of goods and services
supplied by the buyer free of charge or at
a reduced price for use in connection
with the production and sale for export of
the good)
(e) royalties & license fees
(f) value of any part of the proceeds of
subsequent resale, disposal or use of
imported goods that accrue directly or
indirectly to seller
(g) cost of transport
(h) loading, unloading, handling
(i) insurance
Dutiable Value (DV) must NOT include:
(a) charges for construction, erection,
assembly maintenance or technical
assistance undertaken after importation
(b) cost of transport after importation
(c) duties and taxes of Phil
UP LAW BOC
(d) other permissible deduction under WTO
Valuation Agreement
Transaction Value of Identical Goods
The DV shall be the transaction value
of identical goods sold for export to the Phil
and exported at or about the same time as the
goods being valued. Identical goods must be
same commercial level and substantially same
quantity as the goods being valued.
Identical goods
(a) Same in all respects (physical
characteristics, quality and reputation)
(b) Produced in the same country as the goods
being valued
(c) Produced by producer of the goods being
valued
Excludes: imported goods for which
engineering, development, artwork, design
work, plans and sketches is undertaken in the
Phil and provided by the buyer to the producer
free of charge or at a reduced rate
When no identical goods produced by the same
person:
Identical goods produced by different producer
in the same country
If NO identical goods at same commercial level
and same quantity,
(a) TV of identical goods at a different
commercial level and different quantity may
be utilized
(b) TV shall be adjusted upward or downward
to account for the difference
Transaction value of similar goods
The DV shall be the transaction value of
similar goods sold for export to the Phil and
exported at or about the same time as the
goods being valued.
TAXATION 2 TAXATION LAW
Similar goods must be same commercial
level and substantially same quantity as the
goods being valued.
Similar goods
(a) like characteristics and like component
materials
(b) capable of performing same functions
(c) commercially interchangeable
(d) produced in same country
(e) produced by same producer
Excludes: imported goods for which
engineering, development, artwork, design
work, plans and sketches is undertaken in the
Phil and provided by the buyer to the producer
free of charge or at a reduced rate
When no similar goods produced by the same
person:
similar goods produced by different producer
in the same country
If NO similar goods at same commercial level
and same quantity,
(a) TV of similar goods at a different
commercial level and different quantity may
be utilized
(b) TV shall be adjusted upward or downward
to account for the difference
Deductive value
DV is determined on the basis of sales in the
Phil of goods being valued of identical or
similar imported goods less certain expenses
resulting from importation and sale of goods.
Deductive Value is determined by making a
deduction from the established price per unit
for the aggregate of the ff elements:
(a) Commissions OR
(b) additions made in connection with profit
and general expenses AND
(c) transport, insurance and associated
costs
(d) customs duties and other national taxes
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UP LAW BOC TAXATION 2
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
The Sales must meet the following
CONDITIONS:
(1) sold in the Phil in the same condition as
imported
(2) sales taken place at or about the same
time of importation of good being
valued
(3) if no sale took place at or about the time
of importation
- use sales at the earliest date after
importation (of the similar or identical
good) but before expiration of 90 days
(4) if no sale meet the above conditions,
importer may choose the use of sales of
goods being valued after further
processing
“At or about the same time”
45 days prior to and 45 days following the
importation
Computed value
DV is determined on the basis of cost
of production + profit + general expenses
reflected in sales from exporting country to the
Phil of goods of same class or kind
DV is calculated by:
determining aggregate of relevant costs,
charges and expenses or value of (1) materials
and (2) production or processing costs:
(a) Costs* (containers, packing, assists,
engineering, artwork, plans and sketches
undertaken in Phil and charged to
producer
(b) profits and general expenses
(c) cost of transport, insurance and charges
to the port or place of importation
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TAXATION LAW
*Note: these additional costs are added only if
not included in the determination of the
aggregate of relevant costs, charges and
expenses or value of materials and production.
Fallback value
DV cannot be determined using any of
the above methods
Use other reasonable means consistent with
principles and general provisions of General
Agreements on Tariffs and Trade (GATT)
(b) Specific (Sec. 202, TCC)
Rates are based on unit of weight
number or measurement
Kinds of weight:
(a) Gross Weight - weight of same,
together with the weight of all
containers, packages, holders and
packings, of any kind, in which said
articles are contained, held or
packed at the time of importation
(b) Legal Weight – weight at the time of
their sale to the public in usual retail
quantities
(c) Net Weight – only the actual weight
at the time of importation excluding
the weight of the immediate and all
other containers
(2)SPECIAL DUTIES – ADDITIONAL
IMPORT DUTIES IMPOSED ON SPECIFIC
KINDS OF IMPORTED ARTICLES (SEE
TABLE OF SPECIAL DUTIES)
UP LAW BOC
REMEDIES
GOVERNMENT
Administrative/Extrajudicial
Search, seizure, forfeiture, arrest
(1) Enforcement of Tax Lien
Tax Lien – attaches upon the articles
imported which may be enforced while such
are in custody or subject to the control of
the government [Sec. 1204]
(2) Seizure and Forfeiture [Sec. 2205]
Who may effect:
customs official; Fisheries Commissions;
Philippine Coast Guard
Settlement [Sec. 2307]
While case is pending, Collector may accept
settlement of any seizure case
(a) Upon approval of Commissioner
(b) Payment of fine ( 25% - 80% of the landed
cost of the article)
(c) In case of forfeiture, should pay the
domestic market value of the seized article
When Settlement NOT allowed:
(a) Fraud in importation
(b) Importation prohibited by law
(c) Release would be contrary to law
Compromise(Sec. 2316, TCC)
Commissioner may compromise any case
subject to approval by Secretary of Finance
Judicial
Requisites for filing of criminal/civil case
[Sec, 2401, TCC]:
(1) Brought in the name of the government of
the Phil
(2) Conducted by Customs officers
(3) With approval from the Commissioner
TAXATION 2 TAXATION LAW
Rules on appeal including jurisdiction
The party aggrieved by a ruling of the
Commissioner in any matter brought before
him upon protest or by his action or ruling in
any case of seizure may appeal to the Court of
Tax Appeals, in the manner and within the
period prescribed by law and regulations.
Unless an appeal is made to the Court of Tax
Appeals in the manner and within the period
prescribed by laws and regulations, the action
or ruling of the Commissioner shall be final
and conclusive. (Sec. 2402, TCC)
TAXPAYER
Protest
When made:at the time payment of the
amount claimed to be due is made within 15
days thereafter (Sec. 2308)
Form:
(a) Must be in writing
(b) Must point out the particular decision or
ruling of the Collector of Customs to which
exception is taken or objection made
(c) Must state the grounds relied upon for relief
(Sec. 2310, TCC)
Scope: Limited to the subject matter of a single
adjustment (refers to the entire content of one
liquidation including duties, fees, surcharges
and fines) or other independent transaction
Other requirements:
(a) Payment of the amount due and the
corresponding docket fee shall be made
before protest [Sec. 2308]
(b) Upon demand of Collector, the importer
shall furnish samples of the articles which
are the subject of the protest
Effect of Failure to Protest: render the action of
the Collector final and conclusive except for
manifest error
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UP LAW BOC TAXATION 2
Review of Commissioner [Sec. 2313]:
person aggrieved by the decision or Collector
in any matter presented upon protest or by his
action in any case of seizure may, within days
after notification on writing by the Collector of
his actions or decisions, file a written notice to
the Collector with a copy furnished to the
Commissioner of his intention to appeal the
action or decision of the Collector to the
Commissioner
Automatic Review:
Happens in case a decision is made adverse to
the Government
Abandonment
Article is deemed abandoned when (Sec. 1801,
TCC):
(1) owner, importer or consignee expressly
signifies in writing to Collector his intention
to abandon
(2) after due notice, fails to file an entry within
30 days from date of discharge of last
package from vessel or aircraft
(3) after filing entry, fails to claim his
importation 15 days from date of posting of
the notice to claim such importation
Effect [Sec. 1802, TCC]:
(a) deemed to have renounced his interest and
property rights
(b) ipso facto deemed property of the
Government
(c) If the abandoned articles are transferred to
a customs bonded warehouse, the operator
shall be liable for the payment of duties and
taxes in the case of loss of the stored
abandoned imported articles [R.V. Marzan v.
CA, GR No. 128064, March 4, 2004]
Liability of Official for Failure to Report
Abandonment
Any official or employee who:
(a) had knowledge of the existence of
abandoned article
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TAXATION LAW
(b) custody or charge of such article
(c) fails to report within 24 hours from time
article deemed abandoned shall be
punished according to sec. 3604 (fine:
P5000 – P50,000; imprisonment: 1 yr – 10
yrs, perpetual disqualification to hold public
office, vote and participate in election)
Abatement and Refund
When available:
(1) Abatement for Damage incurred during
Voyage (Sec. 1701)
(2) Abatement or Refund for the following:
(a) Missing Packages (Sec. 1702)
(b) Deficiency of Contents in Packages (Sec.
1703)
(c) Articles Lost or Destroyed after Arrival
(Sec. 1704)
(d) Dead or Injured Animals (Sec. 1705)
(3) Refund in case of excess payments due to:
(a) manifest clerical error made in invoice or
entry
(b) error in return of weight, measure and
gauge (certified, under penalties of
falsification or perjury, by examining
official)
(c) error in the distribution of charges on
invoices (which does not involve any
question of law and certified, under
penalties of falsification or perjury, by
examining official) (Sec. 1707)
Conditions for refund of Excess Payments
(1) errors discovered before payment OR
discovered within 1 year after the final
liquidation
(2) written request and notice from importer
OR statement of error certified by the
Collector
How:
(1) Claim made in writing
(2) Collector shall verify with the records in his
office
UP LAW BOC TAXATION 2 TAXATION LAW

(3) Certify claim to Commissioner with his

recommendation and necessary papers
(4) Commissioner shall then cause the claim to
be paid if found correct

If the result of the refund would result to a

corresponding refund of the internal revenue
taxes on the same importation, Collector shall
certify to Commissioner who shall cause the
said excess to be paid, refunded or credited in
favor of the importer

203
UP LAW BOC TAXATION 2 TAXATION LAW

Flowchart IX: Remedies from Seizure and Forfeiture Cases-Tariffs and

Customs Code

START

Collector seizes goods

Importer may secure
Collector determines and reports it to the
release of goods by Collector conducts
probable cause Commissioner and to
(illegal importation) filing of cash bond hearing
COA. Owner is notified
(Sec. 2301)
of seizure

Collector’s Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
adverse to gov’t?

Is
Does
No Commissioner’s
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs adverse to gov’t?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
of Collector’s decision
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
Commissioner’s Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
gov’t?

Is SOF’s
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
to gov’t?

No
Yes
Inaction construed as
affirmation of
Decision becomes
commissioner’s decision No
END final &
(or of collector’s decision Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
Collector’s
days from notice
decision
of decision

Appeal to CTA en
MR within 15 days
banc 15 days from Appeal to the
from receipt of END
receipt of decision Supreme Court
decision
denying MR

*Automatic review is intended to protect the interest of the Government. W/o auto review, the Commissioner and SoF would not know
about the decision laid down by the Collector favoring the taxpayer. Automatic review is necessary because nobody is expected to appeal
the decision of the Collector which is favorable to the taxpayer & adverse to the Government. (Yaokasin v. Commissioner 180 SCTA 591

204
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TABLE OF SPECIAL DUTIES: WHEN IMPOSED

Anti-Dumping Countervailing Marking Discriminatory Safeguard [RA 8800]
[Sec. 301, TCC [Sec. 302 as [Sec. 303] [Sec. 304]
as amended by amended by
RA 8752] RA 8751]
Where a Whenever any If at the time Whenever the (Sec 5) General (Sec 21)
product or product, of President finds Safeguard Special
commodity is commodity or importation that the public Measure: Safeguard
imported in the article of any article (or interest will be Whenever Measure for
Philippines at commerce is its container if served thereby, there is a Agricultural
an export price granted the article additional positive final Products:
less than the directly or cannot be customs duty determination Imposed upon
normal value indirectly by marked), is shall be of the agricultural
in the ordinary the not marked in imposed upon Commission products,
course of trade government in in any official articles wholly that a product consistent
for the like the country of language of or in part the is being with Phil
product or origin or the growth or imported into international
article destines exportation, Philippines product of, or the country in treaty
for any kind or and in a imported in a increased obligations, if
consumption form of specific conspicuous vessel of, any quantities, its:
in the subsidy upon place as foreign country whether a) Cumulative
exporting the production, legibly, whenever he absolute or import
country or manufacture or indelibly and shall find as a relative to the volume in a
materially exportation of permanently fact that such domestic given year
regarding such product, as the nature country — production, as exceeds its
establishment commodity or of the article to be a trigger
of a domestic article, and the (or container). (1) Imposes, substantial volume
industry importation of This is used to directly or cause of subject to the
producing the such prevent indirectly, serious injury conditions
like product subsidized deception of upon any Phil or threat under Sec. 23,
(Sec. 3, RA product, has consumers. product thereof to the RA 8800, or
8752) caused or unreasonable domestic but not
threatens to charge, industry; currently; and
cause material exaction, however, in the b) Actual CIF
injury to a regulation or case of non- import price is
domestic limitation agricultural less than its
industry or has which is not products, the trigger price
materially equally Secretary of subject to
retarded the enforced upon Agriculture conditions
growth or the like articles shall first under Sec. 24,
prevents the of other foreign establish that RA 8800
establishment countries; or the application
of a domestic of such
industry (2) safeguard

205
UP LAW BOC TAXATION 2 TAXATION LAW

Discriminates measures will

in fact against be in the
the commerce public interest
of the
Philippines, as
to place the
commerce of
the Philippines
at a
disadvantage
compared with
the commerce
of any foreign
country.

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti- Countervailing Marking Discriminatory Safeguard (RA 8800)

Dumping (Sec. 302 as (Sec. 303) (Sec. 304)
(Sec. 301, amended by RA
TCC as 8751)
amended by
RA 8752)
(1) Secretary of Trade and Commissioner President For non- Secretary of
Industry - non-agricultural of Customs (through a agricultural Agriculture
products proclamation) products:
(2) Secretary of Agriculture - Secretary of
agricultural products Trade and
(3) Tariff Commission - decides Industry
whether or not to impose For
anti- agricultural
dumping/countervailing products:
duty Secretary of
Agriculture

Anti- Equivalent to 5% ad valorem Not exceeding tariff For a):

Dumping the subsidy of the articles 100% ad increase,
Duty = valorem upon either ad appropriately
Normal the articles valorem or set to a level
Value - specific, or not exceeding
Export Price both, to be one-third of

206
UP LAW BOC TAXATION 2 TAXATION LAW

paid through the applicable

a cash bond out-quota
set at a level customs duty
sufficient to on the
redress or agricultural
prevent injury product under
to the consideration
domestic in the year
industry (Sec. when it is
8, RA 8800) imposed

For b),
compute as
follows:
(a) 0 - if price
difference
is at most
10% of the
trigger
price
(b) 30% of the
amount by
which the
price
difference
exceeds
10% of the
trigger
price
(c) 50% - if it
exceeds
40% but
less than
60%
(d) 70% - if it
exceeds 60
but at most
75%
(e) 90% - if it
exceeds
75%

207
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X. JUDICIAL REMEDIES
JURISDICTION OF THE COURT OF
TAX APPEALS
CIVIL TAX CASES
Exclusive Original Jurisdiction
Tax collection cases involving final and
executory assessments for taxes, fees, charges
and penalties, where the principal amount of
taxes and fees, exclusive of charges and
penalties, claimed is one million pesos or more.
Exclusive Appellate Jurisdiction
CTA Division
(1) Decisions and Inaction 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;
(a) Inaction of the Commissioner shall be
deemed a denial in which the taxpayer
may appeal.
(b) Inaction does not necessarily constitute a
formal decision and the taxpayer may
opt to await the final decision of the
Commissioner by constitute a formal
decision and the taxpayer may opt to
await the final decision of the
Commissioner beyond the 180 days and
may appeal such final decision.
(c) For claim for refund, the taxpayer must
file a petition for review with the CTA
prior to the expiration of the two year
prescriptive period.
(2) Decisions, orders or resolutions of the RTC
in local tax cases and in tax collection cases
208
TAXATION LAW
originally decided or resolved by them in
their ORIGINAL jurisdiction.
(3) 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;
(4) 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;
(5) Decisions of the Secretary of Trade and
Industry, in the case of non-agricultural
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. [Sec. 7, RA No. 1125 as
amended]
CTA en Banc
(1) Decisions or resolutions on motions for
reconsideration or new trial of the Court in
Divisions in the exercise of its exclusive
appellate jurisdiction over:
(a) Cases arising from administrative
agencies – Bureau of Internal Revenue,
Bureau of Customs, Department of
Finance, Department of Trade and
Industry, Department of Agriculture;
UP LAW BOC TAXATION 2
(b) Local tax cases decided by the Regional
Trial Courts in the exercise of their
original jurisdiction; and
(c) Tax collection cases decided by the
Regional Trial Courts in the exercise of
their original jurisdiction involving final
and executory assessments for taxes,
fees, charges and penalties, where the
principal amount of taxes and penalties
claimed is less than one million pesos;
(2) Decisions, resolutions or orders of the
Regional Trial Courts in local tax cases and
in tax collection cases decided or resolved
by them in the exercise of their APPELLATE
jurisdiction;
(3) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over tax collection
cases;
(4) Decisions of the Central Board of
Assessment Appeals (CBAA) 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;
CRIMINAL CASES [SEC. 7, RA 1125 AS
AMENDED]
Exclusive Original Jurisdiction
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. Principal
amount of taxes and fees, exclusive of charges
and penalties, claimed is more than or equal to
One million pesos (P1,000,000.00).
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TAXATION LAW
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.
Exclusive appellate jurisdiction in criminal cases
CTA Division
(1) 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.
(2) 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.
CTA En Banc
(1) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
original jurisdiction over cases involving
criminal offenses arising from violations of
the National Internal Revenue Code or the
Tariff and Customs Code and other laws
administered by the Bureau of Internal
Revenue or Bureau of Customs;
(2) Decisions, resolutions or orders on motions
for reconsideration or new trial of the Court
in Division in the exercise of its exclusive
appellate jurisdiction over criminal offenses
mentioned in the preceding subparagraph;
and
(3) Decisions, resolutions or orders of the
Regional trial Courts in the exercise of their
appellate jurisdiction over criminal offenses
mentioned in subparagraph (f).
UP LAW BOC TAXATION 2
JUDICIAL PROCEDURES
JUDICIAL ACTION FOR COLLECTION OF
TAXES
Internal revenue taxes
The remedies for the collection of
internal revenue taxes, fees or charges, and
any increment thereto resulting from
delinquency can be through the institution of a
civil or criminal action. [Sec. 205, NIRC]
NOTE: Please refer to Taxpayer’s Remedies (B.
Collection)
When this remedy is resorted to:
(1) The tax assessment becomes final and
executory because of the failure to appeal.
(2) Even pending decision of the administrative
protest (CIR v. Union Shipping, 1990)
Local taxes
The LGU concerned may enforce the
collection of delinquent taxes, fees, charges or
other revenues by civil action in any court of
competent jurisdiction. The civil action shall be
filed by the local treasurer. (Sec. 183, LGC)
MTC/RTC depending on jurisdictional
threshold amount.
Prescriptive period
Local taxes, fees, or charges may be collected
within five (5) years from the date of
assessment by administrative or judicial action.
No judicial or administrative action for
collection can be instituted after lapse of the
period for assessment except when there is
fraud or intent to evade tax. (Sec. 194 LGC)
The running of the periods of prescription shall
be suspended for the time during which:
(1) The treasurer is legally prevented from
making the assessment of collection;
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TAXATION LAW
(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. (Sec. 194,
LGC)
CIVIL CASES
Who may appeal, mode of appeal, effect of
appeal
Appeal to CTA Division
A party aggrieved or adversely affected by the
decision or ruling or inaction of
(1) The Commissioner of Internal Revenue;
(2) The Commissioner of Customs;
(3) The Secretary of Finance;
(4) The Secretary of Trade and Industry;
(5) The Secretary of Agriculture; or
(6) The RTC exercising original jurisdiction
may appeal within 30 days from the receipt of
the copy of the decision or ruling, or the
expiration of the period fixed by law for the
Commissioner to decide, to the Court of Tax
Appeals Division.
Mode of Appeal: Rule 42
Aggrieved party may file a motion for
reconsideration or new trial within 15 days from
receipt of the copy of the decision.
Appeal to CTA en Banc
A party adversely affected by a decision or
resolution of a Division of the Court on a
motion for reconsideration or new trial may
appeal within 15 days from receipt of the copy
of the decision.
Mode of Appeal: Rule 43
A party adversely affected by a decision or
ruling of the Central Board of Assessment
Appeals and the Regional Trial Court in the
exercise of their appellate jurisdiction may
UP LAW BOC
appeal within 30 days from the receipt of the
copy of the decision.
Mode of Appeal: Rule 43
(1) Suspension of collection of tax
General Rule: No appeal taken to the Court
shall suspend the payment, levy, distraint,
or sale of any property of the taxpayer for
the satisfaction of his tax liability as
provided under existing laws.
Exception: Where the collection of the
amount of the taxpayer’s liability, sought by
means of a demand for payment, by levy,
distraint or sale of any property of the
taxpayer, or by whatever means, as
provided under existing laws, may
jeopardize the interest of the Government or
the taxpayer, an interested party may file a
motion for the suspension of the collection
of the tax liability
(i) Injunction not available to restrain
collection
No court shall have authority to grant an
injunction to restrain the collection of
any national internal revenue tax, fee or
charge imposed by the Code. [Sec. 217,
NIRC]
Note: The Local Government Code does
not have a provision prohibiting
injunction in the collection of tax.
(2) Taking of evidence
(i) The Court may receive evidence in the
following cases:
(a) In all cases falling within the original
jurisdiction of the Court in Division
pursuant to Section 3, Rule 4 of these
Rules; and
(b) In appeals in both civil and criminal
cases where the Court grants a new
TAXATION 2 TAXATION LAW
trial pursuant to Section 2, Rule 53 and
Section 12, Rule 124 of the Rules of
Court. [Sec. 2, Rule 12, A.M. No. 05-11-
07]
(ii) Taking of evidence by:
(a) Justice—
The Court may, motu proprio or upon
proper motion, direct that a case, or
any issue therein, be assigned to one of
its members for the taking of evidence,
when the determination of a question
of fact arises at any stage of the
proceedings, or when the taking of an
account is necessary, or when the
determination of an issue of fact
requires the examination of a long
account. The hearing before such
justice shall proceed in all respects as
though the same had been made
before the Court.
Upon the completion of such hearing,
the justice concerned shall promptly
submit to the Court a written report
thereon, stating therein his findings
and conclusions. Thereafter, the Court
shall render its decision on the case,
adopting, modifying, or rejecting the
report in whole or in part, or, the Court
may, in its discretion, recommit it to
the justice with instructions, or receive
further evidence. (Sec. 12, RA No. 1125,
as amended; also Sec. 3, Rule 12, A.M.
No. 05-11-07)
(b) Court Official –
In default or ex parte hearings, or in
any case where the parties agree in
writing, the Court may delegate the
reception of evidence to the Clerk of
Court, the Division Clerks of Court,
their assistants who are members of
the Philippine bar, or any Court
attorney. The reception of documentary
evidence by a Court official shall be for
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the sole purpose of marking,
comparison with the original, and
identification by witnesses of such
documentary evidence. The Court
official shall have no power to rule on
objections to any question or to the
admission of exhibits, which objections
shall be resolved by the Court upon
submission of his report and the
transcripts within ten days from
termination of the hearing. (Sec. 4,
Rule 12, A.M. No. 05-11-07)
(3) Motion for reconsideration or new trial [Rule
15, A.M. No. 05-11-07]
Who: Any aggrieved party may seek a
reconsideration or new trial of any decision,
resolution or order of the Court.
Maybe opposed by: The adverse party may file
an opposition to the motion for reconsideration
or new trial within ten days after his receipt of
a copy of the motion for reconsideration or new
trial of a decision, resolution or order of the
Court.
When: He shall file a motion for
reconsideration or new trial within fifteen days
from the date he received notice of the decision,
resolution or order of the Court in question.
The Court shall resolve the motion for
reconsideration or new trial within three
months from the time it is deemed submitted
for resolution.
How: The motion shall be in writing stating its
grounds, a written notice of which shall be
served by the movant on the adverse party.
A motion for new trial shall be proved in the
manner provided for proof of motions. A
motion for the cause mentioned in
subparagraph (a) of the preceding section
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TAXATION LAW
shall be supported by affidavits of merits which
may be rebutted by counter-affidavits. A
motion for the cause mentioned in
subparagraph (b) of the preceding section
shall be supported by affidavits of the
witnesses by whom such evidence is expected
to be given, or by duly authenticated
documents which are proposed to be
introduced in evidence.
A motion for reconsideration or new trial that
does not comply with the foregoing provisions
shall be deemed pro forma, which shall not toll
the reglementary period for appeal.
Effect: The filing of a motion for
reconsideration or new trial shall suspend the
running of the period within which an appeal
may be perfected.
Grounds: A motion for new trial may be based
on one or more of the following causes
materially affecting the substantial rights of
the movant:
(a) Fraud, accident, mistake or excusable
negligence which ordinary prudence
could not have guarded against and by
reason of which such aggrieved party
has probably been impaired in his rights;
or
(b) Newly discovered evidence, which he
could not, with reasonable diligence,
have discovered and produced at the
trial and, which, if presented, would
probably alter the result.
A motion for new trial shall include all grounds
then available and those not included shall be
deemed waived.
Restrictions: No party shall be allowed to file a
second motion for reconsideration of a decision,
final resolution or order; or for new trial.
Appeal to the CTA, en banc
UP LAW BOC TAXATION 2 TAXATION LAW

No civil proceeding involving matter arising (b) Those involving violations of the tariff and
under the National Internal Revenue Code, the Customs Code and other laws enforced by
Tariff and Customs Code or the Local the Bureau of Customs- Must be approved
Government Code shall be maintained, except by the Commissioner of Customs
as herein provided, until and unless an appeal Shall interrupt the running of the period of
has been previously filed with the CTA and prescription
disposed of in accordance with the provisions
of this Act. (2) Prosecution of criminal action
(a) Conducted and prosecuted under the
A party adversely affected by a resolution of a direction and control of the public
Division of the CTA on a motion for prosecutor
reconsideration or new trial, may file a petition (b) Those involving violations of the NIRC
for review with the CTA en banc. (Sec. 18, RA and other laws enforced by the BIR or
No. 1125 as amended) violations of the tariff and Customs Code
and other laws enforced by the Bureau of
Petition for review on certiorari to the Supreme Customs - The prosecution may be
Court [Rule 16, A.M. No. 05-11-07] conducted by their respective duly
A party adversely affected by a decision or deputized legal officers.
ruling of the Court en banc may appeal by
filing with the Supreme Court a verified (3) Institution on civil action in criminal action
petition for review on certiorari within fifteen In cases within the jurisdiction of the
days from receipt of a copy of the decision or Court, the criminal action and the
resolution, as provided in Rule 45 of the Rules corresponding civil action for the
of Court. If such party has filed a motion for recovery of civil liability for taxes and
reconsideration or for new trial, the period penalties shall be deemed jointly
herein fixed shall run from the party’s receipt instituted in the same proceeding. The
of a copy of the resolution denying the motion filing of the criminal action shall
for reconsideration or for new trial. necessarily carry with it the filing of the
civil action. No right to reserve the filing
The motion for reconsideration or for new trial of such civil action separately from the
filed before the Court shall be deemed criminal action shall be allowed or
abandoned if, during its pendency, the movant recognized.
shall appeal to the Supreme Court.
Appeal and period to appeal criminal cases
CRIMINAL CASES Deciding Period to Mode of
Institution and prosecution of criminal actions Body Appeal Appeal
Regional 15 days from Appeal
(1) Institution of criminal action Trial Court in receipt of pursuant to
Instituted by the filing an information in the the exercise decision Sec. 3(a) and
name of the People of the Philippines of its original 6, Rule 122 of
(a) Those involving violations of the NIRC and jurisdiction the Rules of
other laws enforced by the BIR - Must be (to CTA Court
approved by the Commissioner of Internal Division)
Revenue CTA Division 15 days from Petition for
(to CTA En receipt of review as

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Banc) decision provided in certiorari pursuant to Rule 45 of the 1997

Rule 43 of the Rules of Civil Procedure. (Sec. 19, R.A. No. 1125
May be Rules of as amended)
extended for Court
good cause
for not more The Court en TAXPAYER’S SUIT IMPUGNING THE
than 15 days banc shall act VALIDITY OF TAX MEASURES OR ACTS
on the OF TAXING AUTHORITIES
appeal.
Regional Trial 15 days from Petition for Taxpayer’s suit, defined
Courts in the receipt of review as A "taxpayer's suit" refers to a case where the
exercise of decision provided in act complained of directly involves the illegal
their Rule 43 of the disbursement of public funds derived from
appellate Rules of taxation. [Kilosbayan v. Guingona, Jr. (1994)]
jurisdiction Court
(To CTA Distinguished from citizen’s suit
division) The plaintiff in a taxpayer's suit is in a different
category from the plaintiff in a citizen's suit. In
Solicitor General as counsel for the People and the former, the plaintiff is affected by the
government officials sued in their official expenditure of public funds, while in the latter,
capacity he is but the mere instrument of the public
The Solicitor General shall represent concern. (De Castro v. Judicial and Bar Council
the People of the Philippines and government (2010))
officials sued in their official capacity in all
cases brought to the Court in the exercise of its Requisites for challenging the constitutionality
appellate jurisdiction. He may deputize the of a tax measure or act of taxing authority
legal officers of the Bureau of Internal Revenue
in cases brought under the National Internal (1) Concept of locus standi as applied in
Revenue Code or other laws enforced by the taxation
Bureau of Internal Revenue, or the legal (a) CONCEPT OF LOCUS STANDI: The
officers of the Bureau of Customs in cases doctrine of locus standi is the right of
brought under the Tariff and Customs Code of appearance in a court of justice. The
the Philippines or other laws enforced by the doctrine requires a litigant to have a
Bureau of Customs, to appear in behalf of the material interest in the outcome of a
officials of said agencies sued in their official case. In private suits, locus standi
capacity: Provided, however, such duly requires a litigant to be a "real party in
deputized legal officers shall remain at all interest," which is defined as "the party
times under the direct control and supervision who stands to be benefited or injured by
of the Solicitor General. the judgment in the suit or the party
entitled to the avails of the suit."
Petition for review on certiorari to the Supreme
Court In public suits, this Court recognizes the
A party adversely affected by a decision difficulty of applying the doctrine
or ruling of the CTA en banc may file with the especially when plaintiff asserts a public
Supreme Court a verified petition for review on right on behalf of the general public

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because of conflicting public policy
issues. On one end, there is the right of
the ordinary citizen to petition the courts
to be freed from unlawful government
intrusion and illegal official action. At the
other end, there is the public policy
precluding excessive judicial interference
in official acts, which may unnecessarily
hinder the delivery of basic public
services.
The Court has adopted the "direct injury
test" to determine locus standi in public
suits. In People v. Vera, it was held that a
person who impugns the validity of a
statute must have "a personal and
substantial interest in the case such that
he has sustained, or will sustain direct
injury as a result." The "direct injury test"
in public suits is similar to the "real party
in interest" rule for private suits under
Section 2, Rule 3 of the 1997 Rules of
Civil Procedure. (Planter’s Products, Inc.
v. Fertiphil Corporation, G.R. No. 166006,
March 14, 2008)
(b) AS APPLIED TO TAXATION:
(i) It is well-stated that the validity of a
statute may be contested only by one
who will sustain a direct injury in
consequence of its enforcement. Yet,
there are many decisions nullifying, at
the instance of taxpayers, laws
providing for the disbursement of
public funds, upon the theory that
"the expenditure of public funds by an
officer of the State for the purpose of
administering an unconstitutional act
constitutes a misapplication of such
funds," which may be enjoined at the
request of a taxpayer. (Pascual v.
Secretary of Public Works (1960))
(ii) A taxpayer is allowed to sue where
there is a claim that public funds are
illegally disbursed, or that the public
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money is being deflected to any
improper purpose, or that there is
wastage of public funds through the
enforcement of an invalid or
unconstitutional law. A person suing
as a taxpayer, however, must show
that the act complained of directly
involves the illegal disbursement of
public funds derived from taxation. He
must also prove that he has sufficient
interest in preventing the illegal
expenditure of money raised by
taxation and that he will sustain a
direct injury because of the
enforcement of the questioned statute
or contract. In other words, for a
taxpayer’s suit to prosper, two
requisites must be met: (1) public
funds derived from taxation are
disbursed by a political subdivision or
instrumentality and in doing so, a law
is violated or some irregularity is
committed and (2) the petitioner is
directly affected by the alleged act.
[Mamba v. Lara, G.R. No. 165109, Dec.
14, 2009]
(2) Doctrine of transcendental importance
Recognizing that a strict application of the
"direct injury" test may hamper public
interest, this Court relaxed the requirement
in cases of "transcendental importance" or
with "far reaching implications." Being a
mere procedural technicality, it has also
been held that locus standi may be waived
in the public interest. (Ibid)
Planters Products, Inc. v. Fertiphil Corp.:
Even assuming arguendo that there is no
direct injury, We find that the liberal policy
consistently adopted by this Court on locus
standi must apply. The issues raised by
Fertiphil are of paramount public
importance. It involves not only the
constitutionality of a tax law but, more
UP LAW BOC TAXATION 2
importantly, the use of taxes for public
purpose. Former President Marcos issued
LOI No. 1465 with the intention of
rehabilitating an ailing private company.
This is clear from the text of the LOI. PPI is
expressly named in the LOI as the direct
beneficiary of the levy. Worse, the levy was
made dependent and conditional upon PPI
becoming financially viable. The LOI
provided that "the capital contribution shall
be collected until adequate capital is raised
to make PPI viable."
The constitutionality of the levy is already in
doubt on a plain reading of the statute. It is
Our constitutional duty to squarely resolve
the issue as the final arbiter of all justiciable
controversies. The doctrine of standing,
being a mere procedural technicality,
should be waived, if at all, to adequately
thresh out an important constitutional
issue.
(3) Ripeness for judicial determination
“Ripeness for judicial determination” means
that litigation is inevitable or there is no
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adequate relief available in any other form
or proceeding.
CJH Development Corp. v. BIR (GR No.
172457, Dec. 24, 2008) However, CJH is not
left without recourse. The Tariff and
Customs Code (TCC) provides for the
administrative and judicial remedies
available to a taxpayer who is minded to
contest an assessment, subject of course to
certain reglementary periods. The TCC
provides that a protest can be raised
provided that payment first be made of the
amount due.The decision of the Collector
can be reviewed by the Commissioner of
Customs who can approve, modify or
reverse the decision or action of the
Collector. If the party is not satisfied with
the ruling of the Commissioner, he may file
the necessary appeal to the Court of Tax
Appeals. Afterwards, the decision of the
Court of Tax Appeals can be appealed to
this Court.