TABLE OF CONTENTS 8. Compensation and Set-Off .................
30
TAXATION I ...............................................1
I. GENERAL PRINCIPLES OF TAXATION .. 2
A. Definition, Concept and Purpose of
Taxation ........................................................... 2
B. Nature and Characteristics of Taxation ...... 3
C. Power of Taxation as Distinguished from
Police Power and Eminent Domain ........... 4
D. Theory and Basis of Taxation ...................... 5
E. Principles of a Sound Tax System ............... 6
F. Scope and Limitations of Taxation ............. 6
1. Inherent Limitations .............................. 6
2. Constitutional Limitations .................... 9
G. Situs of Taxation ........................................... 15
H. Stages or Aspects of Taxation .................... 16
I. Definition, Nature and Characteristics of
Taxes ............................................................... 16
J. Requisites of a Valid Tax............................. 17
K. Tax as Distinguished from Other Forms of
Exactions ....................................................... 17
L. Kinds of Taxes .............................................. 19
1. As to object............................................ 19
2. As to burden or incidence ................... 19
3. As to tax rates........................................ 20
4. As to purpose ........................................ 20
5. As to scope (or authority imposing the
tax)........................................................... 20
6. As to graduation ................................... 20
M. Sources of Tax Laws .................................... 21
1. Constitution of the Philippines .......... 21
2. Statutes ................................................... 21
3. Judicial Decisions.................................. 21
4. Executive Orders .................................. 21
5. Tax Treaties and Conventions ........... 21
6. Revenue Regulations by the
Department of Finance ....................... 21
7. BIR Revenue Memorandum Circulars
and Bureau of Customs Memorandum
Orders ..................................................... 21
8. BIR Rulings ........................................... 22
9. Local Tax Ordinances .......................... 22
N. Construction and Interpretation ................ 22
1. Tax Laws ................................................ 22
2. Tax Exemption and Exclusion........... 23
3. Tax Rules and Regulations .................. 23
4. Penal Provisions of Tax Laws ............ 24
5. Non-Retroactive Application of Tax
Laws to Taxpayers ................................ 24
O. Doctrines of Taxation.................................. 25
1. Prospectivity of Tax Laws ................... 25
2. Imprescriptibility of Taxes .................. 25
3. Double Taxation ................................... 26
4. Power to Tax Involves Power to
Destroy ................................................... 27
5. Escape from Taxation ......................... 27
6. Exemption from Taxation .................. 29
7. Doctrine of Equitable Recoupment .. 30
9. Compromise and Tax Amnesty .......... 31
10. Ta pa er S i ....................................... 31
II. NATIONAL INTERNAL REVENUE CODE
(NIRC) OF 1997, AS AMENDED .................. 34
A. Organization and Functions of the Bureau
of Internal Revenue ...................................... 34
1. Rule-Making Authority of the Secretary
of Finance ............................................... 34
2. Jurisdiction, Power and Functions of
the Commissioner of Internal Revenue
35
B. Income Taxation ........................................... 36
1. Income Tax ............................................ 36
2. Gross Income ........................................ 45
3. Deductions from Gross Income ........ 68
4. Income Tax on Individuals ................. 81
5. Income Tax on Corporations ............. 97
6. Filing of Returns and Payment of
Income Tax .......................................... 109
7. Withholding of Taxes ......................... 113
TAXATION II .......................................... 115
C. Transfer Taxes ............................................. 116
1. Estate Tax............................................. 116
2. Donor Ta ......................................... 133
D. Value-Added Tax (VAT) and Percentage
Taxes ............................................................. 150
1. VAT....................................................... 150
2. Percentage Taxes ................................. 189
3. Excise Tax and Documentary Stamp
Tax ......................................................... 190
E. TAX REMEDIES UNDER THE NIRC
192
1. General Concepts................................ 192
2. Collection ............................................. 199
F. Ta pa er Remedie .................................. 200
1. Protesting the Assessment ................. 200
2. Compromise and Abatement of Taxes
201
3. Recovery of Tax Erroneously or Illegally
Collected ............................................... 202
G. Go ernmen Remedie ............................ 205
1. Administrative Remedies ................... 205
2. Judicial Remedies Civil or Criminal
Action.................................................... 209
III. LOCAL GOVERNMENT CODE OF 1991,
AS AMENDED ................................................. 211
A. Local Government Taxation ..................... 211
1. Fundamental Principles (UEPIP) ..... 211
2. Nature and Source of Taxing Power211
3. Local Taxing Authority ...................... 212
4. Scope of Taxing Power ...................... 213
5. Specific Taxing Power of LGUs....... 213
6. Common Limitations on the Taxing
Powers of LGUs ................................. 222
 7.
Collection of Business Tax ............... 223
8.
Ta pa er Remedie .......................... 224
9.
Civil Remedies by the LGU for
Collection of Revenues ...................... 225
B. Real Property Taxation .............................. 226
1. Fundamental Principles ..................... 226
2. Nature of Real Property Tax ............ 226
3. Imposition of Real Property Tax ..... 227
4. Appraisal and Assessment of Real
Property Tax ........................................ 228
5. Collection of Real Property Tax ...... 231
6. Refund or Credit of Real Property Tax
232
7. Ta pa er Remedie .......................... 233
IV. JUDICIAL REMEDIES .................................. 238
A. Jurisdiction of the Court of Tax Appeals238
1. Exclusive Appellate Jurisdiction over
Civil Tax Cases .................................... 238
2. Criminal Cases..................................... 239
B. Judicial Procedures ..................................... 240
1. Judicial Action for Collection of Taxes
240
2. Civil Cases ............................................ 241
3. Criminal Cases..................................... 243
TRAIN LAW ............................................. 245
TARIFF AND CUSTOMS CODE .......... 259
V. TARIFF AND CUSTOMS CODE OF THE
PHILIPPINES ................................................... 260
A. Tariff and Duties ........................................ 260
1. Definition ............................................. 260
2. Purpose for Imposition ..................... 260
3. Kinds or Classification of Duties ..... 260
4. Flexible Tariff Clause ......................... 265
B. Requirements of Importation................... 266
1. Beginning and Ending of Importation
266
2. Obligations of Importer .................... 267
C. Accrual and Payment of Tax and Duties 271
1. General Rule: All Imported Articles are
Subject to Duty ................................... 271
2. Goods Declaration ............................. 278
D. Unlawful Importation or Exportation .... 281
1. Technical Smuggling and Outright
Smuggling............................................. 281
2. Other Fraudulent Practices ............... 281
E. Remedies ...................................................... 282
1. Government ........................................ 282
2. Taxpayer ............................................... 285
UP LAW BOC TAXATION I TAXATION LAW

TAXATION I
Taxation Law

Page 1 of 290
U.P. LAW BOC TAXATION I
I. GENERAL
PRINCIPLES OF
TAXATION
A. Definition, Concept and
Purpose of Taxation
DEFINITION & CONCEPT
1. Revenue Raising Measure
The process or means by which the sovereign,
through its law-making body, raises income to defray
the necessary expenses of government; a method of
apportioning the cost of government among
those who in some measure are privileged to
enjoy its benefits and must, therefore, bear its
burdens [51 Am. Jur. 34; 1 Cooley 72-93].
2. As a Power
a. It refers to the inherent power of the state to
demand enforced contributions for public
purpose or purposes.
b. Is described as a destructive power which
interferes with the personal and property
rights of the people and takes from them a
portion of their property for the support of
the government. [Paseo Realty & Development
Corporation v. CA, G.R. No. 119286 (2004)]
PURPOSE
1. Revenue-raising
Primary purpose of taxation is to provide funds
or property with which to promote the general
welfare and protection of its citizens.
Fees may be properly regarded as taxes even
though they also serve as an instrument of
regulation. If the purpose is primarily revenue, or
if revenue is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. [PAL v. Edu, G.R. No. L-
41383 (1988)]
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. Taxes may be levied with a regulatory
purpose to provide means for the rehabilitation
Page 2 of 290
TAXATION LAW
and stabilization of a threatened industry which
is affected with public interest as to be within the
police power of the state. These regulatory
purposes are also known as Sumptuary. Thus,
taxation can:
a. Strengthen anemic enterprises or provide incentives to
greater production through grant of tax
exemptions or the creation of conditions
conducive to their growth.
b. Protect local industries against foreign
competition by imposing additional taxes on
imported goods, or encourage foreign trade
by providing tax incentives on imported
goods.
c. Be a bargaining tool by setting tariff rates first
at a relatively high level before trade
negotiations are entered into with another
country.
d. Halt inflation in periods of prosperity to curb
spending power; ward off depression in periods
of slump to expand business.
e. Reduce inequalities in wealth and incomes, as for
instance, the estate, donor's and income
taxes, their payers being the recipients of
unearned wealth or mostly in the higher
income brackets. Progressive system of
taxation prevents the undue concentration
of wealth in the hands of a few individuals.
Progressivity is keystoned on the principle
that those who are able to pay shoulder the
bigger portion of the tax burden. [Mamalateo]
f. Taxes may be levied to promote science and
invention [see RA. No. 5448] or to finance
educational activities [see RA. No. 5447] or
to improve the efficiency of local police forces in the
maintenance of peace and order through
grant of subsidy [see RA. No. 6141].
g. Be an implement of the police power to promote
the general welfare.
h. Protect local industries from foreign competition.
Taxation is no longer envisioned as a
measure merely to raise revenue to support
the existence of the government; taxes may
be levied with a regulatory purpose to
provide means for the rehabilitation and
stabilization of a threatened industry which
is affected with public interest as to be within
the police power of the state. [Caltex v. COA,
G.R. No. 92585 (1992)]
i. To address f e g e e ea
measure, just like what happened in the
landmark legislation on sin taxes in 2012 [see
R.A. No. 10351].
U.P. LAW BOC TAXATION I
B. Nature and
Characteristics of
Taxation
NATURE
1. Inherent in sovereignty The power to tax is
an attribute of sovereignty. It is a power
emanating from necessity. It is a necessary burden to
preserve the State's sovereignty and a means to
give the citizenry an army to resist an aggression,
a navy to defend its shores from invasion, a corps
of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and
those which come within the State's territory, and
facilities and protection which a government is
supposed to provide [Phil. Guaranty Co., Inc. v.
Commissioner, G.R. No. L-22074 (1965)].
2. Essentially a legislative function The power
to tax is peculiarly and exclusively legislative and
cannot be exercised by the executive or judicial
branch of the government [1 Cooley 160-161].
Hence, only Congress, our national legislative
body, can impose taxes. The levy of a tax,
however, may also be made by a local legislative
body subject to such limitations as may be
provided by law. It includes the authority to:
a. Determine the nature, purpose, extent,
coverage, apportionment, situs, and
method of collection of the tax;
b. Grant tax exemptions or condonations;
and
c. Specify or provide for the administrative as
well as judicial remedies that either the
government or the taxpayers may avail
themselves in the proper implementation of
the tax measure.
3. Subject to constitutional and inherent
limitations The power to tax is said to be the
strongest of all the powers of government. It is
unlimited, plenary, comprehensive and
supreme, in the absence of constitutional
restrictions, the principal check on its abuse
resting in the responsibility of members of
Congress to their constituents. However, the
power of taxation is subject to constitutional and
inherent limitations [Mamalateo]. These
limitations are those provided in the fundamental
law or implied therefrom, while the rest spring
from the nature of the taxing power itself
Page 3 of 290
TAXATION LAW
although they may or may not be provided in the
Constitution.
CHARACTERISTICS
1. Enforced contribution Its imposition is in no
way dependent upon the will or assent of the
person taxed. It is not contractual, either express
or implied, but positive acts of government;
2. Generally payable in the form of money
Although the law may provide payment in kind
(e.g. backpay certificates under Sec. 2, R.A. No.
304, as amended);
3. Proportionate in character Laid by some rule
of apportionment which is usually based on
ability to pay.
The r le of a a ion hall be niform and
equitable. The Congress shall evolve a
progre i e em of a a ion. [Sec. 28 (1), Ar .
VI, 1987 Constitution];
4. Personal to the taxpayer;
5. Levied on persons, property, rights, acts,
privileges, or transactions;
6. Levied by the State which has jurisdiction or
control over the subject to be taxed;
7. Levied by the law-making body of the State.
The power to tax is a legislative power but is also
granted to local governments, subject to such
guidelines and limitations as law may be provided
by law.
Each local government unit shall have the
power to create its own sources of revenues and
to levy taxes, fees, and charges subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall
accr e e cl i el o he local go ernmen .
[Sec. 5, Art. X, 1987 Constitution];
8. Levied for public purpose. Revenues derived
from taxes cannot be used for purely private
purposes or for the exclusive benefit of private
persons. [Gaston v. Republic Planters Bank, G.R.
No. 77194 (1988)]. The p blic p rpo e or
p rpo e of he impo i ion i implied in he le
of tax. [Mendoza v. Municipality, G.R. No. L-7373
(1954)]. A tax levied for a private purpose
constitutes a taking of property without due
process of law; and
9. It is also an important characteristic of most taxes
that they are commonly required to be paid at
regular periods or intervals [see 1 Cooley 64]
every year.
U.P. LAW BOC TAXATION I TAXATION LAW

C. Power of Taxation as Distinguished from Police Power

and Eminent Domain
When the distinction of exercise of powers is relevant
The distinction is important when the one exercising it is the LGU (mere delegated authority).

Since Congress has the power to exercise the State inherent powers of Police Power, Eminent Domain and Taxation,
the distinction between police power and the power to tax, which could be significant if the exercising authority were
mere political subdivisions (since delegation by it to such political subdivisions of one power does not necessarily
include the other), would not be of any moment when, Congress itself exercises the power. [NTC v. CA, G.R. No.
127937 (1999)]
Taxation Eminent Domain Police Power
May be exercised by:
the government; May be exercised only by:
Authority (who May be exercised only by:
its political subdivisions; the government; or
exercises the the government; or
or may be granted to public its political subdivisions.
Power) its political subdivisions.
service companies or public
utilities.
The use of the property is
The property (generally in
reg la ed for he
the form of money) is Merely a power to take private
Purpose purpose of promoting
taken for the support of property for public use.
the general welfare; it is
the government.
not compensable.
Operates upon: Operates on: Operates upon:
Persons
a community; an individual as the owner of a a community;
Affected
or class of individuals. particular property. or a class of individuals.
There is no transfer of
The money contributed
There is a transfer of the right title. At most, there is
Effect becomes part of the public
to property. restraint on the injurious
funds.
use of property.
Protection and benefits Indirect benefits
he receives.
It is assumed that the Market value of the property The person affected
Benefits individual receives the receives indirect benefits
Received equivalent of the tax in the He receives the market value of as may arise from the
form of protection and the property taken from him. maintenance of a healthy
benefits he receives from economic standard of
the government. society.
Amount imposed should
Generally, there is no limit No amount imposed but rather just be commensurate to
Amount of
on the amount of tax that the owner is paid the market cover the cost of the
Imposition
may be imposed. value of property taken. license and necessary
expenses.
Inferior to the impairment
Subject to constitutional prohibition; government cannot Relatively free from
limitations, including the expropriate private property, constitutional limitations
Relationship to
prohibition against which under a contract had and is superior to the
Constitution
impairment of the previously bound itself to impairment of contract
obligation of contracts. purchase from the other provision.
contracting party.
[Mamalateo, Reviewer on Taxation 2nd Edition (2008), pp. 11-12]

Page 4 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Despite the natural reluctance to surrender part

D. Theory and Basis of
Taxation
1. Lifeblood theory
Taxes are the lifeblood of the government and so
should be collected without unnecessary
hindrance. It is said that taxes are what we pay for
civilized society. Without taxes, the government
would be paralyzed for lack of the motive power
to activate and operate it [CIR v. Algue, G.R. No.
L-28896 (1988); See also CIR v. Pineda, G.R. No.
L-22734 (1967)].
4. Jurisdiction over subject and objects
2. Necessity theory
The power of taxation proceeds upon 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.
of one's hard earned income to the taxing
authorities, every person who is able to must
contribute his share in the running of the
government. The government for its part is
expected to respond in the form of tangible and
intangible benefits intended to improve the lives
of the people and enhance their moral and
material values. This symbiotic relationship is the
rationale of taxation and should dispel the
erroneous notion that it is an arbitrary method of
exaction by those in the seat of power. [CIR v.
Algue, supra]
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.

The power to tax is an attribute of sovereignty. It

is a power emanating from necessity. It is a
necessary burden to preserve the State's
sovereignty and a means to give the citizenry:
an army to resist an aggression;
a navy to defend its shores from invasion;
a corps of civil servants to serve;
public improvement designed for the
enjoyment of the citizenry and those which
come within the State's territory; and
facilities and protection which a government
is supposed to provide.
[Phil. Guaranty v. CIR, G.R. No. L-22074 (1965)]

The obligation to pay taxes rests upon the

necessity of money for the support of the state.
For this reason, no one is allowed to object to or
resist the payment of taxes solely because no
personal benefit to him can be pointed out.
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)]

3. 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.

Page 5 of 290
U.P. LAW BOC TAXATION I
E.Principles of a Sound Tax
System
1. Fiscal adequacy
The sources of tax revenue should coincide with,
and approximate the needs of, government
expenditures. The revenue should be elastic or
capable of expanding or contracting annually in
response to variations in public expenditures.
2. Administrative feasibility
Tax laws should be capable of convenient, just
and effective administration. Each tax should be:
capable of uniform enforcement by
government officials,
convenient as to the time, place, and manner
of payment, and
not unduly burdensome upon, or
discouraging to business activity.
3. Theoretical justice or equality
The tax burden should be in proportion to the
a pa er abili o pa . Thi i he o-called
ability to pay principle. Taxation should be
uniform as well as equitable
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]
Page 6 of 290
TAXATION LAW
F. Scope and Limitations of
Taxation
1. Inherent Limitations
The following are the inherent limitations of taxation:
a. Public Purpose
b. Inherently Legislative
c. Territorial
d. International Comity
e. Exemption of Government Entities, Agencies,
and Instrumentalities
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.
Test: Whether the statute is designed to promote the
public interest, as opposed to the furtherance of the
advantage of individuals, although each advantage to
individuals might incidentally serve the public. [Pascual
v. Sec. of Public Works, G.R. No. L-10405 (1960)]
The protection and promotion of the sugar industry
is a matter of public concern; the legislature may
determine within reasonable bounds what is necessary
for its protection and expedient for its promotion.
[Lutz v. Araneta, G.R. No. L-7859 (1955)]
The public purpose of a tax may legally exist even if
the motive which impelled the legislature to impose
the tax was to favor one industry over another. [Tio v.
Videogram, G.R. No. L-75697 (1987)]
Tests in Determining Public Purpose:
a. Duty Test Whether the thing to be furthered
by the appropriation of public revenue is
something which is the duty of the State as a
government to provide.
b. Promotion of General Welfare Test Whether
the proceeds of the tax will directly promote the
welfare of the community in equal measure.
c. Character of the Direct Object of the
Expenditure It is the essential character of the
direct object of the expenditure which must
determine its validity as justifying a tax and not
the magnitude of the interests to be affected nor
the degree to which the general advantage of the
community, and thus the public welfare, may be
U.P. LAW BOC TAXATION I
ultimately benefited by their promotion.
Incidental advantage to the public or to the State,
which results from the promotion of private
enterprises or business, does not justify their aid
with public money. [Pascual v. Sec. of Public Works,
supra]
INHERENTLY LEGISLATIVE
Stated in another way, taxation may exceptionally be
delegated, subject to such well-settled limitations as:
a. The delegation shall not contravene any
constitutional provision or the inherent
limitations of taxation;
b. The delegation is effected either by:
the Constitution; or
by validly enacted legislative measures or
statute; and
c. 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. Judge Cooley
enunciates the doctrine in the following oft-quoted
language: "One of the settled maxims in
constitutional law is that the power conferred upon
the legislature to make laws cannot be delegated by
that department to any other body or authority.
Where the sovereign power of the state has located
the authority, there it must remain; and by the
constitutional agency alone the laws must be made
n il he Con i ion i elf i charged. [People v. Vera,
G.R. No. L-45685 (1937)]
Legislature has the power to determine the:
a. Nature (kind),
b. Object (purpose),
c. Extent (rate),
d. Coverage (subjects) and
e. Situs (place) of taxation.
Exceptions
a. Delegation to local governments This
exception is in line with the general principle that
the power to create municipal corporations for
purposes of local self-government carries with it,
by necessary implication, the power to confer the
power to tax on such local governments. (1 Cooley
190). This is logical for after all, municipal
corporations are merely instrumentalities of the
state for the better administration of the
Page 7 of 290
TAXATION LAW
government in respect to matters of local
concern. [Pepsi-Cola Bottling Co. of the Phil. Inc. v.
Mun. of Tanauan, G.R. No. L-31156 (1976)].
Under the new Constitution, however, LGUs are
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]
b. Delegation to the President
1. to enter into Executive agreements; and
2. to ratify treaties which grant tax exemption
subject to Senate concurrence.
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
Constitution]
c. 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.
There are certain aspects of the taxing process
that are not legislative and they may, therefore, be
vested in an administrative body. The powers
which are not legislative include:
1. the power to value property for purposes of
taxation pursuant to fixed rules;
2. the power to assess and collect the taxes; and
3. the power to perform any of the
innumerable details of computation,
appraisement, and adjustment, and the
delegation of such details.
The exercise of the above powers is really not an
exception to the rule as no delegation of the
strictly legislative power to tax is involved.
The powers which cannot be delegated include:
the determination of the subjects to be taxed;
the purpose of the tax, the amount or rate of
the tax;
U.P. LAW BOC TAXATION I
the manner, means, and agencies of
collection; and
the prescribing of the necessary rules with
respect thereto.
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].
Reasons:
a. Tax laws (and this is true of all laws) do not
operate be ond a co n r erri orial limi .
b. Property which is wholly and exclusively within
the jurisdiction of another state receives none of
the protection for which a tax is supposed to be
a compensation.
Note: Where privity of relationship exists. It does
not mean, however, that a person outside of state is
no longer subject to its taxing powers. The
fundamental basis of the right to tax is the capacity of
the government to provide benefits and protection to
the object of the tax. A person may be taxed where
there is between him and the taxing state, a privity of
he rela ion hip j if ing he le . Th , he ci i en
income may be taxed even if he resides abroad as the
personal (as distinguished from territorial) jurisdiction
of his government over him remains. In this case, the
basis of the power to tax is not dependent on the
source of the income nor upon the location of the
property nor upon the residence of the taxpayer but
upon his relation as a citizen to the state. As such
citizen, he is entitled, wherever he may be, inside or
outside of his country, to the protection of his
government.
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.
Reasons:
a. In par in parem non habet imperium. As between
equals there is no sovereign (Doctrine of
Sovereign Equality among states under
international law). One state cannot exercise its
sovereign powers over another.)
b. In international law, a foreign government may
not be sued without its consent. Therefore, it is
Page 8 of 290
TAXATION LAW
useless to impose a tax which could not be
collected.
c. Usage among states that when a foreign sovereign
enters the territorial jurisdiction of another, there
is an implied understanding that the former does
not intend to degrade its dignity by placing itself
under the jurisdiction of the other.
EXEMPTION OF GOVERNMENT
ENTITIES, AGENCIES, AND
INSTRUMENTALITIES
If the taxing authority is the National
Government:
General Rule: Agencies and instrumentalities of the
government are exempt from tax.
Note: Unless otherwise provided by law, the
exemption applies only to government entities
through which the government immediately and
directly exercises its sovereign powers. With respect
to government-owned or controlled corporations
performing proprietary (not governmental) functions,
they are generally subject to tax unless exempted
under Section 27(C) of the Tax Code or, in certain
cases, if there is a tax exemption provisions in their
charters or the law creating them in line with the rule
that a specific law overrides a general law.
Reasons for the exemption:
a. To levy a tax upon public property would render
necessary new taxes on other public property for
the payment of the tax so laid and thus, the
government would be taxing itself to raise money
to pay over for itself.
b. This immunity also rests upon fundamental
principles of government, being necessary in
order that the functions of government shall not
be unduly impeded. [1 Cooley 263.
c. The practical effect of an exemption running to
the benefit of the government is merely to reduce
the amount of money that has to be handled by
the government in the course of its operations:
For these reasons, provisions granting
exemptions to government agencies may be
construed liberally in favor of non-tax
liability of such agencies. [Maceda v. Macaraig,
Jr., G.R. No. 88291 (1991)].
Exception: There is no constitutional prohibition
against the government taxing itself. [Coll. v. Bisaya
Land Transportation, 105 Phil. 338 (1959)].
U.P. LAW BOC
If the taxing authority is a local government unit: RA
7160 expressly prohibits LGUs from levying tax on
the National Government, its agencies and
instrumentalities and other LGUs. [Sec. 133 (o), LGC]
2. Constitutional Limitations
The following are the constitutional limitations of
taxation:
a. Provisions directly affecting taxation:
1. Prohibition against imprisonment for non-
payment of poll tax;
2. Uniformity and equality of taxation;
3. Grant by Congress of authority to the
President to impose tariff rates;
4. Prohibition against taxation of religious,
charitable entities, and educational entities;
5. Prohibition against taxation of non-stock,
non-profit educational institutions;
6. Majority vote of Congress for grant of tax
exemption;
7. Prohibition on use of tax levied for special
purpose;
8. Pre iden e o po er on appropria ion,
revenue, tariff bills;
9. Non-impairment of jurisdiction of the
Supreme Court;
10. Grant of power to the local government
units to create its own sources of revenue;
11. Flexible tariff clause;
12. Exemption from real property taxes; and
13. No appropriation or use of public money for
religious purposes.
b. Provisions indirectly affecting taxation:
1. Prohibition against imprisonment for non-
payment of poll tax;
2. Equal protection;
3. Religious freedom; and
4. Non-impairment of obligations of contracts
a. PROVISIONS DIRECTLY
AFFECTING TAXATION
1. Prohibition against imprisonment for
non-payment of poll tax
No person shall be imprisoned for debt or non-
payment of a poll tax. [Art. III, Sec. 20, 1987
Constitution]
Page 9 of 290
TAXATION I TAXATION LAW
2. Uniformity and equality of taxation
The rule of taxation shall be uniform and
equitable. Congress shall evolve a progressive
system of taxation. [Art. VI, Sec. 28(1), 1987
Constitution]
a. Uniformity All taxable articles or
properties of the same class shall be taxed at
the same rate. [City of Baguio v. De Leon, G.R.
No. L-24756 (1968)]
1. Uniformity of operation throughout
tax unit The rule requires the uniform
application and operation, without
discrimination, of the tax in every place
where the subject of it is found. This
means, for example, that a tax for a
national purpose must be uniform and
equal throughout the country and a tax
for a province, city, municipality, or
barangay must be uniform and equal
throughout the province, city,
municipality or barangay.
2. Equality in burden Uniformity
implies equality in burden, not equality
in amount or equality in its strict and
literal meaning. The reason is simple
enough. If legislation imposes a single
tax upon all persons, properties, or
transactions, an inequality would
obviously result considering that not all
persons, properties, and transactions are
identical or similarly situated. Neither
does uniformity demand that taxes shall
be proportional to the relative value or
amount of the subject thereof. Taxes
may be progressive.
b. Equity
1. Uniformity in taxation is effected
through the apportionment of the tax
burden among the taxpayers which
under the Constitution must be
eq i able. Eq i able means fair, just,
reasonable and proportionate to the
a pa er abili o pa . Ta a ion ma
be uniform but inequitable where the
amount of the tax imposed is excessive
or unreasonable.
2. The constitutional requirement of
equity in taxation also implies an
approach which employs a reasonable
classification of the entities or
individuals who are to be affected by a
U.P. LAW BOC TAXATION I
a . Where he a differen ia ion i no
based on material or substantial
difference , he g aran ee of eq al
protection of the laws and the
uniformity rule will likewise be
infringed.
Taxation does not require identity or equality
under all circumstances, or negate the authority
to classify the objects of taxation.
Test of Valid Classification: Classification, to be
valid, must be reasonable and this requirement is not
deemed satisfied unless:
a. It is based upon substantial distinctions which make
real differences;
b. These are germane to the purpose of the
legislation or ordinance;
c. The classification applies not only to present
conditions but also to future conditions
substantially identical to those of the present; and
d. The classification applies equally to all those who
belong to the same class. [Pepsi-Cola v. Butuan City,
G.R. No. L-22814 (1968)]
The progressive system of taxation would place
stress on direct rather than indirect taxes, on non-
essentiality rather than essentiality to the taxpayer of
he objec of a a ion, or on he a pa er abili o
pay. Example is that individual income tax system that
imposes rates progressing upwards as the tax base
( a pa er a able income) increa e . A progre i e
tax, however, must not be confused with a
progressive system of taxation.
While equal protection refers more to like treatment
of persons in like circumstances, uniformity and
equity refer to the proper relative treatment for tax
purposes of persons in unlike circumstances.
3. Grant by Congress of authority to the
President to impose tariff rates
Delegation of Tariff powers to the President under
the flexible tariff clause [Sec. 28(2), Art. VI, 1987
Constitution], which authorizes the President to
modify import duties. [Sec. 1608, Customs
Modernization and Tariff Act]
Page 10 of 290
TAXATION LAW
4. Prohibition against taxation of
religious, charitable entities, and
educational entities
Art. VI, Sec. 28(3), 1987 Constitution:
a. Charitable institutions, churches and personages
or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and
improvements,
b. Actually, directly, and exclusively used for
religious, charitable, or educational purposes
shall be exempt from taxation.
c. The tax exemption under this constitutional
provision covers property taxes only and not other
taxes [Lladoc v. Commissioner, G.R. No. L-19201
(1965)].
d. In general, special assessments are not covered by
the exemption because by nature they are not
classified as taxes. [Apostolic Prefect v. City Treasurer
of Baguio, G.R. No. L-47252 (1941)]
To be entitled to the exemption, the petitioner
must prove that:
a. It is a charitable institution
b. Its real properties are actually, directly and exclusively
used for charitable purposes.
Revenue or income from trade, business or other
activity, the conduct of which is not related to the
exercise or performance of religious, educational and
charitable purposes or functions shall be subject to
internal revenue taxes when the same is not actually,
directly or exclusively used for the intended purposes.
[BIR Ruling 046-2000]
Test of Use of the property, and not the
Exemption ownership
Actual, direct and exclusive use
Nature of
for religious, charitable or
Use
educational purposes.
Real property taxes on facilities
which are actual, incidental to,
or
reasonably necessary for the
accomplishment of said
purposes such as in the case of
Scope of
hospitals, a school for training
Exemption
nurses, a n r e home, proper
to provide housing facilities for
interns, resident doctors and
other members of the hospital
staff, and recreational facilities
for student nurses, interns and
U.P. LAW BOC TAXATION I
residents, such as athletic fields.
[Abra Valley College v. Aquino,
G.R. No. L-39086 (1988)]
TEST: Whether an enterprise is charitable or not:
Whether it exists to carry out a purpose
recognized in law as charitable; or
Whether it is maintained for gain, profit, or
private advantage.
A charitable institution does not lose its character as
such and its exemption from taxes simply because it
derives income from paying patients, whether out-
patient, or confined in the hospital, or receives
subsidies from the government, so long as the money
received is devoted or used altogether to the
charitable object which it is intended to achieve; and
no money inures to the private benefit of the persons
managing or operating the institution (including
honoraria to members of the board of trustees; BIR
Ruling No. 558-18, among others).
E " possessed and enjoyed to the
exclusion of others; debarred from participation or
enjoyment;
"Exclusively" - in a manner to exclude; as enjoying
a pri ilege e cl i el .
If real property is used for one or more commercial
purposes, it is not exclusively used for the exempted
purposes but is subject to taxation. The words
"dominant use" or "principal use" cannot be
substituted for the words "used exclusively" without
doing violence to the Constitution and the law. Solely
is synonymous with exclusively. [Lung Center of the
Philippines v. Quezon City, G.R. No. 144104 (2004)]
Note: Lung Center did not necessarily overturn the
case of Abra Valley College v. Aquino, G.R. No. L-39086
(1988). Lung Center just provided a stricter
interpretation. In Abra Valley, the Court held: The
primary use of the school lot and building is the basic
and controlling guide, norm and standard to
determine tax exemption, and not the mere incidental
use thereof. Under the 1935 Constitution, the trial
court correctly held that the school building as well as
the lot where it is built, should be taxed, not because
the second floor of the same is being used by the
Director and his family for residential purposes
(incidental to its educational purpose), but because
the first floor thereof is being used for commercial
purposes. However, since only a portion is used for
Page 11 of 290
TAXATION LAW
purposes of commerce, it is only fair that half of the
assessed tax be returned to the school involved.
5. Prohibition against taxation of non-
stock, non-profit educational
institutions
Art. XIV, Sec. 4, 1987 Constitution
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties.
Proprietary educational institutions, including
those cooperatively owned, may likewise be
entitled to such exemptions subject to the
limitations provided by law, including restrictions
on dividends and provisions for reinvestment.
Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used
actually, directly, and exclusively for educational
purposes shall be exempt from tax.
This provision covers only non-stock, non-profit
educational institutions.
The exemption covers c e, e ,a dd a e,
custom duties, and other taxes imposed by either or both
the national government or political subdivisions on
all revenues, assets, property or donations, used
actually, directly and exclusively for educational
purposes. (In the case of religious and charitable
entities and non-profit cemeteries, the exemption is
limited to property tax.)
The exemption does not cover revenues derived
from, or assets used in, unrelated activities or
enterprise.
Similar tax exemptions may be extended to
proprietary (for profit) educational institutions by law
subject to such limitations as it may provide, including
restrictions on dividends and provisions for
reinvestment. The restrictions are designed to ensure
that the tax-exemption benefits are used for
educational purposes.
Lands, buildings, and improvements actually, directly
and exclusively used for educational purposes are
exempt from property tax [Sec. 28(3), Art. VI, 1987
Constitution], whether the educational institution is
proprietary or non-profit.
U.P. LAW BOC TAXATION I TAXATION LAW

c. Tax refunds
Art. XIV, Sec. 4,
Art. VI, Sec. 28, par. 3
par. 3 Note:
Charitable institutions, Non-stock, non-profit a. Local government units may, through ordinances
churches and educational duly approved, grant tax exemptions, incentives
parsonages or convents institutions. or reliefs under such terms and conditions as they
appurtenant thereto, may deem necessary. [Sec. 192, LGC]
mosques, non-profit b. The President of the Philippines may, when
cemeteries, and all lands, public interest so requires, condone or reduce the
buildings, and real property tax and interest for any year in any
improvements, actually, province or city or a municipality within the
directly, and exclusively Metropolitan Manila Area. [Sec. 277, LGC]
used for religious,
charitable, or 7. Prohibition on use of tax levied for
educational purposes. special purpose
Property taxes Income, property, and
donor a e and All money collected on any tax levied for a special
custom duties. purpose shall be treated as a special fund and paid out
for such purpose only.
6. Majority vote of Congress for grant of
tax exemption If the purpose for which a special fund was created
has been fulfilled or abandoned, the balance, if any,
Art. VI, Sec. 28, 1987 Constitution. No law shall be transferred to the general funds of the
granting any tax exemption shall be passed without Government. [Gaston v. Republic Planters Bank, G.R.
the concurrence of a majority of all the Members No. L-77194 (1988)].
of the Congress.
8. P on
Basis: The inherent power of the state to impose appropriation, revenue, tariff bills
taxes carries with it the power to grant tax
exemptions. Art. VI, Sec. 27(2), 1987 Constitution. The
President shall have the power to veto any
Exemptions may be created by: particular item or items in an appropriation,
a. The Constitution, or revenue, or tariff bill, but the veto shall not affect
b. Statutes, subject to constitutional limitations the item or times to which he does not object.

Vote required for the grant of exemption: 9. Non-impairment of jurisdiction of the

Absolute majority of the members of Congress (at
least ½ + 1 of ALL the members voting
SEPARATELY)
Vote required for withdrawal of such grant of
exemption: Relative majority is sufficient
(MAJORITY of the QUORUM).
The provision guaranteeing equal protection of the
laws and that mandating the rule of taxation shall be
uniform and equitable likewise limit, although not
expressly, the legislative power to grant tax
exemption.
Grants in the nature of tax exemptions:
a. Tax amnesties
b. Tax condonations
Supreme Court
Art VIII, Sec. 2, 1987 Constitution. The
Congress shall have the power to define, prescribe,
and apportion the jurisdiction of the various courts
but may not deprive the Supreme Court of its
jurisdiction over cases enumerated in Section 5
hereof.
Art. VIII, Sec. 5(2(b)), 1987 Constitution. The
Supreme Court shall have the following powers:
xxx
(2) Review, revise, modify or affirm on appeal or
certiorari, as the laws or the Rules of Court may
provide, final judgments and orders of lower
courts in xxx

Page 12 of 290
U.P. LAW BOC TAXATION I
(b) all cases involving the legality of any tax,
impost, assessment or toll or any penalty imposed
in relation thereto.
Even the legislative body cannot deprive the SC of its
appellate jurisdiction over all cases coming from
inferior courts where the constitutionality or validity
of an ordinance or the legality of any tax, impost,
assessment, or toll is in question. [San Miguel Corp v.
Avelino, G.R. No. L-39699 (1979)]
Art. VI, Sec. 30, 1987 Constitution. No law shall
be passed increasing the appellate jurisdiction of the
Supreme Court without its advice and
concurrence.
Scope of Judicial Review in taxation: limited only
to the interpretation and application of tax laws. Its
power does not include inquiry into the policy of
legislation. Neither can it legitimately question or
refuse to sanction the provisions of any law consistent
with the Constitution. [Coll. v. Bisaya Land
Transportation, 105 Phil. 338 (1959)].
10. Grant of power to the local
government units to create its own
sources of revenue
LGUs have 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]
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. 1608 of the CMTA 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.
Charitable institutions, churches and personages
or convents appurtenant thereto, mosques, non-
profit cemeteries, and all lands, buildings, and
improvements, actually, directly, and exclusively
Page 13 of 290
TAXATION LAW
used for religious, charitable, or educational
purposes shall be exempt from taxation.
13. No appropriation or use of public
money for religious purposes
Art. VI, Sec. 29, 1987 Constitution
1. No money shall be paid out of the Treasury
except in pursuance of an appropriation
made by law.
2. No public money or property shall be
appropriated, applied, paid, or employed,
directly or indirectly, for the use, benefit, or
support of any sect, church, denomination,
sectarian institution, or system of religion, or
of any priest, preacher, minister, other
religious teacher, or dignitary as such, except
when such priest, preacher, minister, or
dignitary is assigned to the armed forces, or
to any penal institution, or government
orphanage or leprosarium.
3. 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. If
the purpose for which a special fund was
created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the
general funds of the Government
b. PROVISIONS INDIRECTLY
AFFECTING TAXATION
1. Due process
Art. III, Sec. 1, 1987 Constitution. No person
shall be deprived of life, liberty, or property
without due process of law, nor shall any person
be denied the equal protection of the laws.
Substantive Due Process An act is done under the
authority of a valid law or the Constitution itself.
Procedural Due Process An act is done after
compliance with fair and reasonable methods or
procedure prescribed by law.
Due Process in Taxation requirements:
a. Public purpose
b. Imposed i hin a ing a hori erri orial
jurisdiction
c. Assessment or collection is not arbitrary or
oppressive
U.P. LAW BOC TAXATION I
The due process clause may be invoked where a
taxing statute is so arbitrary that it finds no support in
the Constitution, as where it can be shown to amount
to the confiscation of property. [Sison v. Ancheta, G.R.
No. L-59431(1984)]
Instances of violations of the due process clause:
a. If the tax amounts to confiscation of property;
b. If the subject of confiscation is outside the
jurisdiction of the taxing authority;
c. If the tax is imposed for a purpose other than a
public purpose;
d. If the law which is applied retroactively imposes
just and oppressive taxes.
e. If the law violates the inherent limitations on
taxation.
2. Equal protection
Art. III, Sec. 1, 1987 Constitution. No person shall
be deprived of life, liberty, or property without due
process of law, nor shall any person be denied the
equal protection of the laws.
All persons subject to legislation shall be treated alike
under similar circumstances and conditions both in
the privileges conferred and liabilities imposed. [1
Cooley 824-825; See Sison v. Ancheta, supra].
The doctrine does not require that persons or
properties different in fact be treated in laws as
though they were the same. Indeed, to treat them the
same or alike may offend the Constitution. What the
Constitution prohibits is class legislation which
discriminates against some and favors others. As long
as there are rational or reasonable grounds for so
doing, Congress may, therefore, group the persons or
proper ie o be a ed and i i fficien if all of he
same class are subject to the same rate and the tax is
admini ered impar iall pon hem. [1 Cooley 608].
The equal protection clause is subject to reasonable
classification (See requisites for valid classification,
supra).
3. Religious freedom
Art. III, Sec. 5, 1987 Constitution. No law shall
be made respecting an establishment of religion, or
prohibiting the free exercise thereof. (Non-
establishment clause)
The free exercise and enjoyment of religious
profession and worship, without discrimination or
Page 14 of 290
TAXATION LAW
preference, shall forever be allowed. (Free exercise
clause)
No religious test shall be required for the exercise
of civil and political rights.
The free exercise clause is the basis of tax exemptions.
The imposition of license fees on the distribution and
sale of bibles and other religious literature by a non-
stock, non-profit missionary organization not for
purposes of profit amounts to a condition or permit
for the exercise of their right, thus violating the
constitutional guarantee of the free exercise and
enjoyment of religious profession and worship which
carries with it the right to disseminate religious beliefs
and information. [American Bible Society v. City of
Manila, G.R. No. L-9637 (1957)] It is actually in the
nature of a condition or permit for the exercise of the
right. This is different from a tax in the income of one
who engages in religious activities or a tax on property
used or employed in connection with those activities.
It is one thing to impose a tax on the income or
property of a preacher. It is quite another thing to
exact a tax for the privilege of delivering a sermon.
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, G.R. No. 115455
(1994)]
4. Non-impairment of obligations of
contracts
Art. III, Sec. 10, 1987 Constitution. No law
impairing the obligation of contracts shall be
passed.
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, supra]
U.P. LAW BOC TAXATION I TAXATION LAW

G.Situs of Taxation situs in another

jurisdiction; or
When the law provides
Meaning: Situs of taxation literally means the place of for the situs of the
taxation. subject of tax (e.g., Sec
The state where the subject to be taxed has a situs 104, NIRC)
may rightfully levy and collect the tax; and
The situs is necessarily in the state which has Situs of Excise Tax
jurisdiction or which exercises dominion over the Kind of Excise Tax Situs
subject in question. Within the territorial Source of the income,
jurisdiction, the taxing authority may determine nationality or residence
the situs. Income Tax
of taxpayer (Sec. 23,
NIRC)
Factors that Determine Situs: Location of property;
1. Nature of the tax; D Ta nationality or residence
2. Subject matter of the tax (person, property, act or of taxpayer
activity);
Location of property;
3. Possible protection and benefit that may accrue
Estate Tax nationality or residence
both to the government and the taxpayer;
of taxpayer
4. Citizenship of the taxpayer;
5. Residence of the taxpayer;
6. Source of income. Situs of Business Tax
Kind of Business Tax Situs
Situs of Income Tax Where transaction is
VAT
Taxpayer Source of Income made
Citizen- Within Outside Where the real
Residency Sale of Real Property
ship PH. PH. property is located
Filipino Resident Taxable Taxable Sale of Personal Where the personal
Non- Non- Property property was sold
Filipino Taxable
Resident Taxable
Non-
Alien Resident Taxable
Taxable
Non- Non-
Alien Taxable
Resident Taxable

Situs of Property Tax

Kind of Property Situs
Where it is located (lex
Real property
rei sitae)
Where property is
Tangible Personal physically located
property although the owner
resides in another
jurisdiction.
Intangible personal General Rule: Domicile
property (e.g., of the owner. Mobilia
credits, bills sequuntur personam
receivables, bank (movables follow the
deposits, bonds, person)
promissory notes,
mortgage loans, Exceptions:
judgments and When property has
corporate stocks) acquired a business

Page 15 of 290
U.P. LAW BOC TAXATION I
H. Stages or Aspects of
Taxation
The exercise of taxation involves the following stages:
1. Legislative Act: Levy or imposition This
process involves the passage of tax laws or
ordinances through the legislature. The tax laws
to be passed shall determine:
a. Those to be taxed (person, property or
rights);
b. How much is to be collected (the rate and
the base of tax); and
c. How taxes are to be implemented (the
manner of imposing and collecting tax).
It also involves the granting of tax exemptions,
tax amnesties or tax condonation.
2. Executive Act: 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. Ta a A : Pa this process
involves the act of compliance by the taxpayer in
contributing his share to pay the expenses of the
government. Payment of tax also includes the
options, schemes or remedies as may be legally
open or available to the taxpayer.
4. Ta a a E tive Act: Refund A
claim for refund must first be filed with the
Commissioner of Internal Revenue. A suit or
proceeding may be filed within two years from
the date of payment of the tax or penalty regardless
of any supervening cause that may arise after payment.
The Commissioner may, even without a written
claim therefor, refund or credit any tax, where on
the face of the return, such payment appears
clearly to have been erroneously paid. [Sec. 229,
NIRC]
Page 16 of 290
TAXATION LAW
I. Definition, Nature and
Characteristics of Taxes
TAXES
1. 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.
2. Are the enforced proportional and pecuniary
contributions from persons and property levied
by the law-making body of the state having
jurisdiction over the subject of the burden for the
support of the government and public needs.
3. Are what we pay for civilized society. Without
taxes, the government would be paralyzed for
lack of the motive power to activate and operate
it. [CIR v. Algue, supra]
ESSENTIAL CHARACTERISTICS
1. It is a forced charge, imposition or contribution.
As such, it operates ad infinitum.
2. It is assessed in accordance with some reasonable
rule of apportionment which means that
conformably with the constitutional mandate for
Congress to evolve a progressive tax system,
a e m be ba ed on a pa er abili o pa
[Art VI, Sec 28[a], 1987 Constitution]
3. It is a pecuniary burden payable in money.
4. It is imposed by the State on persons, property,
or exercise within its jurisdiction, in accordance
with the principle of territoriality.
5. It is levied by the legislative body of the State.
6. It is levied for a public purpose.
7. It is personal to the taxpayer.
U.P. LAW BOC TAXATION I TAXATION LAW

J. Requisites of a Valid Tax K. Tax as Distinguished

1. For a public purpose; from Other Forms of
2. Rule of taxation should be uniform;
3. The person or property taxed is within the
Exactions
jurisdiction of the taxing authority; Tariff
4. Assessment and collection is in consonance with
Taxes Tariff
the due process clause; AND
All embracing term to A kind of tax imposed
5. The tax must not infringe on the inherent and
include various kinds of on articles which are
constitutional limitations of the power of
enforced contributions traded internationally
taxation.
upon persons for the
attainment of public
purposes

Toll
Taxes Toll
Paid for the support of Paid for the use of
the government ano her proper .
Demand of sovereignty Demand of
proprietorship
Generally, no limit on Amount paid depends
the amount collected as upon the cost of
long as it is not construction or
excessive, unreasonable maintenance of the
or confiscatory public improvement
used.
Imposed only by the Imposed by the
government government or by
private individuals or
entities.
A toll is a sum of money for the use of something,
generally applied to the consideration which is paid
for the use of a road, bridge or the like, of a public
nature. [1 Cooley 77]

The view has been expressed, however, that the taking

of tolls is only another method of taxing the public
for the cost of the construction and repair of the
improvement for the use of which the toll is charged.
[71 Am. Jur. 2d 351.]

License fee
License and
Taxes
Regulatory Fee
Imposed under the Levied under the police
taxing power of the power of the state.
state for purposes of
revenue.
Forced contributions Exacted primarily to
for the purpose of regulate certain
maintaining government businesses or
functions. occupations.

Page 17 of 290
U.P. LAW BOC
Generally unlimited as Should not
to amount unreasonably exceed the
expenses of issuing the
license and of
supervision.
Imposed on persons, Imposed only on the
property and the right to right to exercise a
exercise a privilege. privilege
Failure to pay does not Failure to pay makes the
necessarily make the act act or business illegal.
or business illegal.
Penalty for non-
payment:
Surcharges; or
Imprisonment (except
poll tax).
License or permit fee is a charge imposed under the
police power for purposes of regulation.
License is in the nature of a special privilege, of a
permission or authority to do what is within its terms.
It makes lawful an act which would otherwise be
unlawful. A license granted by the State is always
revocable. [Gonzalo Sy Trading vs. Central Bank of the
Phil., G.R. No. L-41480 (1976)]
Importance of the distinctions
1. It is necessary to determine whether a particular
imposition is a tax or a license fee because some
limitations apply only to one and not to the other, and for
the reason that exemption from taxes may not
include exemption from license fee.
2. The power to regulate as an exercise of police
power does not include the power to impose fees
for revenue purposes. The amount of tax bears
no relation at all to the probable cost of
regulating the activity, occupation, or property
being taxed. [Progressive Development Corp. vs.
Quezon City, G.R. No. L-36081 (1989)]
3. An exaction, however, may be considered both a
tax and a license fee. This is true in the case of car
registration fees which may be regarded as taxes
even as they also serve as an instrument of
regulation. If the purpose is primarily revenue, or
if revenue, is, at least, one of the real and
substantial purposes, then the exaction is
properly called a tax. [Phil. Airlines, Inc. vs. Edu,
G.R. No. L- 41383 (1988)]
4. But it is possible that a tax may only have a
regulatory purpose. The general rule, however, is
that the imposition is a tax if its primary purpose
is to generate revenue, and regulation is merely
incidental; but if regulation is the primary
Page 18 of 290
TAXATION I TAXATION LAW
purpose, the fact that incidentally revenue is also
obtained does not make the imposition a tax.
[Progressive Development Corp. vs. Quezon City, supra]
Primary purpose test (as seen in Progressive
Development Corp v. QC, supra):
1. Imposition must relate to an occupation or
activity that so engages the public interest in
health, morals, safety and development as to
require regulation for the protection and
promotion of such public interest;
2. Imposition must bear a reasonable relation to the
probable expenses of regulation, taking into
account not only the costs of direct regulation
but also its incidental consequences as well.
Note: Taxes may also be imposed for regulatory
purposes. It is called regulatory tax.
Fees may be properly regarded as taxes even though
they also served as an instrument of regulation. If the
purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the
exaction is properly called a tax. [PAL v. Edu, supra]
Special assessment
Taxes Special Assessment
Levied not only on land Levied only on land
Imposed regardless of Imposed because of an
public improvements increase in value of land
benefited by public
improvement
Contribution of a Contribution of a
taxpayer for the support person for the
of the government construction of a public
improvement
It has general Exceptional both as to
application both as to time and locality
time and place
A special assessment is not a personal liability of the
person assessed, i.e., his liability is limited only to the
land involved. It is based wholly on benefits (not
necessity).
A charge imposed only on property owners benefited
is a special assessment rather than a tax
notwithstanding that the statute calls it a tax. The rule
is that an exemption from taxation does not include
exemption from special assessment. But the power to
tax carries with it the power to levy a special
assessment.
U.P. LAW BOC TAXATION I TAXATION LAW

Note: The term "special levy" is the name used in the

present Local Government Code (RA. No. 7160). A
L. Kinds of Taxes
province, city, or municipality, or the National
Government, may impose a special levy on lands 1. As to object
especially benefited by public works or improvements a. Personal, Poll or Capitation Tax tax of
financed by it. [Sec. 240, RA 7160] a fixed amount imposed on persons
residing within a specified territory, whether
Debt citizens or not, without regard to their
Taxes Debt property or the occupation or business in
Based on laws Generally based on which they may be engaged (e.g. community
contract, express or (formerly residence) tax). Taxes of a
implied. specified amount imposed upon each person
Generally cannot be Assignable performing a certain act or engaging in a
assigned certain business or profession are not,
Generally paid in money May be paid in kind however, poll taxes. [71 Am. Jur. 2d 357]
Cannot be a subject of Can be a subject of set b. Property Tax tax imposed on property,
set off or compensation off or compensation real or personal, in proportion to its value
(see Art. 1279, Civil or in accordance with some other reasonable
Code) method of apportionment (e.g., real estate
Imprisonment is a A person cannot be tax). The obligation to pay the tax is
sanction for non- imprisoned for non- absolute and unavoidable and is not based
payment of tax, except payment of debt (except upon the voluntary action of the person
poll tax when it arises from a assessed.
crime) c. Privilege/Excise Tax any tax which does
Governed by the special Governed by the not fall within the classification of a poll tax
prescriptive periods ordinary periods of or a property tax. Thus, it is said that an
provided for in the prescription excise tax is a charge imposed upon:
NIRC the performance of an act,
Does not draw interest Draws interest when it the enjoyment of a privilege, or
except only when is so stipulated or where the engagement in an occupation,
delinquent there is default profession, or business.
Imposed only by public Can be imposed by
authority private individual The obligation to pay the tax is based on the voluntary
action of the person taxed in performing the act or
A tax is not a debt in the ordinary sense of the word. engaging in the activity which is subject to the excise.
The erm e ci e a i non mo i h pri ilege
Penalty a and he o are of en ed in erchangeabl (e.g.,
Taxes Penalty income tax, val e added a , e a e a , donor a ).
Violation of tax laws Any sanction imposed
may give rise to as a punishment for 2. As to burden or incidence
imposition of penalty violation of law or acts
a. Direct Taxes taxes which are demanded
deemed injurious
from persons who also shoulder them;
Generally intended to Designed to regulate
taxes for which the taxpayer is directly or
raise revenue conduct
primarily liable, or which he cannot shift to
May be imposed only by May be imposed by the
another (e.g., income a , e a e a , donor
the government government or private
tax, community tax)
individuals or entities
b. Indirect Taxes taxes which are demanded
Cannot be a subject of Can be a subject of set from one person in the expectation and
set off or compensation off or compensation (see intention that he shall indemnify himself at
Art. 1279, Civil Code) 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

Page 19 of 290
U.P. LAW BOC TAXATION I
consumers who ultimately pay for them not
as taxes but as part of the purchase price.
Thus, the person who absorbs or bears the
burden of the tax is other than the one on
whom it is imposed and required by law to
pay the tax. Practically all business taxes are
indirect (e.g., VAT, percentage tax, excise
taxes on specified goods, customs duties).
3. As to tax rates
a. Specific Tax a tax of a fixed amount
imposed by the head or number or by some
other standard of weight or measurement. It
requires no assessment (valuation) other than the
listing or classification of the objects to be
taxed (e.g., taxes on distilled spirits, wines,
and fermented liquors; cigars and cigarettes)
b. Ad Valorem Tax a tax of a fixed proportion
of the value of the property with respect to which
the tax is assessed. It requires the
intervention of assessors or appraisers to
estimate the value of such property before
the amount due from each taxpayer can be
de ermined. The phra e ad valorem mean
li erall , according o al e. (e.g., real
estate tax, excise tax on automobiles, non-
essential goods such as jewelry and
perfumes, customs duties (except on
cinematographic films)).
c. Mixed
4. As to purpose
a. General or Fiscal Tax levied for the
general or ordinary purposes of the
Government, i.e., to raise revenue for
governmental needs (e.g., income tax, VAT,
and almost all taxes).
b. Special/Regulatory/Sumptuary Tax
levied for special purposes, i.e., to achieve some
social or economic ends irrespective of
whether revenue is actually raised or not
(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).
Tariff duties intended mainly as a source of
revenue are relatively low so as not to
discourage imports.
5.
Page 20 of 290
TAXATION LAW
5. As to scope (or authority
imposing the tax)
a. National taxes imposed by the national
government (e.g., national internal revenue
taxes, customs duties, and national taxes
imposed by laws).
b. Municipal or Local taxes imposed by
local governments (e.g., business taxes that
may be imposed under the Local
Government Code, professional tax).
6. As to graduation
a. Progressive The rate of tax increases as
the tax base or bracket increases, e.g., income
a , e a e a , donor a .
b. Regressive The rate of tax decreases as
the tax base or bracket increases. There is no
regressive tax in the Philippines.
c. Proportionate The rate of tax is based on
a fixed percentage of the amount of the
property, receipts or other basis to be taxed,
e.g., real estate tax, VAT, and other
percentage taxes.
d. 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.
Regressive/Progressive system of taxation
A regressive tax must not be confused with the
regressive system of taxation.
In a society where the majority of the people have low
incomes, regressive taxation system exists when
there are more indirect taxes imposed than direct
taxes. Since the low-income sector of the population
as a whole buy more consumption goods on which
the indirect taxes are collected, the burden of indirect
taxes rests more on them than on the more affluent
groups.
A progressive tax is, therefore, also different from a
progressive system of taxation.
U.P. LAW BOC TAXATION I
M. Sources of Tax Laws
1. Constitution of the
Philippines
A constitutional provision regarding taxation is
primarily intended to limit and regulate the exercise of
taxation power. The State can exercise the power to
tax even if the Constitution is completely silent about
taxation.
2. Statutes
The present tax statutes of the Philippines are
embodied in R.A. 8424, which is the prevailing
National Internal Revenue Code (NIRC) effective
January 1, 1998, which was amended per R.A. 9337
(The VAT Reform Law) and R.A. 10963 (TRAIN
Law), among others.
3. Judicial Decisions
These refer to the decisions for application made
concerning tax issues by the proper courts
exercising judicial authority of competent jurisdiction.
These courts may be the Supreme Court and the
Court of Tax Appeals. Their decisions on tax laws
comprise the greater portion of tax jurisprudence.
They form part of the legal system of the Philippines.
By the nature of its jurisdiction, the decisions of the
Court of Tax Appeals are still appealable to the
Supreme Court. The decision of the Supreme Court
on any matter is final and executory.
4. Executive Orders
Executive Orders are regulations issued by the
President or some administrative authority under his
direction for the purpose of interpreting,
implementing, or giving administrative effect to a
provision of the Constitution or of some law or treaty.
5. Tax Treaties and
Conventions
These refer to the treaties or international agreements
with foreign countries regarding tax enforcement and
exemptions. They have the force and effect of law.
Page 21 of 290
TAXATION LAW
6. Revenue Regulations by the
Department of Finance
Revenue Regulations are rules or orders having force
of law issued by executive authority of the
government to ensure uniform application of the tax
law.
In order that administrative regulations may be
considered valid, all of the following requisites must
be complied with:
The regulations must be useful, practical and
necessary for the enforcement of the law;
They must be reasonable in their provisions;
They must not be contrary to law; and
They must be duly published in the Official
Gazette. [Interprovincial Auto Bus Co. v. Collector,
G.R. No. L-6741 (1956); Lim Hoa Ting v. Central
Bank, G.R. No. L-10666 (1958)]
Note: Ruling of the Secretary of Finance are not
binding on the courts because the duty or power of
interpreting laws is primarily a function of the
judiciary.
The Courts generally respect the interpretations made
by the executive officer whose duty is to enforce the
law. However, such interpretations are not conclusive
and shall be disregarded if found erroneous by the
Court. [Molina v. Rafferty, 37 Phil 545]
The Secretary of Finance is vested with authority to
revoke, repeal or abrogate acts or previous rulings of
his predecessors in office because these are not
binding on their successors. [Hilado v. Collector, G.R.
No. L-9408 (1956)]
7. BIR Revenue Memorandum
Circulars and Bureau of
Customs Memorandum
Orders
These are administrative rulings or opinions which are
less general interpretations of tax laws being issued
from time to time by the Commissioner of the
Internal Revenue or Commissioner of the Bureau of
Customs, as the case may be. They are primarily
intended to maintain uniform application of tax laws
within the department or area of authority.
U.P. LAW BOC TAXATION I
Memoranda have the status of advisory or sort of
information service. For this reason, they can be
reversed anytime.
Note: The Courts generally respect the interpretations
made by the executive officer whose duty is to enforce
the law. However, such interpretations are not
conclusive and shall be disregarded if found
erroneous by the Court. [Molina v. Rafferty, 37 Phil 545]
8. BIR Rulings
BIR Rulings are expressed official interpretations of
the tax laws as applied to specific transactions. Unlike
a Revenue Regulation, it is more limited in
application.
BIR Rulings are not the final interpretations of the
tax laws. They are considered the best opinion or
advisory at the moment and are considered sound law
until changed by the court. [CIR v. Ledesma, (1970)]
9. Local Tax Ordinances
These are tax ordinances issued by the province, city,
municipality and barangay subject to such limitations
as provided by the Local Government Code. [Valencia
and Roxas]
Page 22 of 290
TAXATION LAW
N. Construction and
Interpretation
1. 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, G.R. No. L-
30264 (1929)].
No person or property is subject to taxation unless
within the terms or plain import of a taxing statute.
[see72 Am. Jur. 2d 44]
Taxes, being burdens, they are not to be presumed
beyond what the statute expressly and clearly declares.
[Coll. v. La Tondena, G.R. No. L-10431 (1962)]. Thus,
a a pa able b indi id al doe no appl o
corpora ion .
Tax statutes offering rewards are liberally construed
in favor of informers. [Penid v. Virata, G.R. No. L-
44004 (1983)].
Exceptions:
a. 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. E.g. Word indi id al a
changed b he la o per on . Thi clearl
indicates that the tax applies to both natural and
juridical persons, unless otherwise expressly
provided.
b. The rule does not apply where the taxpayer
claims exemption from the tax.
Tax statutes are to receive a reasonable construction
or interpretation with a view to carrying out their purpose
and intent. They should not be construed as to permit
the taxpayer easily to evade the payment of tax.
[Carbon Steel Co. v. Lewellyn, 251 U.S. 201]. Thus, the
good faith of the taxpayer is not a sufficient
justification for exemption from the payment of
surcharges imposed by the law for failing to pay tax
within the period required by law.
U.P. LAW BOC TAXATION I TAXATION LAW

2. Tax Exemption and 3. Tax Rules and Regulations

Exclusion General Rule: The Secretary of Finance, upon
recommendation of the CIR, shall promulgate all
Tax exemptions must be shown to exist clearly and
needful rules and regulations for the effective
categorically, and supported by clear legal
enforcement of the provisions of the NIRC. [Sec.
provisions. [NPC v. Albay, G.R. No. 87479 (1990)]
244, NIRC]
General Rule: In the construction of tax statutes,
It is an elementary rule in administrative law that
exemptions are not favored and are construed
administrative regulations and policies enacted by
strictissimi juris against the taxpayer. [Republic Flour Mills
administrative bodies to interpret the law which they
v. Comm. & CTA, G.R. No. L-25602 (1970)]
are entrusted to enforce have the force of law and
a. NPC v. Albay [supra]: Tax exemptions must be
entitled to great respect. They have in their favor a
shown to exist clearly and categorically, and
presumption of legality [Gonzales v. Land Bank, G.R.
supported by clear legal provisions.
No. 76759 (1990)]
b. Floro Cement v. Gorospe [supra]: Claims for an
exemption must be able to point out some
Requisites for validity and effectivity of
provision of law creating the right, and cannot
regulations
be allowed to exist upon a mere vague
a. Reasonable;
implication or inference.
b. Within the authority conferred;
c. CIR v. CA [supra]: Refunds are in the nature of
c. Not contrary to law and the Constitution [Art. 7,
exemption and must be construed strictly
NCC]; and
against the grantee/taxpayer.
d. Must be published.
d. Comm. v. Kiener Co. Ltd. [G.R. No. L-24754
(1975)]: Taxation is the rule and exemption the
Tax regulations whose purpose is to enforce of
exception, and therefore, he who claims
implement existing law must comply with the
exemption must be able to justify his claim or
following requisites to be effective [RP v. Pilipinas Shell
right here o, b a gran e pre ed in erm oo
Petroleum Corp., G.R. No. 173918 (2008)]:
plain to be mistaken and too categorical to be
a. Be published in a newspaper of general
mi in erpre ed.
circulation [Art. 2, NCC]; AND
b. Filed with the UP Law Center Office of the
Exceptions:
National Administrative Register (ONAR) [Ch 2,
a. When the law itself expressly provides for
Book VII, EO 292]
a liberal construction, that is, in case of
doubt, it shall be resolved in favor of
Note: Administrative rules and regulations must
exemption; and
always be in harmony with the provisions of the law.
b. When the exemption is in favor of the
In case of conflict with the law or the Constitution,
government itself or its agencies, or of
the administrative rules and regulations are null and
religious, charitable, and educational
void. As a matter of policy, however, courts will
institutions because the general rule is that
declare a regulation or provision thereof invalid only
they are exempt from tax.
when the conflict with the law is clear and
c. When the exemption is granted under
unequivocal.
special circumstances to special classes
of persons.
Administrative interpretations and opinions
d. If there is an express mention or if the
The power to interpret the provisions of the Tax
taxpayer falls within the purview of the
Code and other tax laws is under the exclusive and
exemption by clear legislative intent, the rule
original jurisdiction of the Commissioner of Internal
on strict construction does not apply. [Comm.
Revenue subject to review by the Secretary of Finance
v. Arnoldus Carpentry Shop, Inc., G.R. No.
[Sec. 4, par.1, NIRC].
71122 (1988)].
Revenue regulations are the formal interpretation
of the provisions of the NIRC and other laws by the

Page 23 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Secretary of Finance upon the recommendation of
the Commissioner of Internal Revenue.
General rule: The Commissioner has the sole authority
to issue rulings but he also has the power to delegate
said authority to his subordinates with the rank
equivalent to a division chief or higher.
Exceptions: The Commissioner may not delegate the
following:
a. The power to recommend the promulgation of
rules and regulations by the Secretary of Finance;
b. The power to issue rulings of first impression or
to reverse, revoke, or modify any existing ruling
of the Bureau; and
c. The power to compromise or abate any tax
liability as provided by Sec. 204 and 205 of the
NIRC
of individuals and the object is to establish a certain
rule by conformity to which mankind would be safe,
and the discretion of the court limited. [People v.
Purisima, G.R. No. L-42050-66 (1978)].
5. 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.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or clearly the legislative
intent. [Lorenzo v. Posadas, supra].

Exception to the exception: BUT assessments issued by Exception to the exception: a tax law should not be given
RDOs involving (a) Php500,000 or less, and (b) minor retroactive application when it would be so harsh and
criminal violations as determined by the Secretary of oppressive for in such case, the constitutional limitation
Finance as recommended by the Commissioner, may of due process would be violated [Republic v. Fernandez,
be compromised by a Regional Evaluation Board supra].
(CHAIRMAN: Regional Director; MEMBERS:
Assistant Regional Director, heads of the Legal,
Assessment and Collection Divisions, and the
Revenue District Officer having jurisdiction over the
taxpayer.) [Sec. 7, NIRC].

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,
he form par of he la of he land.

The same is also true with respect to decisions of the

Court of Tax Appeals. However, by the nature of its
jurisdiction, the decisions of this court are still
appealable to the Supreme Court by a petition for
review on certiorari (Rule 45). [Sec. 11, RA 9282]

4. 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.

A penal statute should be construed strictly against

the State and in favor of the accused. The reason for
this principle is the tenderness of the law for the rights

Page 24 of 290
U.P. LAW BOC TAXATION I
O. Doctrines of Taxation
1. Prospectivity of Tax Laws
General rule: Tax laws are prospective in operation.
Reason: Nature and amount of the tax under tax laws
enacted after the transaction could not have been
foreseen and understood by the taxpayer at the time
of the transaction.
Exception: Tax laws may be applied retroactively
provided it is expressly declared or it is clearly the
legislative intent (e.g., increase taxes on income
already earned) except when retroactive application
would be so harsh and oppressive. [Republic v.
Fernandez, G.R. No. L-9141 (1956)]
It is a cardinal rule that laws shall have no retroactive
effect, unless the contrary is provided (Art. 4, Civil
Code). [Hydro Resources v. CA, G.R. No. 80276 (1990)]
The language of the statute must clearly demand or
press that it shall have a retroactive effect. [Lorenzo v.
Posadas, supra]
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, G.R. No. L-23236
(1967)]
Non-retroactivity of rulings [Sec. 246, NIRC]
General rule: Rulings do not have retroactive
application if the revocation, modification, or reversal
will be prejudicial to the taxpayer.
Exceptions:
a. Ta pa er delibera e mi a emen or omi ion
of facts
b. BIR ga hered fac i ma eriall differen from
the facts from which the ruling was based on
c. Taxpayer acted in bad faith
Note: The rule on non-retroactivity of rulings may be
applied only if the parties in the ruling involve the
taxpayer himself/itself. The taxpayer cannot invoke
the rulings granted in favor of the other taxpayers.
Page 25 of 290
TAXATION LAW
2. Imprescriptibility of Taxes
Unless otherwise provided by law, taxes are
imprescriptible. [CIR v. Ayala Securities Corporation
G.R. No. L-29485 (1980)]
The law on prescription, being a remedial measure,
should be liberally construed in order to afford such
protection. As a corollary, the exceptions to the law
on prescription should perforce be strictly construed.
[Commissioner v. CA, G.R. No. 104171 (1999)]
a. Prescriptions found in statutes
1. National Internal Revenue Code
statute of limitations in the assessment and collection
of taxes therein imposed.
Summary of prescription on assessment and
collection:
Prescription of assessment AND
collection from the:
prescribed last day of filing of
returns (even if return was filed
3 YEARS earlier than the deadline); OR
the day when the return was actually
filed if filed later than the last day of
filing [Sec. 203, NIRC] whichever comes
earlier.
Prescription of assessment in cases
of:
false or fraudulent return with intent
to evade tax; OR
10 YEARS
failure to file a return [Sec. 222,
NIRC]
From the discovery of the fraud,
falsity, or omission.
Prescription of collection of tax if:
assessed within the 3-year and 10-
year prescriptive periods
assessed within the extended period
agreed upon by the Commissioner
5 YEARS
and taxpayer (waiver of the
prescriptive period)
Collected by distraint, levy or by a
proceeding in court. [Sec. 222,
NIRC]
Note: The prescriptive period from final liquidation is
three (3) years, except in cases of:
1. tentative liquidation;
2. payment under protest;
U.P. LAW BOC TAXATION I
3. fraud; and
4. compliance audit.
2. Customs Modernization and Tariffs
Act (CMTA)
CMTA repealed the Tariff and Customs Code (TCC).
Under Sec. 430, i pro ide ha [i]n he ab ence of
fraud and when the goods have been finally assessed
and released, the assessment shall be conclusive upon
all parties three (3) years from the date of final
payment or duties, or upon completion of the post-
clearance audit. (Note: The same rule was provided
under Sec. 1603 of the TCC, but it was worded
differently).
3. Local Government Code
The LGC prescribes prescriptive periods for the
assessment from the date they became due (5 years)
and collection (5 years) of taxes (including Real
Property Taxes) from the date of assessment by
administrative or judicial action. The prescriptive
period is 3 years if the tax accrued before the
effectivity of the Local Government Code [Sec. 194
and 270, RA 7160 or the LGC]. In case of fraud or
intent to evade the payment of taxes, fees, or charges,
the same may be assessed from discovery of the fraud
or intent to evade payment (10 years).
The prescriptive period is tolled when:
a. The treasurer is legally prevented from making
the assessment or collection
b. The taxpayer requests for a reinvestigation and
executes a waiver in writing before expiration of
the period within which to assess or collect; and
c. The taxpayer is out of the country or otherwise
cannot be located.
3. Double Taxation
Means taxing twice the same taxpayer for the same tax
period upon the same thing or activity, when it should
be taxed once, for the same purpose and with the
same kind of character of tax.
a. Strict sense (Direct Duplicate
Taxation)
The same property must be taxed twice when it should
be taxed once;
1. Both taxes must be imposed on the same
property or subject matter;
Page 26 of 290
TAXATION LAW
2. For the same purpose;
3. By the same State, Government, or taxing
authority;
4. Within the same territory, jurisdiction or
taxing district;
5. During the same taxing period; and
6. Of the same kind or character of tax.
b. Broad sense (Indirect Duplicate
Taxation)
There is double taxation in the broad sense or there is
indirect duplicate taxation if any of the elements for
direct duplicate taxation is absent.
It extends to all cases in which there is a burden of
two or more pecuniary impositions. For example, a
tax upon the same property imposed by two different
states.
Double taxation, standing alone and not being
forbidden by our fundamental law, is not a valid
defense against the legality of a tax measure [Pepsi Cola
v. Mun. of Tanauan, G.R. No. L-31156 (1976)]. But
from it might emanate such defenses against taxation
as oppressiveness and inequality of the 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 (1968)]
If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to taxing
the same income, business or property twice. [China
Banking Corp. v. CA, G.R. No. 146749 (2003)]
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].
International Double Taxation
Double taxation usually takes place when a person is
resident of a contracting state and derives income
from, or owns capital in, the other contracting state
and both states impose tax on that income or capital.
In order to eliminate double taxation, a tax treaty
U.P. LAW BOC TAXATION I
resorts to several methods. [CIR v. SC Johnson & Sons,
Inc., G.R. No. 127105 (1999)]
The purpose of these international agreements is to
reconcile the national fiscal legislations of the
contracting parties in order to help the taxpayer avoid
simultaneous taxation in two different jurisdictions.
More precisely, the tax conventions are drafted with a
view towards the elimination of international
juridical double taxation, which is defined as the
imposition of comparable taxes in two or more states
on the same taxpayer in respect of the same subject
matter and for identical periods.
The apparent rationale for doing away with double
taxation is to encourage the free flow of goods and
services and the movement of capital, technology
and persons between countries, conditions deemed
vital in creating robust and dynamic economies.
Foreign investments will only thrive in a fairly
predictable and reasonable international investment
climate and the protection against double taxation is
crucial in creating such a climate. [CIR v. SC Johnson
& Sons, Inc., supra]
Modes of eliminating double taxation
1. Allowing reciprocal exemption either by law or
by treaty;
2. Allowance of tax credit for foreign taxes paid;
3. Allowance of deductions such as for foreign
taxes paid, and vanishing deductions in estate tax;
OR
4. Reduction of Philippine tax rate.
4. Power to Tax Involves Power
to Destroy
According to Chief Justice John Marshall, "the power
to tax involves the power to destroy." [McCulloch v.
Maryland, 17 U.S. [4 Wheat.] 316-428, 4L. ed. 579.] To
say, however, that the power to tax is the power to
destroy is to describe not the purposes for which the
taxing power may be used but the extent to which it
may be employed in order to raise revenues [see 1
Cooley 178]. Thus, even if a tax should destroy a
business, such fact alone could not invalidate the tax.
[84 C.J.S. 46]
Incidentally, our Constitution mandates that "the rule
of taxation shall be uniform and equitable." In a
case, our Supreme Court said: "The power of taxation
is sometimes called also the power to destroy.
Therefore, it should be exercised with caution to
Page 27 of 290
TAXATION LAW
minimize injury to the proprietary rights of the
taxpayer. It must be exercised fairly, equally and
uniformly, lest the tax collector kills the 'hen that lays
the golden eggs.' And in order to maintain the general
public's trust and confidence in the government, this
power must be used justly and not treacherously."
[Roxas v. Court of Tax Appeals, G.R. No. L-25043
(1968); Philex Mining Corp. vs. Comm. of Internal Revenue,
G.R. No. 125704 (1998)]
Note: J ice Holme once aid: The po er o a i
not the power to destroy while this Court (the
Supreme Court) i . The o limi a ion on he
power of taxation are the inherent and constitutional
limitations which are intended to prevent abuse on
the exercise of the otherwise plenary and unlimited
po er. I i he Co r role o ee o i ha he
exercise of the power does not transgress these
limitations.
5. Escape from Taxation
a. 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.
Ways of shifting the tax burden
1. Forward shifting - When the burden of the tax
is transferred from a factor of production
through the factors of distribution until it
finally settles on the ultimate purchaser or
consumer. Examples: VAT, percentage tax.
2. Backward shifting - When the burden of the tax
is transferred from the consumer or purchaser
through the factors of distribution to the factor
of production. Example: Consumer or purchaser
may shift tax imposed on him to retailer by
purchasing only after the price is reduced, and
from the latter to the wholesaler, and finally to
the manufacturer or producer.
3. Onward shifting - When the tax is shifted two
or more times either forward or backward.
Factors determining tax shifting
1. Elasticity of demand and supply - The more
the elasticity, the lower the incidence on the sales.
The higher the incidence on supply.
U.P. LAW BOC TAXATION I TAXATION LAW

2. Nature of markets In an oligopolistic market Impact Incidence

(i.e. sellers and many buyers) tax shifting to Falls upon the person Rests on the person
buyers is high since few sellers can team up to from whom the tax is who pays it eventually
determine the market price. In a situation where collected
there are many buyers and sellers, a large portion May be shifted Cannot be shifted
of tax will be borne by sellers. For a monopolistic
market, the entire tax burden falls on the Incidence is the end of
shoulders of the buyer. the shifting process.
3. Government policy on pricing In the case of Sometimes, however,
government price control, the supplier cannot when no shifting is
increase prices, hence cannot shift tax burden to possible, as in the case
buyers and vice versa. of income tax or such
4. Geographical location If taxes are imposed other direct taxes, the
on certain regions, it is hard to shift them to impact coincides with
consumers because consumers will move to incidence on the same
regions with low taxes. person.
5. Nature of tax (Direct or Indirect tax) Direct
tax e.g. PAYE (pay-as-you-earn) cannot be Notes: Suppose a tax excise duty is imposed on
shifted whatsoever while indirect taxes can be soap. Its impact is on the producers, in the first
shifted through increase in prices. instance, as they are liable to pay it to the government.
6. Rate of tax If too high, shifting can occur But, the producers may succeed in collecting it from
backwards or forwards, if too low, it may be the consumers by raising the price of soap by the
absorbed by the manufacturer. amount of tax. In that case, consumers eventually pay
7. Time available for adjustment The person the tax and so the incidence falls upon them.
who can adjust faster (buyer or seller) will be able
to shift tax e.g. if the buyer cash shift to substitute Relationship between Impact, Shifting, and
goods, the seller will bear the tax burden. Incidence of a Tax
8. The tax point Impact Shifting Incidence
Initial Intermediate Result
Taxes that can be shifted phenomenon process
1. Value-added Tax Imposition of Transfer of Setting or
2. Percentage Tax the tax the tax coming to rest
3. Excise Tax of the tax
MEANING OF IMPACT AND INCIDENCE Example: Impact in VAT is on the producer who
OF TAXATION shifts the burden to the customer who finally bears
the incidence of the tax
Impact of taxation is the point on which a tax is
originally imposed. In so far as the law is concerned,
the taxpayer, the subject of tax, is the person who b. Tax Avoidance (Tax
must pay the tax to the government. Minimization)
Incidence of taxation is that point on which the tax The exploitation by the taxpayer of legally permissible
burden finally rests or settles down. It takes place alternative tax rates or methods of assessing taxable
when shifting has been effected from the statutory property or income in order to avoid or reduce tax
taxpayer to another. liability. It is politely called tax minimization and i
NOT punishable by law.
Impact Distinguished from Incidence
Impact Incidence Example: A person refrains from engaging in some
Initial burden of tax Ultimate burden of the activity or enjoying some privilege in order to avoid
tax the incidental taxation or to lower his tax bracket for
At the point of At the point of a taxable year.
imposition settlement
c. Tax Evasion (Tax Dodging)
Page 28 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Method of escape in taxation whereby the

Tax Evasion - is the use by the taxpayer of illegal or manufacturer or producer upon whom the tax has
fraudulent means to defeat or lessen the payment of been imposed pays the tax and endeavors to recoup
a a . I i al o kno n a a dodging. I i himself by improving his process of production
punishable by law. thereby turning out his units of products at a lower
cost. The taxpayer escapes by a transformation of the
Example: Deliberate failure to report a taxable income tax into a gain through the medium of production.
or property; deliberate reduction of income that has
been received; overstatement of expenses. 6. Exemption from Taxation
Meaning ofexemption from taxation
The grant of immunity to particular persons or
Elements of Tax Evasion
corporations or to person or corporations of a
1. The end to be achieved. Example: the payment
particular class from a tax which persons and
of less than that known by the taxpayer to be
corporations generally within the same state or taxing
legally due, or in paying no tax when such is due.
district are obliged to pay. It is an immunity or
2. An accompanying state of mind described as
privilege; it is freedom from a financial charge or
being e il, in bad fai h, illf l or
burden to which others are subjected. It is strictly
delibera e and no acciden al.
construed against the taxpayer.
3. A course of action (or failure of action) which is
unlawful.
Taxation is the rule; exemption is the exception.
He who claims exemption must be able to justify his
Since fraud is a state of mind, it need not be proved
claim or right thereto, by a grant expressed in terms
by direct evidence but may be inferred from the
oo plain o be mi aken and oo ca egorical o be
circumstances of the case. Thus:
mi in erpre ed. If no e pre l men ioned in he
1. The failure of the taxpayer to declare for
law, it must at least be within its purview by clear
taxation purposes his true and actual income
legislative intent.
derived from his business for two consecutive
years has been held as an indication of his
Grounds for Tax Exemption
fraudulent intent to cheat the government of its
a. It may be based on contract.
due taxes. [Republic v. Gonzales, G.R. No. L-17962
b. It may be based on some ground of public policy.
(1965)]
c. It may be created in a treaty on grounds of
2. The substantial underdeclaration of income
reciprocity or to lessen the rigors of international or
in the income tax returns of the taxpayer for
multiple taxation.
four (4) consecutive years coupled with his
intentional overstatement of deductions
But equity is NOT a ground for tax exemption.
justifies the finding of fraud. [Perez v. CTA and
Exemption from tax is allowable only if there is a clear
Collector, G.R. No. L-10507 (1958)].
provision. While equity cannot be used as a basis or
justification for tax exemption, a law may validly
Tax Avoidance v. Tax Evasion
authorize the condonation of taxes on equitable
Tax Avoidance Tax Evasion
considerations.
Also called Tax Tax Dodging
as Minimization Nature of tax exemption
Legal Illegal a. Mere personal privilege - cannot be assigned or
Means
Outcome of tax Outcome of transferred without the consent of the legislature.
planning tax fraud The legislative consent to the transfer may be
Punishable? No Yes given either in the original act granting the
Merely minimize Entirely exemption or in a subsequent law
payment of escape b. General rule: Revocable by the government.
Purpose
taxes (tax payment of Exception: If founded on a contract which is
savings) taxes protected from impairment. But the contract
must contain the essential elements of other
d. Transformation contracts. An exemption provided for in a
franchise, however, may be repealed or amended
pursuant to the Constitution [Art. XII, Sec. 11,

Page 29 of 290
U.P. LAW BOC TAXATION I
1987 Constitution]. A legislative franchise is a
mere privilege.
c. 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.
d. 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 guarantee or the uniformity rule.
KINDS OF TAX EXEMPTION
a. Express or Affirmative - either entirely or in
part, may be made by provisions of the
Constitution, statutes, treaties, ordinances,
franchises, or contracts.
b. Implied or Exemption by Omission - when a
tax is levied on certain classes without
mentioning the other classes. Every tax statute, in
a very real sense, makes exemptions since all
those not mentioned are deemed exempted. The
omission may be either accidental or intentional.
Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
taxation is the exception.
c. Contractual - The legislature of a State may, in
the absence of special restrictions in its
constitution, make a valid contract with a
corporation in respect to taxation, and that such
contract can be enforced against the State at the
instance of the corporation [Casanovas v. Hord,
G.R. No. 3473 (1907)].
In the real sense of the term and where the non
impairment clause of the Constitution can rightly
be invoked, this includes those agreed to by the
taxing authority in contracts, such as those
contained in government bonds or debentures,
lawfully entered into by them under enabling laws
in which the government, acting in its private
capacity, sheds its cloak of authority and waives
its governmental immunity.
These contractual tax exemptions, however, are
not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature
of a grant which is beyond the purview of the
non-impairment clause of the Constitution.
[Manila Electric Company v. Province of Laguna, G.R.
No. 131359 (1999)]
Page 30 of 290
TAXATION LAW
Rationale of Tax Exemption
Such exemption will benefit the body of the people
and not particular individuals or private interest and
that the public benefit is sufficient to offset the
monetary loss entailed in the grant of the exemption.
Principles of Tax Exemption:
a. As the power of taxation is a high prerogative of
sovereignty, the relinquishment is never
presumed and any reduction or diminution
thereof with respect to its mode or its rate, must
be strictly construed, and the same must be couched in
clear and unmistakable terms in order that it may be
applied. [Floro Cement v. Gorospe, G.R. No. L-
46787 (1991)]
b. When granted, they are strictly construed
against the taxpayer [Luzon Stevedoring Co. v.
CTA, G.R. No. L-30232 (1988)]
c. Tax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may
almo be aid o be odio o he la . [Manila
Electric Company v. Vera, G.R. No. L-29987
(1975)]
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.
7. Doctrine of Equitable
Recoupment
A claim for refund barred by prescription may be
allowed to offset unsettled tax liabilities. The doctrine
finds NO application in this jurisdiction.
8. 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 (1962)]
Reasons:
a. This would adversely affect the government
revenue system [Philex Mining v. CA, G.R. No.
125704 (1998)].
b. Government and the taxpayer are not creditors
and debtors of each other. The payment of taxes
U.P. LAW BOC TAXATION I TAXATION LAW

is not a contractual obligation but arises out of a The State cannot strip itself of the most essential
duty to pay. [Republic v. Mambulao Lumber, supra] power of taxation by doubtful words. He who claims
an exemption (or an amnesty) from the common
Exception: If the claims against the government have burden must justify his claim by the clearest grant of
been recognized and an amount has already been organic or state law. It cannot be allowed to exist
appropriated for that purpose. Where both claims upon a vague implication. If a doubt arises as to the
have already become: intent of the legislature, that doubt must be resolved
a. due in favor of the state. [CIR v. Marubeni Corp., G.R. No.
b. demandable, and 137377 (2001)].
c. fully liquidated,
compensation takes place by operation of law under Amnesty distinguished from tax exemption
Art. 1200 in relation to Articles 1279 and 1290 of the Tax amnesty is immunity from all criminal and
NCC, and both debts are extinguished to the civil obligations arising from non-payment of taxes.
concurrent amount. [Domingo v. Garlitos, G.R. No. L- It is a general pardon given to all taxpayers. It applies
18994 (1963)] to past tax periods, hence of retroactive application.
[People v. Castañeda, G.R. No. L-46881 (1988)]
9. Compromise and Tax
Tax exemption is immunity from all civil liability
Amnesty only. It is an immunity or privilege, a freedom from a
charge or burden of which others are subjected.
COMPROMISE [Greenfield v. Meer, C.A. No. 156 (1946)]. It is generally
a. A contract whereby the parties, by making prospective in application [Dimaampao, 2005, p. 111].
reciprocal concessions avoid litigation or put an
end to one already commenced [Art. 2028, Civil Tax Amnesty v. Tax Exemption
Code]. It involves a reduction of he a pa er Tax
Tax Amnesty
liability. Exemption
b. Requisites of a tax compromise: Immunity from
i. The taxpayer must have a tax liability. civil, criminal,
ii. There must be an offer (by the taxpayer or Immunity from
administrative
Commissioner) of an amount to be paid by civil liability
Benefit liability arising
the taxpayer. (relief from
from non-
iii. There must be acceptance (by the paying taxes)
payment of
Commissioner or the taxpayer, as the case taxes
may be) of the offer in settlement of the Future tax
original claim. Coverage Past tax liability
liability
Actual
TAX AMNESTY Revenue Yes None
Loss
Definition
A tax amnesty partakes of an absolute forgiveness
or waiver by the Government of its right to collect 10. Ta a S
what otherwise would be due it, and in this sense,
prejudicial thereto, particularly to give tax evaders, NATURE AND CONCEPT
who wish to relent and are willing to reform a chance Ta a refers to a case where the act
to do so and become a part of the new society with a complained of directly involves the illegal
clean slate. [Republic v. IAC, G.R. No. L-69344 (1991)] disbursement of public funds derived from taxation.
[Kilosbayan v. Guingona, Jr. (1994)]
A tax amnesty, much like a tax exemption, is never
favored nor presumed in law. If granted, the terms of A a
the amnesty, like that of a tax exemption, must be The plaintiff in a taxpayer's suit is in a different
construed strictly against the taxpayer and category from the plaintiff in a citizen's suit. In the
liberally in favor of the taxing authority. former, the plaintiff is affected by the expenditure of
public funds, while in the latter, he is but the mere

Page 31 of 290
U.P. LAW BOC
instrument of the public concern. [De Castro v. Judicial
and Bar Council, G.R. No. 191002 (2010)]
REQUISITES OF A TAXPAYER S SUIT
CHALLENGING THE
CONSTITUTIONALITY OF A TAX
MEASURE OR ACT OF TAXING
AUTHORITY
a. Concept of locus standi as applied in taxation
The doctrine of locus standi is the right of
appearance in a court of justice. The doctrine
requires a litigant to have a material interest in the
outcome of a case. In private suits, locus standi
requires a litigant to be a "real party in interest,"
which is defined as "the party who stands to be
benefited or injured by the judgment in the suit
or the party entitled to the avails of the suit."
In public suits, this Court recognizes the
difficulty of applying the doctrine especially when
plaintiff asserts a public right on behalf of the
general public 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. [P a e P d c , I c. . Fe
Corporation, G.R. No. 166006 (2008)]
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
Page 32 of 290
TAXATION I TAXATION LAW
enjoined at the request of a taxpayer. [Pascual v.
Secretary of Public Works, G.R. No. L-10405 (1960)]
A taxpayer is allowed to sue where there is a claim
that public funds are illegally disbursed, or that
the public 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
con rac . In o her ord , for a a pa er i o
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
(2009)]
b. 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.
[Id.]
Planters Products, Inc. v. Fertiphil Corp. [G.R. No.
166006 (2008)]: e en a ming arg endo ha
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 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
U.P. LAW BOC TAXATION I TAXATION LAW

until adequate capital is raised to make PPI

viable."

c. Ripeness for judicial determination

Ripene for j dicial de ermina ion mean ha
litigation is inevitable or there is no adequate
relief available in any other form or proceeding.

CJH Development Corp. v. BIR [G.R. No. 172457

(2008)]: Ho e er, CJH i no lef i ho
recourse. The tariff and customs code 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 o hi Co r .

Page 33 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

II. NATIONAL 4. The conditions to be observed by revenue

officers respecting the institutions and conduct
INTERNAL of legal actions and proceedings;
5. The conditions under which goods intended for
REVENUE CODE storage in bonded warehouses shall be
conveyed thither, their manner of storage and the
(NIRC) OF 1997, AS method of keeping the entries and records in
connection therewith, also the books to be kept
AMENDED by Revenue Inspectors and the reports to be
made by them in connection with their
supervision of such houses;
A. Organization and 6. The conditions under which denatured alcohol
may be removed and dealt in, the character and
Functions of the Bureau quantity of the denaturing material to be used, the
of Internal Revenue manner in which the process of denaturing shall
be effected, so as to render the alcohol suitably
denatured and unfit for oral intake, the bonds to
1. Rule-Making Authority of be given, the books and records to be kept, the
entries to be made therein, the reports to be made
the Secretary of Finance to the CIR, and the signs to be displayed in the
business ort by the person for whom such
a. Authority of the Secretary of denaturing is done or by whom, such alcohol is
Finance to Promulgate Rules dealt in;
7. The manner in which revenue shall be collected
and Regulations (Sec. 244, and paid, the instrument, document or object to
NIRC) which revenue stamps shall be affixed, the
mode of cancellation of the same, the manner in
The Secretary of Finance, upon recommendation of which the proper books, records, invoices and
the CIR, shall promulgate all needful rules and other papers shall be kept and entries therein
regulations for effective enforcement of the made by the person subject to the tax, as well as
provisions of the Code. the manner in which licenses and stamps shall be
gathered up and returned after serving their
b. Specific Provisions to be purposes;
8. The conditions to be observed by revenue
Contained in Rules and officers respecting the enforcement of Title III
Regulations (Sec. 245, NIRC) imposing a tax on estate of a decedent, and other
transfers mortis causa, as well as on gifts and
1. The time and manner in which Revenue Regional such other rules and regulations which the CIR
Director shall canvass their respective Revenue may consider suitable for the enforcement of the
Regions for the purpose of discovering persons said Title III;
and property liable to national internal revenue 9. The manner in which tax returns, information
taxes, and the manner in which their lists and and reports shall be prepared and reported and
records of taxable persons and taxable objects the tax collected and paid, as well as the
shall be made and kept; conditions under which evidence of payment
2. The forms of labels, brands or marks to be shall be furnished the taxpayer, and the
required on goods subject to an excise tax, and preparation and publication of tax statistics;
the manner in which the labelling, branding or 10. The manner in which internal revenue taxes,
marking shall be effected; such as income tax, including withholding tax,
3. The conditions under which and the manner in estate and donor's taxes, value-added tax, other
which goods intended for export, which if not percentage taxes, excise taxes and documentary
exported would be subject to an excise tax, shall stamp taxes shall be paid through the collection
be labelled, branded or marked; officers of the Bureau of Internal Revenue or
through duly authorized agent banks which are
hereby deputized to receive payments of such

Page 34 of 290
U.P. LAW BOC
taxes and the returns, papers and statements that
may be filed by the taxpayers in connection with
the payment of the tax:
Provided, however, that notwithstanding the other
provisions of this Code prescribing the place of
filing of returns and payment of taxes, the CIR
may, by rules and regulations require that the tax
returns, papers and statements and taxes of large
taxpayers be filed and paid, respectively, through
collection officers or through duly authorized
agent banks:
Provided, further, That the CIR can exercise this
power within six (6) years from the approval of
R.A. 7646 or the completion of its
comprehensive computerization program,
whichever comes earlier:
Provided, finally, that separate venues for the
Luzon, Visayas and Mindanao areas may be
designated for the filing of tax returns and
payment of taxes by said large taxpayers.
For the purpose of this Section, 'large taxpayer'
means a taxpayer who satisfies any of the
following criteria:
a. Value-Added Tax (VAT) - Business
establishment with VAT paid or payable of
at least P100,000 for any quarter of the
preceding taxable year;
b. Excise tax - Business establishment with
excise tax paid or payable of at least
P1,000,000 for the preceding taxable year;
c. Corporate Income Tax - Business
establishment with annual income tax paid
or payable of at least P1,000,000 for the
preceding taxable year; and
d. Withholding tax - Business establishment
with withholding tax payment or remittance
of at least P1,000,000 for the preceding
taxable year.
Provided, however, That the Secretary of Finance,
upon recommendation of the CIR, may modify or
add to the above criteria for determining a large
taxpayer after considering such factors as
inflation, volume of business, wage and
employment levels, and similar economic factors.
The penalties prescribed under Section 248 shall be
imposed on any violation of the rules and regulations issued
by the Secretary of Finance, upon recommendation of
Page 35 of 290
TAXATION I TAXATION LAW
the CIR, prescribing the place of filing of returns and
payments of taxes by large taxpayers.
RA 7646 An Act Authorizing the CIR to Prescribe
the Place for Payment of Internal Revenue Taxes by
Large Taxpayers
2. Jurisdiction, Power and
Functions of the
Commissioner of Internal
Revenue
a. Powers and Duties of the Bureau
of Internal Revenue (Sec. 2,
NIRC)
1. To assess and collect national internal taxes, fees,
and charges;
2. To enforce all forfeitures, penalties and fines
connected therewith;
3. To execute judgment in all cases decided in its
favor by the CTA and the ordinary courts; and
4. To effect and administer the supervisory and
police powers conferred upon it by the Tax Code
or other special laws.
b. Power of the Commissioner to
Interpret Tax Laws and to
Decide Tax Cases
Power to Interpret
The power to interpret provisions of the NIRC and
other tax laws shall be under the exclusive and original
jurisdiction of the CIR, subject to review by the
Secretary of Finance. [Sec. 4, NIRC]
A ruling by the CIR that interpret provisions of the
NIRC and other tax laws shall be presumed valid
unless modified, reversed or superseded by the
Secretary of Finance. A taxpayer who receives an
adverse ruling from the CIR may, within thirty (30)
days from the date of receipt of such ruling, seek its
review by the Secretary of Finance. The Secretary of
Finance may also review the rulings motu proprio.
[DOF Order 7-02]
Power to Decide Tax Cases
The power to decide (1) disputed assessments, (2)
refunds of internal revenue taxes, fees, charges and
penalties, or (3) other matters arising under the NIRC
U.P. LAW BOC TAXATION I
or other laws administered by the BIR is vested in the
CIR, subject to the exclusive appellate jurisdiction of
the CTA. [Sec. 4, NIRC]
c. Non-retroactivity of rulings (Sec.
246, NIRC)
General Rule: Any revocation, modification or reversal
of (1) rules and regulations promulgated in
accordance with the NIRC, or (2) any rulings or
circulars promulgated by the CIR shall not be given
retroactive application if the prejudicial to the
taxpayers.
Exceptions:
1. Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the BIR;
2. Where the facts subsequently gathered by the
BIR are materially different from the facts on
which the ruling is based; or
3. Where the taxpayer acted in bad faith.
The general rule is that a void law or administrative
act cannot be the source of legal rights or duties. The
doctrine of operative fact is an exception to the
general rule; it is incorporated in Sec. 246 of the
NIRC. Under Sec. 246, taxpayers may rely upon a rule
or ruling issued by the CIR from the time the rule or
ruling is issued up to its reversal by the CIR or this
Court. The reversal is not given retroactive effect.
There must, however, be a rule or ruling issued by the
Commissioner that is relied upon by the taxpayer in
good faith. A mere administrative practice, not
formalized into a rule or ruling, will not suffice
because such a mere administrative practice may not
be uniformly and consistently applied. [CIR v. San
Roque, G.R. No. L-187485 (2013)].
Page 36 of 290
TAXATION LAW
B. Income Taxation
1. Income Tax
a. Definition, Nature and General
Principles
Definition
Income Tax is defined as a tax on all yearly profits
arising from property, professions, trades, or offices,
or as a tax on the per on income, emol men ,
profits and the like. It may be succinctly defined as a
tax on income, whether gross or net, realized in one
taxable year. [De Leon citing CJS and AmJur]
Nature
Income tax is generally classified as an excise tax. It is
not levied upon persons, property, funds or profits
but upon the right of a person to receive income or
profits. [De Leon]
General Principles (Sec. 23, NIRC)
Income Tax Law aims to mitigate the evils arising
from the inequalities of wealth by a progressive
scheme of taxation which places the burden of
taxation on those best able to pay [Madrigal v.
Rafferty & Concepcion, G.R. No. L-12287 (1918)].
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
4. An alien individual, whether a resident or not of
the Philippines, is taxable only on income derived
from sources within the Philippines;
5. A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
6. A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable
U.P. LAW BOC TAXATION I TAXATION LAW

only on income derived from sources within the Global System Schedular System
Philippines. It is a personal tax
Tax on income
based on the income of
producing activities.
Taxpayer Within Without the taxpayer.
Resident Citizen Emphasizes the burden Emphasizes on revenue
Non-resident Citizen and X allocation aspects. and administrative
OCW aspects.
Resident and Non-resident X Because of its multiple
Most equitable system
Alien rates, the tax burden of
yet developed for
Domestic Corporation a person does not
distributing tax burden.
Foreign Corporation X correspond to his
The burden of an
income but rather fall
individual is closely
fortuitously on the type
1. Income Tax Systems related to his resources
of his income. It is
and his ability to pay.
fixed and final.
a. Global Tax System
It serves as a means for
Under a global tax system, it did not matter
redistributing income
whether the income received by the taxpayer is
and wealth. Big
classified as compensation income, business or
income earners are
professional income, passive investment income,
subject to higher taxes
capital gain, or other income. All items of gross This function is alien to
than small income
income, deductions, and personal and additional schedular system where
earners it serves as an
exemptions, if any, are reported in one income in times of plenty or in
automatic counter-
tax return, and one set of tax rates are applied on times of need, people
cyclical device to
the tax base. pay the same fixed tax
generate more revenues
on their income.
from people in times of
b. Schedular Tax System
expanding economies
Different types of incomes are subject to
and at the same time to
different sets of graduated or flat income tax
collect less from them
rates. The applicable tax rate(s) will depend on
in times of depression.
the classification of the taxable income and the
It serves as a
basis could be gross income or net income.
supplementary device
Separate income tax returns (or other types of
to accomplish non-
return applicable) are filed by the recipient of
fiscal goals of the
income for the particular types of income
government, such as, to
received. The schedular system
encourage desired
cannot perform any of
activities. By adjusting
these functions.
the rates, for instance,
it can promote saving
or consumer's demand,
or encourage donations
worthy causes.
Administration is not
quite as easy as The administration is
schedular because one simple, being confined
has to consider all to each transaction or
income from whatever activity.
source.

c. Semi-schedular or Semi-global Tax System

All compensation income, business or
professional income, capital gain and passive
income not subject to final tax, and other income
are added together to arrive at the gross income,

Page 37 of 290
U.P. LAW BOC TAXATION I
and after deducting the sum of allowable
deductions, the taxable income is subjected to
one set of graduated tax rates or normal
corporate income tax. With respect to such
income the computation is global.
For those other income not mentioned above,
they remain subject to different sets of tax rates
and covered by different returns.
Note: The Philippines, under the NIRC, follows a
semi-schedular and semi-global tax system.
2. Features of the Philippine Income Tax
Law
a. Direct Tax The tax burden is borne by the
income recipient upon whom the tax is imposed.
b. Progressive The tax rate increases as the tax
base increases. It is founded on the ability to pay
principle and is consistent with Sec. 28, Art. VI,
1987 Constitution.
c. Comprehensive The Philippines has adopted
the most comprehensive system of imposing
income tax by adopting the citizenship principle,
the residence principle, and the source principle.
Any of the three principles is enough to justify
the imposition of income tax on the income of a
resident citizen and a domestic corporation that
are taxed on a worldwide income.
d. Semi-Schedular or Semi-Global Tax System
The Philippines follows the semi-schedular or
semi-global system of income taxation, although
certain passive investment incomes and capital
gains from sale of capital assets (namely: (a)
shares of stock of domestic corporations, and (b)
real property) are subject to final taxes at
preferential tax rates.
3. Criteria in Imposing Philippine
Income Tax
CITIZENSHIP OR NATIONALITY
PRINCIPLE
A citizen of the Philippines is subject to Philippine
income tax:
On his worldwide income, if he resides in the
Philippines; or
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
Page 38 of 290
TAXATION LAW
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.
4. Types of Philippine Income Tax
a. Graduated income tax and fixed tax on gross
sales or receipts for individuals
b. Normal corporate income tax on corporations
c. Minimum corporate income tax on corporations
d. Special income tax on certain corporations
e. Capital gains tax on sale or exchange of shares of
stock of a domestic corporation classified as
capital assets
f. Capital gains tax on sale or exchange of real
property classified as capital asset
g. Final withholding tax on certain passive
investment income paid to residents
h. Final withholding tax on income payments made
to non-residents
i. Fringe benefits tax on fringe benefits of
supervisory or managerial employees
j. Branch profit remittance tax
k. Tax on improperly accumulated earnings of
corporations
5. Taxable Period
"Taxable year" means the calendar year, or the fiscal
year ending during such calendar year, upon the basis
of which the net income is computed. Taxable year
includes, in the case of return made for a fractional
part of a year under the provisions of Title II (Tax on
Income), the period for which such return is made
[Sec. 22 (P), NIRC].
a. Calendar Year - Accounting period of 12
months ending on the last day of December.
Instances when the Calendar Year is used for the
computation of income:
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
 U.P. LAW BOC TAXATION I TAXATION LAW

before the last month of the tax year (less than 12 the
months). Instances whereby short accounting Philippines
period arises:
d. When a corporation is newly organized. Special
e. When a corporation is dissolved. [Sec 52(c), Classes of Minimum Wage Earner
NIRC] Individuals
f. When a corporation changes accounting period.
[Sec 46, NIRC] Domestic Corporations
g. When the taxpayer dies. Resident
Corporations
Corporations
General rule: Taxable income shall be computed based Foreign Corporations Non-
on he a pa er ann al acco n ing period, hich resident
may be fiscal year or calendar year Corporations
Estates and
Exception: Taxable income shall be computed based Trusts
on the basis of calendar year only if: General Partnership
Partnerships
a. If the taxpayer's annual accounting period is General Professional Partnership
other than a fiscal year; or
b. If the taxpayer has no annual accounting period; a. INDIVIDUAL TAXPAYERS
or
c. If the taxpayer does not keep books of accounts; CITIZENS
or 1. Resident Citizens (RC)
d. If the taxpayer is an individual [Sec. 43, NIRC]. 2. Non-resident Citizens (NRC) [Sec. 22 (E)]
a. PH citizen who establishes to the satisfaction
6. Kinds of Taxpayers of the CIR the fact of his physical presence
abroad with a definite intention to reside
Taxpayer any person subject to tax imposed by therein.
Title II of the Tax Code [Sec. 22(N), NIRC]. b. PH citizen who leaves the Philippines during
the taxable year to reside abroad, either as an
Person means an individual, a trust, estate or immigrant or for employment on a
corporation [Sec. 22(A), NIRC]. permanent basis.
c. PH citizen who works and derives income
For income tax purposes, taxpayers are classified from abroad and whose employment thereat
generally as follows: requires him to be physically present abroad
a. Individuals most of the time during the taxable year (183
b. Corporations DAYS).
c. Estates and Trusts d. PH citizen previously considered as non-
d. Partnerships (General Partnership and General resident citizen and who arrives during the
Professional Partnerships) taxable year to reside permanently in the
Philippines Treated as NRC with respect
Primary to his income derived from sources abroad
Sub-Classification(s) until his arrival in the Philippines
Classification
Citizens of Residents citizens
the ALIENS
Non-resident citizens 1. Resident Alien An alien actually present in the
Philippines
Residents Philippines who is not a mere transient or
Engaged in sojourner is a resident for income tax purposes.
Trade or a. No/Indefinite Intention = RESIDENT:
Individuals If he lives in the Philippines and has no
Business in
Aliens Non- the definite intention as to his stay, he is a
residents Philippines resident. A mere floating intention indefinite
Not Engaged as to time, to return to another country is not
in Trade or sufficient to constitute him a transient.
Business in

Page 39 of 290
U.P. LAW BOC
b. Definite Intention = TRANSIENT: One
who comes to the Philippines for a definite
purpose, which in its nature may be
promptly accomplished, is a transient.
Exception: Definite Intention but such cannot be promptly
accomplished; If his purpose is of such nature that
an extended stay may be necessary for its
accomplishment, and thus the alien makes his
home temporarily in the Philippines, then he
becomes a resident.
2. Non-resident Alien
a. 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.
b. 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. worker in the private sector paid the statutory
minimum wage; or
b. employee in the public sector with compensation
income not more than the statutory minimum
wage in the non-agricultural sector where he/she
is assigned. [Sec. 22 (HH), NIRC]
b. Corporations
Includes all types of corporations, partnerships (no
matter how created or organized), joint stock
companies, joint accounts (cuentas en participacion),
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 (1) undertaking construction projects or (2)
engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating or
consortium agreement under a service contract with
the government. [Sec. 22 (B), NIRC]
Domestic corporations
A corporation created and organized in the
Philippines or under its laws (the law of incorporation
test). [Sec. 22 (C), NIRC]
Page 40 of 290
TAXATION I TAXATION LAW
Foreign corporations
A corporation which is not domestic. [Sec. 22 (D),
NIRC]
1. Resident foreign corporations Foreign
corporation engaged in trade or business within
the Philippines. [Sec. 22 (H), NIRC]
2. Non-resident foreign corporations Foreign
corporation not engaged in trade or business
within the Philippines. [Sec. 22 (I), NIRC]
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
Includes:
1. soliciting orders, service contracts
2. opening offices, whether called "liaison" offices
or branches
3. appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period
totaling 180 days or more
4. participating in the management, supervision or
control of any domestic business, firm, entity or
corporation in the Philippines.
Excludes:
1. mere investment as a shareholder in domestic
corporations, and/or the exercise of rights as
such investor
2. having a nominee director or officer to represent
its interests in such corporation
3. appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account.
[RA 7042, Foreign Investments Act]
c. Estates and Trusts
Income tax imposed on individuals shall apply to
income of estates or of any kind of property held in
trust. [Sec. 60 (A), NIRC]
Exceptions: (1) Emplo ee r [Sec. 60, NIRC]; (2)
Revocable trusts [Sec. 63, NIRC]; (3) Income for
Benefit of Grantor [Sec. 64, NIRC]
Taxable income of the estate or trust is computed in
the same manner as an individual, subject to certain
special rules [Sec 61, NIRC]
U.P. LAW BOC TAXATION I
Estate
Refers to all the property, rights and obligations of a
person which are not extinguished by his death and
those which have accrued thereto since the opening
of the succession. [De Leon citing Arts. 776 and 781
NCC]
Trust
An arrangement created by will or an agreement
under which legal title to property is passed to another
for conservation or investment with the income
therefrom and ultimately the corpus (principal) to be
distributed in accordance with the directions of the
creator as expressed in the governing instrument. [De
Leon]
d. Partnerships, Joint Ventures, Co-
ownership
General Partnerships
A partnership which is not a general professional
partnership. Treated as a corporation.
General Professional Partnerships (GPP)
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. [Sec. 22 (B), NIRC]
The partners themselves, not the partnership, shall be
liable for income tax in their separate and individual
capacities. Each partner shall report as gross income
his distributive share, actually or constructively
received, in the net income of the partnership. [Sec.
26, NIRC]
Joint venture and consortium
Essential factors of a joint venture or consortium:
1. Each party must make a contribution, not
necessarily of capital but by way of services, skill,
knowledge, material or money;
2. Profits must be shared among the parties;
3. There must be a joint proprietary interest and
right of mutual control over the subject matter of
the enterprise;
4. There is a single business transaction.
Co-ownership
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons.
[Art. 484, NCC]
Page 41 of 290
TAXATION LAW
Co-ownerships are not subject to tax if the activities
of the co-owners are limited to the preservation of the
property and the collection of the income therefrom,
in which case each co-owner is taxed individually on
his distributive share in the income of the co-
ownership. [De Leon citing Sec. 210 Regs]
b. Income
1. Definition and Nature
a. Income means all wealth which flows to the
taxpayer other than a mere return of capital. It
includes gain derived from the sale or other
disposition of capital assets. Income is a gain
derived from labor or capital, or both labor and
capital; and includes the gain derived from the
sale or exchange of capital assets. [De Leon]
b. Income includes earnings, lawfully or unlawfully
acquired, without consensual recognition,
express or implied, of an obligation to repay and
without restriction as their disposition. [James v.
US, 366 US 213 (1961)]
c. Income may be received in the form of cash,
property, service, or a combination of the three.
Income v. Capital
"The fact is that property is a tree, income is the fruit;
labor is a tree, income the fruit; capital is a tree,
income the fruit." A tax on income is not a tax on
property. "Income," as here used, can be defined as
"profits or gains."[Madrigal v. Rafferty, supra]
Income Capital
Denotes a flow of Fund or property
wealth during a definite existing at one distinct
period of time. point in time.
Service of wealth Wealth itself
Return of capital is not
Subject to tax
subject to tax
Fruit Tree
2. When Income is Taxable
a. Existence of Income
Requisites for income to be taxable [De Leon]
1. There is INCOME, gain or profit
2. RECEIVED or REALIZED during the taxable
year
3. NOT EXEMPT from income tax
U.P. LAW BOC TAXATION I
b. Realization of Income
Income is realized when there is a gain or profit
derived from a closed and completed transaction. The
realization of gain may take the form of actual receipt
of cash or may occur as a constructive receipt of
income. [Valencia and Roxas]
A mere increase in the value of property is not
income, but merely unrealized increase in capital.
Mere increase in the value of property without actual
realization, either through sale or other disposition, is
not taxable. [De Leon]
Actual v. Constructive receipt
1. Actual receipt Income is actually reduced to
possession. The realization of gain may take the
form of actual receipt of cash.
2. Constructive receipt An income is considered
constructively received when it is credited to the
account of, or segregated in favor of a person.
The person may withdraw the said account
credited in his favor anytime without any
substantial limitations or conditions upon
which payment or enjoyment is to be made
or exercised.
Examples of Constructive receipt:
1. Interest credited on savings bank deposit
2. Matured interest coupons not yet collected by the
taxpayer
3. Dividends applied by the corporation against the
indebtedness of a stockholder
4. Share in the profit of a partner in a general
professional partnership, although not yet
distributed, is regarded as constructively received;
or
5. Intended payment deposited in court
(consignation).
The doctrine of constructive receipt is designed to
prevent the taxpayer using the cash basis from
deferring or postponing the actual receipt of taxable
income. Without the rule, the taxpayer can
conveniently select the year in which he will report the
income. [Dimaampao]
The A If Theor of Con r c i e Income i
designed to prevent a cash basis taxpayer to delay
reporting of income. It also presumes the existence of
income on transactions supposedly not subject to tax.
[Valencia and Roxas]
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TAXATION LAW
c. Recognition of Income
Income realized pertains to the accrual basis of
accounting.
Recognition of income in the books is when it is
realized and expenses are recognized when incurred.
It is the right to receive and not the actual receipt that
determines the inclusion of the amount in gross
income
Examples:
1. Interest or rent income earned but not yet
received
2. Rent expense accrued but not yet paid
3. Wages due to workers but remaining unpaid
Generally, trade and manufacturing businesses use
accrual method while servicing businesses use cash
method. If the service business opted to report on
accrual basis, such method can only be applied when
it comes to reporting of expense. To prevent tax
evasion, individual taxpayers whose business consists
of the sale of inventories cannot use cash method.
[Valencia and Roxas]
d. Cash Method of Accounting v. Accrual
Method of Accounting
PRINCIPAL METHODS:
1. Cash method income, profits and gains earned
are not included in gross income until received,
and expenses are not deducted until paid. [De
Leon]
N.B. recei ed here incl de ac al and
constructive receipt.
2. Accrual method income, profits and gains are
included in gross income when earned whether
received or not, and expenses are allowed as
deductions when incurred, although not yet paid.
It is the right to receive and not the actual receipt
that determines the inclusion of the amount in
gross income. [De Leon]
3. Hybrid method income and expenses are
reported by employing the combination of cash
and accrual method. Example: where a taxpayer
is engaged in more than one trade or business, he
may use a different method of accounting for
each trade or business. [De Leon]
OTHER METHODS:
N.B. not included in Bar Syllabus
1. Installment Basis [Sec. 49, NIRC]
U.P. LAW BOC TAXATION I TAXATION LAW

Taxpayer reports as income only a part of the gross Held as capital

profit to be realized from the sale on the instalment asset
plan equivalent to that proportion of the instalments
received every year which the gross profit realized or Initial payments mean the payments received in
to be realized when payment is completed bears to the cash or property (other than evidences of
contract price. indebtedness of the purchaser) by the seller during the
Gross taxable year of the disposition of the real property.
Income to be
Instalment Profit [Sec 49 (B), NIRC]
reported for = ×
Received Contract
the year
Price Deferred Payment Sales
a. Applicable when the initial payments exceed 25%
Installment basis is available to: Dealers in personal of the selling price
property [Sec 49 (A), NIRC]; Casual Sellers of b. The income to be reported during the year of sale
personal property [Sec 49 (B), NIRC]; and Sellers of is the difference between the selling or contract
real property [Sec 49 (B) & (C), NIRC] price and the cost of the property, even though
the entire purchase price has not been actually
Personal Property Real Property received in the year of sale.
Dealer c. The obligations of the purchaser received by the
Installment Installment vendor are considered as equivalent of cash.
method method if initial
Person who payments do not 2. Percentage of completion [Sec. 48, NIRC]
regularly exceed 25% of
sells/disposes of selling price Income from long-term contracts is reported for tax
personal property Deferred purposes on the basis of percentage of completion.
on instalment plan payment method Long- erm con rac mean b ilding, in alla ion or
Held as ordinary if initial payments construction contracts covering a period in excess of
asset exceed 25% 1 year.
Regardless of Held as inventory
amount of Gross income already earned though not yet received,
percentage of based on estimates of architects or engineers duly
initial payments certified by them, is reported in a taxable year; and all
Casual Sale deductions relating to such gross income for the
taxable year, even if not yet paid are taken into
Installment
account. [De Leon]
method if :(1)
Selling price
Completed contract method No longer allowed
exceeds P1k and
since January 1, 1998 as per RA 8424. Cost of the
(2) Initial
contract is accumulated during the years of
payments do not
construction, and deducted from the income of the
exceed 25% of
contract in the year it is completed.
selling price
Deferred payment 3. Crop Year Basis
method if neither
of the 2 Expenses in the production of crops are deducted in
conditions are met the year the gross income from the crop has been
Personal property realized. Applicable only to farmers engaged in
not considered producing crops which take more than a year from
inventory planting to gathering and disposal. [De Leon]
Sale by Individuals
Installment
method provided;
initial payments do
not exceed 25% of
selling price

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U.P. LAW BOC TAXATION I
c. 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 which
would result in the receipt of income [Eisner v.
Macomber, 252 U.S. 189, 190 (1920)]. Thus, stock
dividends are not income subject to income tax on the
part of the stockholder when he merely holds more
shares representing the same equity interest in the
corporation that declared stock dividends [Fisher v
Trinidad, supra].
2. Claim of Right Doctrine
a.k.a. Doctrine of Ownership, command, or control
In the claim-of-right doctrine, if a taxpayer receives
money or other property and treats it as its own under
the claim of right that the payments are made
absolutely and not contingently, such amounts are
included in the taxpayer's income, even though the
right to the income has not been perfected at that
time. It does not matter that the taxpayer's title to the
property is in dispute and that the property may later
be recovered from the taxpayer. [CIR v Meralco, C.T.A.
EB No. 773 (2012)]
3. 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. Thus, in stock options,
the difference between the fair market value of the
shares at the time the option is exercised and the
option price constitutes additional compensation
income to the employee at the time of exercise (not
upon the grant or vesting of the right).
4. Severance Test
Under the doctrine of severance test of income, in
order that income may exist, it is necessary that there
be a separation from capital of something of
exchangeable value. The income requires a realization
of gain.
Page 44 of 290
TAXATION LAW
5. 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.
All events test requires: (1) fixing a right to income
or liability to pay; and (2) the availability of reasonably
accurate determination of such income or liability.
[CIR v Isabela Cultural Corporation, G.R. No. 172231
(2007)]
All of the above tests are followed in the Philippines
for purposes of determining whether income is
received by the taxpayer or not during the year
[Mamalateo].
d. Classification of Income
1. Compensation Income
The gain derived from labor, especially
employment (earned form employer-employee
relationship) such as salaries and commissions.
2. Profession or Business Income
The value derived from an exercise of profession,
business or utilization of capital including profit
and gain derived from sale or conversion of
assets. Examples are net income from business
and gain from the sale of assets used in trade or
business.
3. Passive Income
An income in which the taxpayer merely waits for
the amount to come in. Examples are royalty,
interest, prizes, and winnings.
4. Capital Gain
An income derived from sale of assets not used
in trade or business. Examples are sale of family
home and other capital assets. [Valencia and
Roxas]
e. Situs of Income Taxation
Income Situs
Interest Residence of the debtor
Dividends Residence of the corporation
Services Place of performance
Rentals Location of the property
U.P. LAW BOC TAXATION I TAXATION LAW

Royalties Place of use or exercise computation of gross income which determines

Sale of Real Location of realty
Property
Sale of Personal Tangible
Manufactured w/in and
sold w/o: Partly w/in
and partly w/o the PH
Manufactured w/o and
sold w/in: Partly w/in
and partly w/o the PH
Purchased w/in but sold
w/o: Place of Sale
Purchased w/o but sold
w/in: Place of sale
Intangible
General rule: Place of Sale
Exception: Shares of stock
of domestic
corporations: Place of
incorporation
taxable income. [CIR v PAL, GR 160628 (2006)]
The erm gross income hene er ed i ho
qualification is comprehensive, as defined above, and
is different from the limited meaning of gross income
for purposes of minimum corporate income tax or the
gross income tax of corporations. Gross income
includes gross profit from ordinary business and
other income not subject to passive income tax or
final withholding tax.
Gross income means income, gain, or profit subject
to income tax. It includes the compensation for
personal services, business income, profits, and
income derived from any source whatever (whether
legal or illegal), unless it is exempt from income tax
under the Constitution, tax treaty, or statute or it is
subject to final withholding income tax in accordance
with the semi-global or semi-schedular tax system
adopted by the Philippines.

2. Gross Income It is the difference between gross sales/revenue and

a. Definition
Gross Income [Sec. 32(A)]
the cost of goods sold/services. The definition of
gross income is broad and comprehensive to include
proceeds from sales of transport documents.
[Mamalateo]
CG2IR2DAP3

Gross Income means all income derived from
whatever source, including (but not limited to) the
following items:
1. Compensation for services in whatever form
paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
2. Gross income derived from the conduct of trade
or business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
11. Partner's distributive share from the net income
of the general professional partnership.
The list here is NOT exclusive.
The definition of gross income is broad enough to
include all passive income subject to specific rates or
final taxes. However, since these passive incomes are
already subject to different rates and taxed finally at
source, they are no longer included in the
b. Concept of Income from
Whatever Source Derived
Income deri ed from ha e er o rce 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.)
c. Gross Income vis-à-vis Net
Income vis-à-vis Taxable Income
Gross income The total income of a taxpayer
subject to tax. It includes the gains, profits, and
income derived from whatever source, whether legal
or illegal. (Sec. 32(A), NIRC) It does not include
income excluded by law, or which are exempt from
income tax. [Sec. 32(B), NIRC]

Page 45 of 290
U.P. LAW BOC TAXATION I
Net income Means gross income less statutory
deductions and exemptions. [Sec. 31, NIRC1]
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, NIRC2]. I i non mo o he erm ne
income. [Valencia and Roxas]
d. Sources of Income Subject to
Tax
Source is ascribed to the place wherein the income is
earned. It is governed by the situs of taxation. This
classification of income is necessary to determine
whether such income is subject to tax or not. Income
may be:
1. Derived Entirely from Sources Within
the Philippines [Sec. 42(A), NIRC]
Examples:
a. compensation for labor or service performed in
the Philippines;
b. interest on bonds, notes, deposits and the like
earned in the Philippines;
c. dividends declared by domestic corporations;
d. rentals and royalties from property located within
the Philippines; and
e. gains, profits and income from sale of real
property as well as from personal property in the
Philippines.
As a rule, incomes earned within the Philippines are
taxable.
2. Derived Entirely from Sources without
the Philippines [Sec. 42(C), NIRC]
Examples:
a. compensation for labor or service rendered by
overseas contract workers;
b. interest on bonds, notes, deposits and the like
earned abroad;
c. dividends declared by non-resident foreign
corporation;
d. rental and royalties from property located outside
the Philippines; and
1
SECTION 31. Taxable Income Defined. T taxable
income a ome specified
in this Code, less the deductions and/or personal and
Page 46 of 290
TAXATION LAW
e. gains, profits and income from sale of real
property as well as from personal property
located outside the Philippines.
As a rule, income earned from outside the Philippines
are not taxable except for resident citizens and
domestic corporations.
3. Derived from Sources Partly within
and Partly without the Philippines
[Sec. 42(E), NIRC]
Examples:
a. gains, profits and income from transportation or
other services rendered partly within and partly
outside, and dividend received by a resident
citizen from a resident foreign corporation. (Sec.
43(E), NIRC).
b. In general, when an income is earned partly from
within and partly from without, only income
within is taxable in the Philippines, except if the
taxpayer is a resident citizen or a domestic
corporation.
c. A Filipino citizen or a domestic corporation
whose income is derived from within and
without the Philippines is generally subject to tax.
e. Classification of Income Subject
to Tax
The following sources of income subject to tax are the
following.
1. Compensation income;
2. Fringe benefits;
3. Professional income;
4. Income from business;
5. Income from dealings in property;
6. Passive investment income;
7. Annuities, proceeds from life insurance or other
types of insurance;
8. Prizes and awards;
9. Pensions, retirement benefits, or separation pay.
1. Compensation Income
All remunerations for services performed by an
employee for his employer under an employer-
employee (ER-EE) relationship, unless excepted
under the provisions of the NIRC are considered as
compensation income. [RR No. 02-98, Sec 2.78.1]
additional exemptions, if any, authorized for such types of
income by this Code or other special laws.
2
Id.
U.P. LAW BOC TAXATION I
It includes, but is not limited to, salaries and wages,
honoraria and emoluments, allowances (e.g.,
transportation, representation, entertainment),
commi ion , fee (incl ding direc or fee , if he
director is, at the same time, an employee of the
payor-corporation), tips, taxable bonuses, fringe
benefits except those subject to Fringe Benefit Tax
(FBT) under Section 33 of the Tax Code, and taxable
pensions and retirement pay (e.g., retirement benefits
earned without meeting the conditions for exemption
thereof, such as retirement of less than 50 years of
age.)
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:
1. For agricultural labor paid entirely in products of
the farm where the labor is performed
2. For domestic service in a private home
3. For casual labor not in the course of the
employer's trade or business
4. For services by a citizen or resident of the
Philippine for a foreign go ernmen or an in l
organization. [Sec. 78(A), NIRC]
The term a wages [RA 9504]; Provided, however, that an
refers to remuneration paid for services of a
household nature performed by an employee in or
about the private home of the person whom he is
employed. The services of household personnel
furnished to an employee (except rank and file
employees) by an employer shall be subject to the
fringe benefits tax pursuant to Sec. 33 of the Tax
Code. A private home is the fixed place of abode of
an individual or family. If the home is utilized
primarily for the purpose of supplying board or
lodging to the public as a business enterprise, it ceases
to be a private home and remuneration paid for
services performed therein is not exempted. Services
3
Prior to TRAIN Law, threshold is P82,000.
SECTION 32. Gross Income.
(B) Exclusions from Gross Income. The following items
shall not be included in gross income and shall be exempt
from taxation under this Title:
(7) Miscellaneous Items.
Page 47 of 290
TAXATION LAW
of the household nature in or about a private home
include services rendered by cooks, maids, butlers,
valets, laundresses, gardeners, chauffeurs of
automobiles for family use. The remuneration paid
for the services which are performed in or about
rooming or lodging houses, boarding houses, clubs,
hotels, hospitals or commercial officer or
establishments is considered as compensation.
Remuneration paid for services performed as a
private secretary, even if they are performed in the
emplo er home i con idered a compen a ion.
The term a a ab includes labor which is
occa ional, inciden al or reg lar. No in the course
of he emplo er rade or b ine incl de labor
that does not promote or advance the trade or
business of the employer.
The term a a
performed as an employee of a foreign
government or an international organiza
includes not only remuneration paid for services
performed by ambassadors, ministers and other
diplomatic officers and employees but also
remuneration paid for services performed as consular
or other officer or employee of a foreign government
or as a non-diplomatic representative of such
government.
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 not subject to withholding tax on
employee shall not enjoy the privilege of being a
MWE and, therefore, his/her entire earning are not
exempt from income tax and, consequently, from
withholding tax if he receives/earns additional
compensation such as commissions, honoraria, fringe
benefits, benefits in excess of the allowable
statutory amount of P90,0003 [RA 10963], taxable
allowance, and other taxable income other than the
statutory minimum wage (SMW), holiday pay,
overtime pay, hazard pay and night shift differential
pay.
(e) 13th Month Pay and Other Benefits. Gross benefits
received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed eighty-two Ninety thousand
pesos (P82,000) (P90,000) x x x
U.P. LAW BOC TAXATION I
MWEs receiving other income, such as income from
the conduct of trade, business, or practice of
profession, except income subject to final tax, in
addition to compensation income are not exempted
from income tax on their income earned during the
taxable year.
This rule, notwithstanding, the SMW, Holiday Pay,
overtime pay, night differential pay and hazard pay
shall still exempt from withholding tax.
FORMS OF COMPENSATION AND HOW
THEY ARE ASSESSED
1. Cash If compensation is paid in cash, the full
amount received is the measure of the income
subject to tax.
2. Medium other than money If services are
paid for in a medium other than money (e.g.,
shares of stock, bonds, and other forms of
property), the fair market value (FMV) of the
thing taken in payment is the amount to be
included as compensation subject to tax. If the
services are rendered at a stipulated price, in the
absence of evidence to the contrary, such price
will be presumed to be the FMV of the
remuneration received.
Living quarters or meals
General Rule: The value to the employee of the living
quarters and meals given by the employer shall be
added to his compensation subject to withholding.
Exception: If living quarters/meals are furnished to an
employee for the convenience of the employer, the
value need NOT be included as part of compensation
income.
Facilities and privileges of a relatively small value
- Facilities and privileges (such an entertainment,
medical services, or o called co r e di co n on
p rcha e ), o her i e kno n a de minimi
benefi f rni hed or offered b an emplo er o hi
employees generally, are NOT considered as
compensation subject to income tax and therefore
withholding tax if such facilities are offered or
furnished by the employer merely as means of
promoting the health, goodwill, contentment, or
efficiency of his employees.
Convenience of the Employer Rule
Allowances in kind furnished to the employee for and
as necessary incident to the performance of his duties
are not taxable [Valencia and Roxas].
Page 48 of 290
TAXATION LAW
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 he emplo ee ork or position, the
value of that privilege need not be included as
compensation [Henderson v. Collector, G.R. No. L-
12954 (1961)]
The amo n of de minimi benefi confirming o
the ceiling prescribed shall not be considered in
determining the P90,000 [RA 10963] ceiling of o her
benefi e cl ded from gro income nder Sec ion
32 (b)(7)(e) of the Tax Code, Provided, that the excess
of he de minimi benefi o er heir re pec i e
ceilings prescribed by these regulations shall be
considered a par of o her benefi and he
employee receiving it will be subject to tax only on
the excess over the P90,000 ceiling [Section 32 (7) (e)],
Pro ided, f r her, ha MWE recei ing, o her
benefi e ceeding he P90,000 limi hall be taxable
on the excess benefits, as well as on his salaries, wages,
and allowances, just like an employee receiving
compensation income beyond the SMW. Any amount
given by the employer as benefits to its employees,
he her cla ified a de minimi benefits or fringe
benefits, shall constitute as deductible expense upon
such employer. Where compensation is paid in
property other than money, the employer shall make
necessary arrangements to ensure that the amount of
the tax required to be withheld is available for
payment to the BIR.
CLASSIFICATION OF GROSS
COMPENSATION INCOME
Basic salary or wage
Salary earnings received periodically for a regular
work other than manual labor, e.g., monthly salary of
an employee
Wages earnings received usually according to
specified intervals of work, as by the hour, day, or
eek, e.g., a carpen er age.
Backwages are subject to income tax and withholding
tax on wages [BIR Ruling No. DA-073-2008]
Honoraria payments given in recognition for
services performed for which the established practice
discourages charging a fixed fee, e.g., honorarium of
a guest lecturer
U.P. LAW BOC TAXATION I
Fixed or variable allowances, i.e. Transportation,
Representation, and other allowances such as Cost of
Living Allowances (COLA)
General Rule: Fixed or variable transportation,
representation or other allowances that are
received by a public officer or employee of a
private entity, in addition to the regular
compensation fixed for his position or office is
COMPENSATION subject to withholding tax.
[Rev. Regs. 2-98]
Exception: Any amount paid specifically, either as
advances or reimbursements for travelling,
representation and other bona fide ordinary and
necessary expenses incurred or reasonably
expected to be incurred by the employee in the
performance of his duties are NOT
COMPENSATION subject to withholding tax,
provided the following conditions are satisfied:
1. It is for ordinary and necessary traveling and
representation or entertainment expenses
paid or incurred by the employee in the
pursuit of the emplo er rade, business or
profession; and
2. The employee is required to account or
liquidate for the foregoing expenses.
The excess of actual expenses over advances made
shall constitute taxable income if such amount is not
returned to the employer. The employee is required
to account/liquidate for the expenses in accordance
with the specific requirements of substantiation for
each category of expenses pursuant to Sec. 34 of the
Tax Code.
Note: Reasonable amounts of reimbursements/
advances for traveling and entertainment expenses
which are pre-computed on a daily basis and are paid
to an employee while he is on an assignment or duty
are NOT subject to withholding tax on wages and
substantiation requirements.
Commission usually a percentage of total sales or
on certain quota of sales volume attained as part of
incentive such as sales commission.
Fees received by an employee for the services
rendered o he emplo er incl ding a direc or 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.
Page 49 of 290
TAXATION LAW
Tips and Gratuities those paid directly to the
employee (usually by a customer of the employer)
which are not accounted for by the employee to the
employer (taxable income but not subject to
withholding tax) [RR NO. 2-98, Sec. 2.78.1]
Hazard or Emergency Pay additional payment
recei ed d e o he orker e po re o danger or
harm while working. It is normally added to the basic
salary together with the overtime pay and night
differential to arrive at gross salary.
Retirement Pay a lump sum payment received by
an employee who has served a company for a
considerable period of time and has decided to
withdraw from work into privacy. [RR 6-82, Sec. 2b]
In general, retirement pay is taxable except in the
following instances:
1. SSS or GSIS retirement pays.
2. Retirement pay (RA 7641) due to old age
provided the following requirements are met:
a. The retirement program is approved by the
BIR Commissioner;
b. It must be a reasonable benefit plan. (Its
implementation must be fair and equitable
for the benefit of all employees)
c. The retiree should have been employed for
10 years in the said company;
d. The retiree should have been 50 years old or
above at the time of retirement; and
e. It should have been availed of for the first
time.
Separation pay taxable if VOLUNTARILY availed
of. It shall not be taxable if involuntary, i.e., death,
sickness, disability, reorganization/ merger of
company and company at the brink of bankruptcy or
for any cause beyond the control of the said official
or employee.
F a a b . Connotes
involuntariness on the part of the official or
employee. The separation from the service of the
official or employee must not be asked for or initiated
by him or it was not of his own making. Such fact
shall be duly established by the employer by
competent evidence which should be attached to the
monthly return for the period in which the amount
paid due to the involuntary separation was made.
Amounts received by reason of involuntary
separation remain EXEMPT from income tax even if
the official or the employee, at the time of separation,
U.P. LAW BOC TAXATION I
had rendered less than ten (10) years of service and/or
is below fifty (50) years of age.
Any payment made by an employer to an employer to
an employee on account of dismissal, constitutes
compensation regardless of whether the employer is
legally bound by contract, statute, or otherwise, to
make such payment.
Pension 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. Pension is taxable unless
the law states otherwise, OR unless the BIR approves
the pension plan of a private company.
Vacation and sick leave rules in determining
whether money received for vacation and sick leave is
taxable or not:
1. If paid or availed of as salary of an employee who
is on vacation or on sick leave notwithstanding
his absence from work, it constitutes TAXABLE
compensation income. [RR 6-82, 2d]
2. Monetized value of unutilized VACATION leave
credits of ten (10) days or less which were paid to
private employees during the year, and the
monetized value of vacation and sick leave credits
paid to government officials and employees are
NOT subject to income tax and to the
i hholding a . The e are de minimi benefi .
[RR no. 11-2018/RR no. 05-2011, amending Sec
2.78.1(A)(7) of RR no. 02-1998] Note:
Monetization of sick leave credits of private
employees even if not exceeding 10 days is not
exempt from income tax and withholding tax on
wages.
3. Terminal leave or money value of accumulated
vacation and sick leave benefits received by heir
upon death of employee is not taxable.
Thirteenth month pay and other benefits - Not
taxable if the total amount received is P90,000 [RA
4
SECTION 32. Gross Income.
(B) Exclusions from Gross Income. The following items
shall not be included in gross income and shall be exempt
from taxation under this Title:
(7) Miscellaneous Items.
(e). 13th Month Pay and Other Benefits. Gross benefits
received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed eighty-two Ninety thousand
pesos (P82,000) (P90,000) which shall cover:
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act
No. 6686;
Page 50 of 290
TAXATION LAW
10963] or less. Any amount exceeding P90,000 is
taxable. [Sec. 32(7)e, NIRC4]
Fringe Benefits and De Minimis
Fringe Benefits any good, service, or other
benefit furnished or granted by an employer, in
cash or in kind, in addition to basic salaries of an
individual employee [Sec. 33, NIRC]
De Minimis privileges of relatively small value
as given by the employer to his employees.
Fringe Benefits and De Minimis are not considered
compensation subject to income tax and withholding
tax.
Overtime Pay premium payment received for
working beyond regular hours of work which is
included in the computation of gross salary of
employee. It constitutes compensation.
Profit Sharing the proportionate share in the
profits of the business received by the employee in
addition to his wages.
Awards for special services awards for past
services or suggestions to employers resulting in the
prevention of theft or robbery, etc. are also
compensations.
Beneficial Payments such as where employer pays
the income tax owed by an employee are additional
compensation income.
Other forms of compensation other forms
received due to services rendered are compensation
paid in kind, e.g., insurance premium paid by the
employer for insurance coverage where the heirs of
he emplo ee are he beneficiarie i he emplo ee
income.
Note: Any amount which is required by law to be
deducted by the employer from the compensation of
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered
by Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, That every three (3) years
after the effectivity of this Act, the President of the
Philippines shall adjust the amount herein stated to its
present value using the Consumer Price Index (CPI), as
published by the National Statistics Office (NSO).
U.P. LAW BOC TAXATION I
an employee including the withheld tax is considered
a par of he emplo ee compen a ion and i
deemed to be paid to the employee as compensation
at the time the deduction is made. (This also applies
to deductions not required by law.)
Withholding Tax on Compensation Income
The income recipient (i.e., EE) is the person liable to
pay the tax on income, yet to improve the collection
of compensation income of EEs, the State requires
the ER to withhold the tax upon payment of the
compensation income.
2. Fringe Benefits
a. Special treatment of fringe benefits
Persons liable: The Employer (as a withholding
agent), whether individual, professional partnership
or a corporation, regardless of whether the
corporation is taxable or not, or the government and
its instrumentalities, is liable to remit the fringe
benefit tax to the BIR once fringe benefit is given to
a managerial AND supervisory employee.
The fringe benefit tax (FBT) is a final tax on the
emplo ee income o be i hheld b he emplo er.
The withholding and remittance of FBT shall be made
on a calendar quarterly basis.
Managerial employee: one who is vested with the
powers or prerogatives to lay down and execute
management policies and/or to hire, transfer,
suspend, lay-off, recall, discharge, assign or discipline
employees.
Supervisory employees: those who, in the interest
of the employer, effectively recommend such
managerial actions if the exercise of such authority is
not merely routinary or clerical in nature but requires
the use of independent judgment.
All employees not falling within any of the above
definitions are considered rank-and-file employees.
5
SECTION 33. Special Treatment of Fringe Benefit.
(A) Imposition of Tax. Effective January 1, 2018 and
onwards, A a final tax of thirty-four percent (34%) effective
January 1, 1998; thirty-three percent (33%) effective January
1, 1999; and thirty-two percent (32%) effective January 1,
2000 and thereafter, thirty-five percent (35%) is hereby
imposed on the grossed-up monetary value of fringe benefit
furnished or granted to the employee (except rank and file
employees as defined herein) by the employer, whether an
individual or a corporation (unless the fringe benefit is
required by the nature of, or necessary to the trade, business
Page 51 of 290
TAXATION LAW
Fringe benefit tax is imposed on fringe benefits
received by supervisory and managerial employees.
The fringe benefits of rank and file employees are
treated as part of compensation income subject to
income tax and withholding tax on compensation.
b. Definition
Fringe benefit means any goods, services, or other
benefit furnished or granted in cash or in kind, in
addition to basic salaries, to an individual employee,
except a rank and file employee (RR No. 03-98, Sec
2.23b)
Fringe benefit means includes but not limited to the
following:
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and
others
5. Interest on loan at less than market rate to the
extent of the difference between the market rate
and actual rate granted.
6. Membership fees, dues and other expenses borne
by the employer for the employee in social and
athletic clubs and similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows.[Sec. 33(B)]
Tax Rate and Tax Base
Tax base is based on the grossed-up monetary
value (GMV) of fringe benefits.
Rate is generally 35%, since this is the headline or the
highest tax rate for individual income taxpayers.
FBT is calculated using the GMV multiply by the
35%. [Sec. 33 (A), NIRC5]
or profession of the employer, or when the fringe benefit is for
the convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax shall be
paid in the same manner as provided for under Section 57(A)
of this Code. The grossed-up monetary value of the fringe
benefit shall be determined by dividing the actual monetary
value of the fringe benefit by sixty-six percent (66%) effective
January 1, 1998; sixty-seven percent (67%) effective January
1, 1999; and sixty-eight percent (68%) effective January 1,
2000 and thereafter sixty-five percent (65%) effective
January 1, 2018 and onwards: Provided, however, That
U.P. LAW BOC
GMV represents
1. the whole amount of income realized by the
employee which includes the net amount of
money or net monetary value of property that has
been received; and
2. the amount of fringe benefit tax due from the
employee which has been withheld and paid by
the employer for and in behalf of his employee.
How GMV is determined
GMV is determined by dividing the actual monetary
value of the fringe benefit by 65% [100% - tax rate of
35%].
For example, the actual monetary value of the fringe
benefit is P1,000. The GMV is equal to P1,538.46
[P1,000 / 0.65]. The fringe benefit tax, therefore, is
P538.46 [P1538.46 x 35%].
Special Cases:
For fringe benefits received by non-resident alien not
engaged in trade of business in the Philippines
(NRANETB), the tax rate is 25% of the GMV. The
GMV is determined by dividing the actual monetary
value of the fringe benefit by 75% [100% - 25%].
What is the tax implication if the employer gives
b a -and-file employees?
Fringe benefits given to a rank-and-file employee are
treated as part of his compensation income subject to
normal tax rate and withholding tax on compensation
income, except de minimis benefits and benefits
provided for the convenience of the employer.
Payor of Fringe Benefit Tax (FBT): The employer
withholds and pays the FBT but the law allows him
to deduct such tax from his gross income.
c. Taxable and non-taxable fringe benefits
Fringe Benefits NOT subject to Tax
1. Fringe benefits not considered as gross income
if it is required or necessary to the business of
employer; if it is for the convenience or
advantage of employer
2. Fringe Benefit that is not taxable under Sec. 32
(B) Exclusions from Gross Income
fringe benefit furnished to employees and taxable under
Subsections (B), (C), (D), and (E) of Section 25 shall be taxed
at the applicable rates imposed thereat: Provided, further,
That the grossed-up value of the fringe benefit shall be
determined by dividing the actual monetary value of the fringe
Page 52 of 290
TAXATION I TAXATION LAW
Fringe benefits not subject to Fringe Benefit Tax:
1. Fringe Benefits which are authorized and
exempted from income tax under the Code or
under special laws;
2. Contributions of the employer for the benefit of
the employee for retirement, insurance and
hospitalization benefit plans;
3. Benefits given to the rank-and-file employees,
whether granted under a collective bargaining
agreement or not; and
4. Fringe benefits granted for the convenience of
the employer;
5. De minimis benefits
The exemption of any Fringe Benefit from the FBT
shall not be interpreted to mean exemption from any
other income tax imposed under the Tax Code except
if the same is likewise expressly exempt from any
other income tax imposed under the Tax Code or
under any other existing law. Thus, if the Fringe
Benefit is exempted from the FBT, the same may,
however, still form of he emplo ee gro
compensation income which is subject to income tax;
hence, likewise subject to withholding tax on
compensation income payment.
De Minimis Benefits
De Minimis Benefits are facilities and privileges
furnished or offered by an employer to his employees
that are relatively small value and are offered or
furnished by the employer merely as means of
promoting health, goodwill, contentment, and
efficiency of his employees [RR No. 3-98, Sec 2.23c]
The following De Minimis Benefits are exempt from
income tax and withholding tax on compensation
income of BOTH managerial and rank and file EEs
[as provided by R.R. No. 11-2018/ R.R. No. 5-2011
/ R.R. No. 8-2012 and R.R. No. 1-20156]:
1. Monetized unused vacation leave credits of
PRIVATE employees not exceeding ten (10)
days during the year. Note that the monetization
of unused VL credits in excess of 10 days and
monetization of SL even if not exceeding 10 days
are subject to tax; (RR No. 5-2011)
2. Monetized value of vacation and sick leave
credits paid to GOVERNMENT officials and
employees. Note that there is no limit as to the
number of credits; [RR No. 5-2011]
benefit by the difference between one hundred percent
(100%) and the applicable rates of income tax under
Subsections (B), (C), (D), and (E) of Section 25.
6
RR 11-2018 only changed the amount of de minimis benefit.
U.P. LAW BOC TAXATION I TAXATION LAW

3. Medical cash allowance to dependents of

employees, not exceeding P1,500 per employee Housing
per semester or P250 per month; [RR No. 11- Fringe Benefit
2018] Housing Privilege Tax Base
4. Rice subsidy of P2,000 or one (1) sack of 50 kg. (Monetary Value)
rice per month amounting to not more than LEASE of residential MV= 50% of lease
P2,000; [RR No. 11-2018] property for the residential payments, where
5. Uniform and Clothing allowance not exceeding use of employees MV = monetary
P6,000 per annum; [RR No. 11-2018] value of the FB
6. Actual medical assistance, e.g. medical allowance Assignment of residential MV= [5% (FMV or
to cover medical and healthcare needs, annual property owned by ZV, whichever is
medical/executive check-up, maternity employer for use of higher) x 50%]
assistance, and routine consultations, not employees
exceeding P10,000.00 per annum; [RR No. 5- Purchase of residential MV= 5% x
2011] property in installment acquisition cost
7. Laundry allowance not exceeding P300 per basis for the use of the exclusive of interest
month; [RR No. 5-2011] employee x 50%
8. Employees achievement awards, e.g., for length Purchase of residential MV= FMV or ZV,
of service or safety achievement, which must be property and ownership is whichever is higher
in the form of a tangible personal property other transferred in the name of
than cash or gift certificate, with an annual the employee
monetary value not exceeding P10,000 received ZV = Zonal Value = value of the land or
by the employee under an established written improvement, as declared in the Real Property
plan which does not discriminate in favor of Declaration Form
highly paid employees; [RR No. 5-2011] FMV = Fair Market Value = FMV as determined by
9. Gifts given during Christmas and major the Commissioner of Internal Revenue
anniversary celebrations not exceeding P5,000
per employee per annum; [RR No. 5-2011] Non-taxable housing fringe benefit:
10. Daily meal allowance for overtime work and 1. Housing privilege of the Armed Forces of the
night/graveyard shift not exceeding twenty-five Philippines (AFP) officials i.e. those of the
percent (25%) of the basic minimum wage on a Philippine Army, Philippine Navy, or Philippine
per region basis; [RR No. 3-98] Air Force
11. Benefits received by an employee by virtue of a 2. A housing unit, which is situated inside or
collective bargaining agreement (CBA) and adjacent to the premises of a business or factory
productivity incentive schemes provided that the maximum of 50 meters from perimeter of the
total monetary value received from both CBA business premises
and productivity incentive schemes combined do 3. Temporary housing for an employee who stays in
not exceed P10,000.00 per employee per taxable housing unit for three months or less
year. [RR No 1-2015]
Motor Vehicle
All other benefits given by employers which are not Fringe Benefit
included in the above enumeration shall NOT be Motor Vehicle Tax Base
considered as "de minimis" benefits and hence, shall (Monetary Value)
be subject to withholding tax on compensation (rank Purchased in the name of MV = acquisition
and file employees) and FBT (managerial/supervisory the employee cost
employees). Cash given to employee to MV = cash received
purchase in his own name by employee
MV = acquisition
Purchase on installment, in
cost exclusive of
the name of employee
interest
Employee shoulders part
MV = amount
of the purchase price,
shouldered by
ownership in the name of
employer
employee

Page 53 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Employer owns and

maintains a fleet of motor MV = (AC/5) x 4. Income from Business
vehicles for use of the 50%
business and of employees Any income derived from doing business.
Employer leases and
maintains a fleet for the MV = 50% of Doing business: The term implies a continuity of
use of the business and of rental payment commercial dealings and arrangements, and
employees contemplates, to that extent, the performance of acts
or works or the exercise of some of the functions
Pure Compensation Earner normally incident to, and in progressive prosecution
(Minimum Wage Earner, Rank & File, Executive) of, the purpose and object of its organization.
Minimum
Managerial or
Wage Rank and File
Supervisory 5. Income from Dealings in Property
Earner
Basic Compensation Dealings in property such as sales or exchanges may
Taxable Taxable result in gain or loss. The kind of property involved
Exempt
Compensation Compensation (i.e., whether the property is a capital asset or an
Holiday Pay, OT, Nightshift Pay, Hazard Pay ordinary asset) determines the tax implication and
Taxable Taxable income tax treatment, as follows:
Exempt
Compensation Compensation
13th Month Pay up to P90,000 Net Capital
Exempt Exempt Exempt Taxable Gains (other
Ordinary
Net than those
Other Benefit in Excess of P90,000 Income
= Net Income +
subject to final
N/A (with Taxable Taxable CGT)
caveat) Compensation Compensation
Fringe Benefit
Subject to
Taxable
Fringe Benefit Ordinary Asset Capital Asset
Compensation
N/A Tax Gain from sale, exchange or other disposition
Tax shouldered
Tax shouldered Ordinary Gain (part
by employee Capital Gain
by employer of Gross Income)
De Minimis Benefit Loss from sale, exchange, or other disposition
Exempt Exempt Exempt Ordinary Loss (part of
Allowable Deductions Capital Loss
3. Professional Income from Gross Income)
Excess of Gains over Losses
Refers to fees received by a professional from the Part of Gross Income Net Capital Gain
practice of his profession, provided that there is NO Excess of Losses over Gains
employer-employee relationship between him and Part of Allowable
his clients. Deductions from Net Capital Loss
Gross Income
It includes the fees derived from engaging in an
endeavour requiring special training as professional as
a. Types of Properties
means of livelihood, which includes, but is not limited
to, the fees of CPAs, doctors, lawyers, engineers, and
Capital v. Ordinary Asset
the like [RR No. 2-98].
Ordinary Assets Capital Assets
The existence of employee-employer relationship is Stock in trade of the Property held by the
the distinguishing factor between compensation taxpayer/ other property taxpayer, whether or
income versus professional income. of a kind which would not connected with his
properly be included in trade or business
the inventory of the which is not an
taxpayer if on hand at the ordinary asset.
close of the taxable year.

Page 54 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Ordinary Assets Capital Assets

Property held by the Generally, they The following percentages of the gain or loss
taxpayer primarily for include: recognized upon the sale or exchange of a capital asset
sale to customers in the stocks and securities shall be taken into account in computing net capital
ordinary course of his held by taxpayers other gain, net capital loss, and net income:
trade or business. than dealers in 1. If the taxpayer is an individual
Property used in the securities 100% if the capital asset has been held for
trade or business of a real property not used not more than 12 months; and
character which is in trade or business, 50% of the capital asset has been held for
subject to the allowance such as residential more than 12 months
for depreciation, or house and lot, idle or 2. If the taxpayer is a corporation
Real property used in the vacant land or building 100%, regardless of the holding period of the
trade or business of the investment property, capital asset [Sec. 39(B), NIRC]
taxpayer, including such as interest in a
property held for rent. partnership, stock The tax rules for the gains or losses from sales or
investment exchanges of capital assets over ordinary assets are as
Personal or non- follows:
business properties, 1. Net capital gain is added to ordinary gain but net
such as family car, capital loss is not deductible from ordinary gain.
home appliances, 2. Net ordinary loss is deductible from ordinary
jewelry. gain.
Note in ordinary assets, that the list is EXCLUSIVE. 3. Capital losses are deductible only to the extent of
The actual use determines whether a property is an the capital gain.
ordinary asset or a capital asset. [BIR Ruling No. DA 4. There is a net capital loss carry-over on the net
212-07, April 3, 2007] capi al a e lo in a a able ear hich ma be
deducted as a short-term capital loss from the net
b. Types of Gains from dealings in property capital gain of the subsequent taxable year;
provided that the following conditions shall be
ORDINARY INCOME VIS-À-VIS CAPITAL observed:
GAIN. a. The taxpayer is other than a corporation;
If the asset involved is classified as ordinary, the b. The amount of loss does not exceed the
entire amount of the gain from the transaction shall income before exemptions at the year when
be included in the computation of gross income [Sec the loss was sustained; and
32(A)], and the entire amount of the loss shall be c. The holding period should not exceed 12
deductible from gross income. [Sec 34(D)]. (See months. [Valencia]
Allowable Deductions from Gross Income - Losses
If the asset involved is a capital asset, the rules on When a capital gain or capital loss is sustained by a
capital gains and losses apply in the determination of corporation, the following rules shall be observed:
the amount to be included in gross income. (See 1. There is no holding period; hence, there is no net
Capital Gains and Losses). capital loss carry-over.
2. Capital gains and losses are recognized to the
These rules do not apply to: extent of their full amount.
1. real property with a capital gains tax (final tax), or 3. Capital losses are deductible only to the extent of
2. shares of stock of a domestic corporation with a capital gains.
capital gains tax (final tax). 4. Net capital losses are not deductible from
ordinary gain or income but ordinary losses are
Also, sale of shares of stock of a domestic deductible from net capital gains.
corporation, held as capital assets, through the stock
exchange by either individual or corporate taxpayers, Note: For sale, barter, exchange or other forms of
is subject to 0.6 of 1%7 percentage tax based on gross disposition of shares of stock subject to the 15%8
selling price. capital gains tax on the net capital gain during the

7
Prior to TRAIN, the rate was ½ of 1%. 5% if not over P100,000; and
8
Prior to TRAIN, the rates were: 10% on any amount in excess of P100,000.

Page 55 of 290
U.P. LAW BOC TAXATION I
taxable year, the capital losses realized from this type
of transaction during the taxable year are deductible
only to the extent of capital gains from the same type
of transaction during the same period. If the
transferor of the shares is an individual, the rule on
holding period and capital loss carry-over will not
apply, notwithstanding the provisions of Section 39
of the Tax Code. [RR 6-2008, c.4]
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. Thus, whether or not
the seller makes a profit from the sale of real
property, he has to pay 6% capital gains tax. In
fact, he has to pay the tax, even if he incurs an actual
loss from the sale thereof. (However, when the buyer
is the government, the individual seller has the option
whether to be taxed at the graduated income tax rates
or at 6% capital gains tax.)
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 0% to 35% (if an individual)9
or to 30% corporate tax or to 2% minimum corporate
income tax (MCIT) (if a corporation).
Computation of the amount of gain or loss
Amount realized from sale or other
disposition of property
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].
9
Prior to TRAIN, graduated rates start from 5% to 32% for
individuals.
Page 56 of 290
TAXATION LAW
LONG TERM CAPITAL GAIN VIS-À-VIS
SHORT TERM CAPITAL GAIN
Long-term capital gain: Capital asset is held for
more than twelve months before it is sold. Only 50%
of the gain is recognized.
Short-term capital gain: Capital asset is held for 12
months or less, 100% of the gain is subject to tax.
NET CAPITAL GAIN VIS-À-VIS NET
CAPITAL LOSS
Net Capital Gain: Excess of the gains over the losses
on sales or exchange of capital assets during the
taxable year.
Net Capital Loss: Excess of the losses over the gains
on sales or exchanges of capital assets during the
taxable year. [Sec. 39 (A), NIRC]
INCOME TAX TREATMENT OF CAPITAL
LOSS
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].
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].
U.P. LAW BOC TAXATION I
DEALINGS IN REAL PROPERTY
SITUATED IN THE PHILIPPINES
Persons Liable and Transactions Affected:
1. Individual taxpayers, estates and trusts
2. Sale or exchange or other disposition of real
property considered as capital assets.
3. Includes "pacto de retro sale" and other
conditional sale.
4. Domestic Corporation
5. 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. A final withholding tax of 6% is based on the
b. gross selling price; or
c. fair market value; or
d. zonal value whichever is higher.
Note: Gain or loss is immaterial, there being a
conclusive presumption of gain.
DEALINGS IN SHARES OF STOCK OF
PHILIPPINE CORPORATIONS
Persons Liable to the Tax:
1. Individual taxpayer, whether citizen or alien;
2. Corporate taxpayer, whether domestic or foreign;
and
3. Other taxpayers not falling under (a) and (b)
above, such as estate, trust, trust funds and
pension funds, among others.
Persons not liable:
1. Dealers in securities
2. Investor in shares of stock in a mutual fund
company
3. 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
0.6 of 1%10 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
10
Prior to TRAIN, the rate was ½ of 1%.
11
Prior to TRAIN, the rates were:
5% if not over P100,000; and
Page 57 of 290
TAXATION LAW
through the remittance of the stock transaction tax by
he eller or ran feror broker.
Note: In the nature of percentage tax and not income
tax; exempt from income tax per Section 127 (d):
An gain deri ed 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
a .
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 at 15% of net
capital gains (on a per transaction basis).11 (Note:
There is a different tax treatment for foreign
corporations as RA 10963 [TRAIN Law] did not
amend such provisions so the old rate is used12)
SALE OF PRINCIPAL RESIDENCE
Principal residence: the family home of the
individual taxpayer [RR 14-2000]
Disposition of principal residence (capital asset) is
exempt from Capital Gains Tax, provided:
1. Sale or disposition of the old principal residence;
2. 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);
3. 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;
4. 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;
5. Can only be availed of only once every ten (10)
years;
6. The historical cost or adjusted basis of his old
principal residence shall be carried over to the
cost basis of his new principal residence
7. If there is no full utilization, the portion of the
gains presumed to have been realized shall be
subject to capital gains tax.
10% on any amount in excess of P100,000.
12
Id.
U.P. LAW BOC TAXATION I
8. Portion of presumed gains subject to CGT:
(Unutilized/GSP) x (higher of GSP or FMV)
c. Tax free exchanges [Sec. 40 (c)(2)]
MERGER OR CONSOLIDATION
No gain or loss shall be recognized if in pursuance of
a plan of merger or consolidation
1. A corporation, which is a party to a merger or
consolidation, exchanges property solely for
stock in a corporation, which is a party to the
merger or consolidation; or
2. A shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation,
solely for the stock of another corporation also a
party to the merger or consolidation; or
3. A security holder of a corporation, which is a party
to the merger or consolidation, exchanges his
securities in such corporation, solely for stock or
securities in such corporation, a party to the
merger or consolidation.
Both corporations in the aforementioned cases must
be parties to a merger or consolidation.
Merger occurs when one corporation acquires all or
substantially all the properties of another corporation.
Consolidation occurs when two or more
corporations merge to form one corporation. Securities
include debentures but does not include notes of
whatever class or duration.
Substantially all the properties of another
corporation means the acquisition of at least 80% of
the assets, including cash, of another corporation
which has the element of permanence and not merely
momentary holding [Banggawan citing BIR Gen.Circ. V-
253 (1957)]
INITIAL ACQUISITION OF CONTROL
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange
for stock or unit of participation in such a corporation
of which as a result of such exchange said person,
alone or together with others, not exceeding four (4)
persons, gains control of said corporation: Provided,
That stocks issued for services shall not be considered
as issued in return for property.
6. Passive Investment Income
Under Sec 24(B) of the Tax Code, a final tax is
imposed upon gross passive income of citizen and
Page 58 of 290
TAXATION LAW
resident aliens. An income is considered passive if the
taxpayer merely waits for it to be realized.
TAX TREATMENT
Passive income may be subject to either schedular
rates or final tax rate.
a. Subject to schedular rates such as dividend
income received by a domestic corporation from
non-resident foreign corporation; and
b. Subject to final tax rate such as interest, income
from foreign currency bank deposits by a resident
citizen.
SOURCES
The following are the sources of passive income
subject to final tax
a. Interest income;
b. Dividend Income;
c. Royalty Income; and
d. Rental Income.
Note that these incomes are NOT added to other
income in the determination of ordinary income tax
liability.
a. Interest Income
An earning derived from depositing or lending of
money, goods or credits [Valencia and Roxas] e.g.,
interest income from government securities such as
Treasury Bills.
Unless exempted by law, interest income received by
the taxpayer, whether or not usurious, is subject to
income tax.
b. Dividend Income
A form of earnings derived from the distribution
made by a corporation out of its earnings or profits
and payable to its stockholders, whether in money or
in property.
The following are the classification of dividends:
1. Cash dividends
2. Stock dividends
3. Property dividends; and
4. Liquidating dividends.
In general, dividends are subject to final tax under the
Tax Code.
Cash dividends
Dividends are subject to final tax under the NIRC.
However, dividends received by a domestic
corporation from another domestic corporation, and
U.P. LAW BOC TAXATION I TAXATION LAW

a non-resident foreign corporation from a domestic

corporation is exempt from income tax.

Cash dividend is the most common form of dividend,

valued at the amount of money received by the
stockholder. Cash dividends and property dividends
are subject to income tax.

Stock dividends
Stock dividend is generally exempt from income tax,
EXCEPT:
1. 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
15%
dividend, the amount so distributed in or 30% if
redemption or cancellation of the stock shall be without
considered as taxable income to the extent that it
represents a distribution of earnings or profits
(Sec. 73(B), NIRC); or
2. 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
ockholder propor iona e hare in he
outstanding share of the corporation. c. Royalty Income
Royalty is a valuable property that can be developed
Property dividends and sold on a regular basis for a consideration; in
Property dividends or dividends in the form of which case, any gain derived therefrom is considered
property are subject to tax at preferential rate under as an active business income subject to the normal
the NIRC. corporate tax.

Liquidating dividends
Represents distribution of all the property or assets of
a corporation in complete liquidation or dissolution.
It is strictly not dividend income, but rather is treated
in effect, a return of capital to the extent of the
hareholder in e men . The difference be een he
cost or other basis of the stock and the amount
received in liquidation of the stock is a capital gain or
a capital loss. Where property is distributed in
liquidation, the amount received is the FMV of such
property. The income is subject to ordinary income
tax rates. It is subject neither to the FWT on dividends
nor to the CGT on sale of shares.
Where a person pays royalty to another for the use of
its intellectual property, such royalty is generally a
passive income of the owner thereof subject to
withholding tax.
d. Rental Income
Refers to earnings derived from leasing real estate as
well as personal property. Aside from the regular
amount of payment for using the property, it also
includes all other obligations assumed to be paid by
the lessee to the third party in behalf of the lessor (e.g.,
interest, taxes, loans, insurance premiums, etc.) [RR
19-86]

Rent income may be in the following forms:

1. Cash, at the stipulated price
2. Obligations of the lessor to third persons paid or
assumed by the lessee in consideration of the
contract of lease, e.g., real estate tax on the
property leased assumed by the lessee

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U.P. LAW BOC TAXATION I TAXATION LAW

3. Advance payment located in the

Philippines shall be
If the advance payment is actually a loan to the lessor, subject to 30%
or an option money for the property, or a security corporate income tax,
deposit for the faithful performance of certain such tax to be withheld
obligations of the lessee, such advance payment is not and remitted by the
income to the lessor. lessee in the Philippines

However, a security deposit that is applied to rental is TAX TREATMENTS

taxable income to the lessor.
a. Leasehold improvements by lessee
If the advance payment is, in fact, a pre-paid rental,
received by the lessor under a claim of right and Rent Income from leasehold improvements:
without restriction as to its use, then such payment is 1. Outright method- lessor shall report as income
income to the lessor. FMV of the buildings or improvements subject
to the lease in the year of completion.
Pre-paid rent must be reported in full in the year of 2. Spread-out method- lessor shall spread over the
receipt, regardless of the accounting method used by remaining term of the lease the estimated
the lessor. depreciated (book) value of such buildings or
improvements at the termination of the lease, and
Lease of personal property reports as income for each remaining term of the
Rental income on the lease of personal property lease an aliquot part thereof.
located in the Philippines and paid to a non-resident
taxpayer shall be taxed as follows: Estimated BV at the end of the lease contract/
NRA- remaining lease term = Income per year
NRFC
NETB
Vessel 4.5% 25% If for any reason than a bona fide purchase from the
Aircraft, machineries and 7.5% 25% lessee by the lessor, the lease is terminated, so that the
other Equipment lessor comes into possession or control of the
Other assets 30% 25% property prior to the time originally fixed, lessor
receives additional income for the year which the lease
Lease of real property is so terminated to the extent of the value of such
Lessor Tax Rate buildings or improvements when he became entitled
Citizen to such possession exceeds the amount already
Resident Alien Net taxable income shall reported as income on account of the erection of such
Non-resident alien be subject to the building or improvement. No appreciation in value
engaged in trade or graduated income tax due to causes other than the premature termination
business in the rates of lease shall be included [Sec. 49, RR No. 2].
Philippines
Non-resident alien not Rental income from real If the building or other leasehold improvement is
engaged in trade or property located in the destroyed before the expiration of the lease, the lessor
business in the Philippines shall be is entitled to deduct as a loss for the year when such
Philippines subject to 25% final destruction takes place, the amount previously
withholding tax unless a reported as income because of the erection of the
lower rate is imposed improvement, less any salvage value, to the extent that
pursuant to an effective such loss was not compensated by insurance [Sec. 49,
tax treaty RR No. 2].
Domestic Corporation Net taxable income shall
Resident Foreign be subject to 30% b. VAT added to rental/paid by the lessee
Corporation corporate income tax or If the lessee is VAT-registered, treat VAT paid as
its gross income will be input VAT
subject to 2% MCIT
Non-resident Foreign Gross rental income
Corporation from real property

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U.P. LAW BOC
If the lessee is not VAT-registered OR not liable to
VAT, treat VAT paid as additional rent expense
deductible from gross income.
c. 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.
7. Annuities, Proceeds from Life
insurance or Other Types of Insurance
It refers to periodic instalment payments of income
or pension by insurance companies during the life of
a person or for a guaranteed fixed period of time,
whichever is longer, in consideration of capital paid
by him. It is paid annually, monthly, or periodically,
computed upon the amount paid yearly, but
necessarily for life. [Peralta v. Auditor General, G.R. No.
L-8480 (1957)]
Annuities are installment payments received for life
insurance sold by insurance companies.
The aleatory contract of life annuity binds the debtor
to pay an annual pension or income during the life of
one or more determinate persons in consideration of
a capital consisting of money or other property,
whose ownership is transferred to him at once with
the burden of the income. [Art. 2021, New Civil
Code]
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.
8. Prizes and Awards
A prize is a reward for a contest or a competition. It
represents rem nera ion for an effor reflec ing one
superiority.
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, scientific, educational,
artistic, literary or civic achievements are
EXCLUSIONS from gross income if:
2. The recipient was selected without any action on
his part to enter a contest or proceedings; and
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TAXATION I TAXATION LAW
3. The recipient is not required to render substantial
future services as a condition to receiving the
prize or award.
4. 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.
9. Pensions, Retirement Benefit, or
Separation Pay
Paid for past employment services rendered.
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]
10. 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
Forgiveness of indebtedness
The cancellation or forgiveness of indebtedness may
have any of three possible consequences:
It may amount to payment of income. If, for example,
an individual performs services to or for a creditor,
who, in consideration thereof, cancels the debt,
income in that amount is realized by the debtor as
compensation for personal services.
It may amount to a gift. If a creditor wishes merely to
benefit the debtor, and without any consideration
therefore, cancels the debt, the amount of the debt is
a gift to the debtor and need not be included in the
la er repor of income.
It may amount to a capital transaction. If a
corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of a
payment of dividend.
Tax Benefit Rule
This is a general principle in taxation which states that
if a taxpayer deducted an item on his income tax
return and enjoyed a tax benefit (reduced his income
U.P. LAW BOC TAXATION I TAXATION LAW

tax) thereby, and in a subsequent year recovers all or Year 2

part of that item, he will recognize gross income in
the year the deducted item is recovered. The rule has
both an inclusionary and an exclusionary component,
i.e., he reco er i incl ded in he a pa er gro
income to the extent that the taxpayer obtained a tax
benefi from he prior ear deduction, and the
reco er i e cl ded o he e en ha he prior ear
deduction did not provide a tax benefit.
3 deductions in Sec. 34 which makes reference to Tax
Benefit Rule are the following:
Taxes [Sec 34(C)(1)]
Abandonment Losses [Sec 34 (D)(7)(b)]
Bad Debts [Sec 34(E)(1)]
Recovery of accounts previously written-off
Bad debts claimed as a deduction in the preceding
year(s) but subsequently recovered shall be included
a par of he a pa er gro income in he ear of
such recovery to the extent of the income tax benefit
of said deduction. There is an income tax benefit
when the deduction of the bad debt in the prior year
resulted in lesser income and hence tax savings for the
company. [Sec. 4, RR 5-99]
Recovery of
Amounts 2,000 2,000 6,000
Written Off
Taxable
Income on 2,000 - 5,000
the Recovery
In Case A, the entire amount recovered (P2,000) is
included in the computation of gross income in Year
2 because the taxpayer benefited by the same extent.
Prior to the write-off, the taxable income was
P300,000; after the write-off, the taxable income was
reduced to P298,000.
In Case B, none of the P2,000 recovered would be
recognized as gross income in Year 2. Note that even
without the write-off, the taxpayer would not have
paid an income a an a . The a able income
before the write-off was actually a net loss.
In Case C, only P5,000 of the P6,000 recovered would
be recognized as gross income in Year 2. It was only
to this extent that the taxpayer benefited from the
write-off. The taxpayer did not benefit from the extra
P1,000 because at this point, the P1,000 was already a
net loss.

Illustration: Receipt of tax refunds or credit

Case A Case B Case C
Year 1 General rule: A refund of a tax related to the business
or the practice of profession, is taxable income (e.g.,
Gross
500,000 400,000 500,000 refund of fringe benefit tax) in the year of receipt to
Income
the extent of the income tax benefit of said deduction
Less:
(i.e., the tax benefit rule applies).
Allowable
Deductions
Exceptions: However, the following tax refunds are not
(before write-
(200,000) (480,000) (495,000) to be included in the computation of gross income:
off of
a. Philippine income tax, except the fringe benefit
Uncollectible
tax
Accounts/De
b. Income tax imposed by authority of any foreign
bts)
country, if the taxpayer claimed a credit for such
Taxable tax in the year it was paid or incurred.
Income (Net c. Esta e and donor a e
Loss) before 300,000 (60,000) 5,000 d. Taxes assessed against local benefits of a kind
write-off tending to increase the value of the property
Deduction assessed (Special assessments)
for Accounts e. Value Added Tax
Receivable (2,000) (2,000) (6,000) f. Fines and penalties due to late payment of tax
written off g. Final taxes
Taxable h. Capital Gains Tax
Income (Net
298,000 (62,000) (1,000)
Loss) after Note: The enumeration of tax refunds that are not
write-off taxable (income) is derived from an enumeration of

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U.P. LAW BOC TAXATION I
tax payments that are not deductible from gross
income.
If a tax is not an allowable deduction from gross
income when paid (no reduction of taxable income,
hence no tax benefit), the refund is not taxable.
SOURCE RULES IN DETERMINING
INCOME FROM WITHIN AND WITHOUT
The following items of gross income shall be treated
as gross income from sources WITHIN the
Philippines:
a. Interests
Derived from sources within the Philippines, and
interests on bonds, notes or other interest-
bearing obligation of residents.
Ultimately, the situs of interest income is the
residence of the debtor.
b. Dividends
Dividends received:
From a domestic corporation; and from a foreign
corporation, UNLESS less than 50% of its gross
income for the previous 3-year period was
derived from sources within the Philippines [in
which case it will be treated as income partly from
within and partly from without].
The income which is considered as derived from
within the Philippines is obtained by using the
following formula:
Philippine Gross Income* x Dividend =
Income Within Worldwide Gross Income*
*of the corporation giving the dividend
As a rule, the situs of dividend income is the
residence of the corporation declaring the
dividend.
c. Services
Compensation for labor or personal services
performed in the Philippines: As a rule, the situs
of compensation is the place of performance of
the services.
d. Rentals and Royalties
From property located in the Philippines or from
any interest in such property, including rentals or
royalties for
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TAXATION LAW
1. The use of or the right or privilege to use in
the Philippines any copyright, patent, design
or model, plan, secret formula or process,
goodwill, trademark, trade brand or other
like property or right;
2. The use of, or the right to use in the
Philippines 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
(a), any such equipment as is mentioned in
(b) or any such knowledge or information as
is mentioned in (c);
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. Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme; and
7. The use of or the right to use:
8. Motion picture films;
9. Films or video tapes for use in connection
with television; and
10. Tapes for use in connection with radio
broadcasting.
As a rule, the situs of rental income is the place
where the property is located. The situs of royalty
income is where the rights are exercised.
e. Sale of Real Property
As a rule, the situs of the income from sale of real
property is where the realty is located.
f. Sale of Personal Property
General Rule: Gains, profits and income from the
sale of personal property, subject to the following
rules:
Place of Place of
Treatment*
PURCHASE SALE
Income from
Philippines Abroad
Without
Income from
Abroad Philippines
Within
U.P. LAW BOC TAXATION I TAXATION LAW

*in other words, the situs of the income from the sale sold from the gross selling price or consideration, or
of personal property is the place of sale. through the deduction from gross income of
depreciation relating to the property used in trade or
Exceptions: business before it is sold.
1. Gain from the sale of shares of stock in a
domestic corporation It may also relate to indemnities, such as proceeds of
2. Treated as derived entirely from sources life in rance paid o he in red beneficiarie and
within the Philippines regardless of where return of premiums paid by the insurance company to
the said shares are sold. the insured under a life insurance, endowment or
3. Gains from the sale of (manufactured) annuity contract.
personal property:
4. produced (in whole or in part) by the Damages, in certain instances, may also be exempt
taxpayer within and sold without the because they represent return of capital.
Philippines, or
5. produced (in whole or in part) by the Items of Exclusion because it is subject to
taxpayer without and sold within the another internal revenue tax
Philippines The value of property acquired by gift, bequest, devise
6. Treated as derived partly from sources or descent is exempt from income tax on the part of
within and partly from sources without the the recipient because the receipt of such property is
Philippines. alread bjec o ran fer a e (e a e a or donor
tax).
Place of Place of
Treatment
PRODUCTION SALE Items of Exclusions because they are expressly
Partly within, exempt from income tax
Philippines Abroad 1. Under the Constitution
partly without
Partly within, 2. Under a tax treaty
Abroad Philippines 3. Under special laws
partly without

g. Shares of Stock of Domestic Corporation 1. Rationale for the Exclusions

Treated as derived entirely from sources within
the Philippines regardless of where the said The erm e cl ion refer o i em ha are no
shares are sold. included in the determination of gross income
because:
f. Exclusions from Gross Income a. They represent return of capital or are not
income, gain or profit;
Exclusions from gross income refer to income b. They are subject to another kind of internal
received or earned but is not taxable as income revenue tax;
because it is exempted by law or by treaty. Such tax- c. They are income, gain or profit expressly exempt
free income is not to be included in the income tax from income tax under the Constitution, tax
return unless information regarding it is specifically treaty, Tax Code, or a general or special law.
called for. Receipts which are not in fact income are, [Mamalateo]
of course, excluded from gross income.
2. Taxpayers Who May Avail of the
The exclusion of income should not be confused with Exclusions
the reduction of gross income by the application of
allowable deductions. While exclusions are simply not Exclusion Taxpayer
taken into account in determining gross income, All taxpayers since
Return of capital
deductions are subtracted from gross income to arrive there is no income.
at net income. [De Leon] All taxpayers unless
Already subject to
provided that income is
internal revenue tax
Items of Exclusions representing return of to be included.
capital Express exclusion As expressly provided.
Amount of capital is generally recovered through
deduction of the cost or adjusted basis of the property

Page 64 of 290
U.P. LAW BOC TAXATION I
3. Exclusions Distinguished from
Deductions and Tax Credit
Exclusions from gross income refer to flow of
wealth to the taxpayer which are not treated as part of
gross income for purposes of computing the
a pa er a able income, d e o he follo ing
reasons: (1) it is exempted by the Constitution or a
statute; or (2) it does not come within the definition
of income.
Deductions, on the other hand, are the amounts
which the law allows to be subtracted from gross
income in order to arrive at net income.
Exclusions pertain to the computation of gross
income, while deductions pertain to the computation
of net income.
Exclusions are something received or earned by the
taxpayer which do not form part of gross income
while deductions are something spent or paid in
earning gross income.
Tax Credit refers to amounts subtracted from the
computed tax in order to arrive at taxes payable.
4. 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.
5. Exclusions Under the Tax Code (Sec.
32(b), NIRC)
a. Proceeds of life insurance policies
General rule: The proceeds of life insurance policies
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 the insured shall be included in
gross income. The interest income shall be taxed at
the graduated income tax rates.
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TAXATION LAW
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.
This refers to the cash surrender value of the contract.
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 sums subsequently paid by the transferee are
exempt from taxation.
d. Value of property acquired by gift, bequest,
devise or descent
Gifts, bequests and devises (which are subject to
estate or gift taxes) are excluded from gross income,
BUT not the income from such property. If the
amount received is on account of services rendered,
whether constituting a demandable debt or not, or the
use or opportunity to use of capital, the receipt is
income [Pirovano v. Commissioner, G.R. No. L-19865,
July 31, 1965]
U.P. LAW BOC TAXATION I TAXATION LAW

Retirement benefits received under RA 7641(The

e. Amount received through accident or health Retirement Pay Law) and those received by officials
insurance (Compensation for damages) and employees of private firms under a reasonable
As a rule, amounts received through accident or private benefit plan (RPBP) maintained by the
health insurance or nder orkmen compen a ion employer under RA 4917 (now Section 32(B)(6)(a) of
acts, as compensation for personal injuries or NIRC) are excluded from gross income subject to
sickness, plus the amount of any damages received, income tax.
whether by suit or agreement, on account of such
injuries or sickness are excluded from gross income. RA 7641 RPBP
Retiring employee must
Examples of non-taxable and taxable damages recoveries are: Retiring official or
be in the service of
employee must have
Non-taxable Taxable same employer
been in the service of
compensation for compensation for CONTINUOUSLY
the same employer for
damages on account damages on account for at least five (5)
at least ten (10) years.
of of years
Personal (physical) Actual damages for loss Retiring employee must Retiring official or
injuries or sickness of anticipated profits be at least sixty (60) employee must be at
years old but not more least fifty (50) years old
Any other damages Moral and exemplary than 65 years of age at at the time of
recovered on account damages awarded as a the time of retirement retirement
of personal injuries or result of break of
Retiring employee shall
sickness contract
not have previously
Exemplary and moral Availed of only once,
availed of the privilege
damages for out-of- and only when there is
Interest for non-taxable under a retirement
court settlement, no RPBP
damages above benefit plan of the
incl ding a orne same or another
fees employer
Alienation of affection, Any damages as Plan must be
or breach of promise to compensation for reasonable. Its
marry unrealized income implementation must
Any amount received be fair and equitable
as a return of capital or for the benefit of all
reimbursement of employees (e.g. from
expenses president to laborer)
Plan must be approved
by BIR
f. Income exempt under tax treaty

Income of any kind, to the extent required by any A 'reasonable private benefit plan' means a pension,
treaty obligation binding upon the Government of the gratuity, stock bonus or profit-sharing plan
Philippines. maintained by an employer for the benefit of some or
all of his employees wherein contributions are made
g. Retirement benefits, pensions, gratuities, by such employer, or employees, or both for the
etc. purpose of distributing to such employees the
These are: earnings and principal of the fund thus accumulated
a. Retirement benefits under RA 7641, RA 4917, by the trust in accordance with such plan (trust fund)
and Section 60(B) of the NIRC
b. Terminal pay Further, it should be provided in the plan that at no
c. Retirement Benefits from foreign government time prior to the satisfaction of all liabilities with
agencies respect to employees under any trust, shall any part of
d. Veterans benefits the corpus or income of the fund be used for, or be
e. Benefits under the Social Security Act diverted to, any purpose other than for the exclusive
f. GSIS benefits benefit of his employees.

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U.P. LAW BOC TAXATION I
Terminal pay/Separation pay
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
emplo ee. The phra e for an ca e be ond he
con rol of he aid official or emplo ee mean ha
the separation of the employee must be involuntary
and not initiated by him.
The separation must not be of his own making.
Notes:
Sickness must be life-threatening or one which
renders the employee incapable of working
Retrenchment of the employee due to
unfavorable business conditions or financial
reverses is considered as involuntary. However,
resignation or availment of an optional early
retirement plan is voluntary and bars a claim
under this provision.
BIR Ruling 143-98: The erminal lea e pa
(amount paid for the commutation of leave
credits) of retiring government employees is
considered not part of the gross salary, and is
exempt from taxes. The government recognizes
that for most public servants, retirement pay is
always less than generous if not meager and
scrimpy. Terminal leave payments are given not
only at the same time but also for the same policy
considerations governing retirement benefits.
[Commissioner v. CA and Castaneda, G.R. 96016
(1991)].
Retirement BENEFITS from foreign
government agencies The social security benefits,
retirement gratuities, pensions and other similar
benefits received by resident or non-resident citizens
or aliens who come to reside permanently in the
Philippines from foreign government agencies and
other institutions, private or public;
Payments of VETERANS benefits under U.S.
Veterans Administration Payments of benefits
due or to become due to any person residing in the
Philippines under the laws of the United States
administered by the United States Veterans
Administration
Social Security Act benefits Payments of benefits
received under the Social Security Act of 1954 (RA
8282), as amended, e.g., Maternity Benefits
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TAXATION LAW
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]
h. Winnings, prizes and award, including those
in sports competitions
All prizes and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad, AND
sanctioned by their national sports associations shall
not be included in gross income and shall be tax
exempt. [Sec. 32 B7d, NIRC]
Prizes and awards made primarily in recognition of
charitable, literary, educational, artistic, religious,
scientific, or civic achievement are not taxable, provided
Recipient was selected without any action on his part
to enter the contest or proceeding; and Recipient is
not required to render substantial future services as a
condition to receiving the prize or award
6. Exclusions Under Special Laws
Personal Equity and Retirement Account
Under R.A. 6657 (Comprehensive Agrarian
Reform Package Law), gain arising from the
transfer of agricultural property covered by the law
shall be exempt from capital gains tax.
Under R.A. 6938 (Cooperative Code of the
Philippines), as amended by R.A. 9520, cooperatives
transacting business with both members and non-
members shall not be subject to tax on their
transactions with members. In relation to this, the
transactions of members with the cooperative shall
not be subject to any taxes and fees, including but not
limited to final taxes on members' deposits.
Under R.A. 7916 (PEZA Law), as amended, PEZA-
registered enterprises are given income tax holidays of
six or four years from the date of commercial
operations, depending on whether their activities are
considered pioneer or non-pioneer.
Under R.A. 9178 (Barangay Micro Business
Enterprises Act of 2002), BMBEs shall be exempt
from income tax for income arising from the
operation of the enterprise.
U.P. LAW BOC TAXATION I
3. Deductions from Gross
Income
Deductions are items or amounts authorized by law
to be subtracted from the pertinent items of gross
income to arrive at taxable income.
Deductions from income tax purposes partake of the
nature of tax exemptions; hence, if tax exemptions are
to be strictly construed, then it follows that
deductions must also strictly construed. [CIR v Isabela
Cultural Co., G.R. No. 172231 (2007)]
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.
In general, deductions or allowable deductions are
business expenses and losses incurred which the law
allows to reduce gross business income to arrive at net
income subject to tax. [Sec. 65, RR No. 2]
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 fall 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.
If the exemption is not expressly stated in the law, the
taxpayer must at least be within the purview of the
exemption by clear legislative intent [Commissioner of
Customs v. Philippine Acetylene Co., G.R. No. L-22443
(1971)]
However, if there is an express mention in the law or
if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on strict
construction will not apply. [Commissioner v. Anoldus
Caprentry Shop, G.R. No. 71122 (1988)]
The purpose of deductions from gross income is to
provide the taxpayer a just and reasonable tax amount
as the basis of income tax. It is because many
taxpayers spend adequate expenditures in order to
obtain a legitimate income.
Types of deductions
There are four (4) types of deductions from gross
income:
Page 68 of 290
TAXATION LAW
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. optional standard deduction available to
corporations under Section 34(L) of the Tax
Code (introduced by RA No. 9504)
d. the special deductions in Sections 37 and 38 of
the NIRC, and in special laws like the BOI law
(E.O. 226).
a. General Rules
1. Deductions must be paid or incurred in
connec ion i h he a pa er rade, b ine or
profession
2. Deductions must be supported by adequate
receipts or invoices (except standard deduction)
3. Additional requirement relating to withholding
b. Return of Capital
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]
Sale of inventory of goods by manufacturers and
dealers of properties: In sales of goods representing
inventory, the amount received by the seller consists
of return of capital and gain from sale of goods or
properties. That portion of the receipt representing
return of capital is not subject to income tax.
Accordingly, cost of goods manufactured and sold (in
the case of manufacturers) and cost of sales (in the
case of dealers) is deducted from gross sales and is
reflected above the gross income line in a profit and
loss statement.
Sale of stock in trade by a real estate dealer and
dealer in securities: Real estate dealers and dealers
in securities are ordinarily not allowed to compute the
amount representing return of capital through cost of
U.P. LAW BOC TAXATION I
sales. Rather they are required to deduct the total cost
specifically identifiable to the real property or shares
of stock sold or exchanged.
Sale of services: Their entire gross receipts are
treated as part of gross income.
c. Itemized Deductions
These are enumerated in Section 34 of the NIRC.
Additional deductions are granted to insurance
companies in Section 37, while losses from wash sales
of stock or securities by a dealer in securities are
provided for in Section 38 of the NIRC. Other
itemized deductions could be granted under general
or special laws, e.g. additional training expenses are
allowed to enterprises registered with PEZA, BOI,
and SBMA.
Timing of Claiming Deductions
A taxpayer has the right to deduct all authorized
allowances for the taxable year. As a rule, if he does
not within any year deduct certain of his expenses,
losses, interest, taxes or other charges, he cannot
deduct them from the income of the next of any
succeeding year [Sec. 76, Income Tax Regulations]
1. Expenses
Business expenses deductible from gross income
include the ordinary and necessary expenditures
directly connected wi h or per aining o he a pa er
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.
Includes:
a. Salaries, wages, and other forms of compensation
for personal services actually rendered, including
the grossed-up monetary value of fringe benefits
furnished or granted by the employer to the
employee
b. Travel expenses
c. Rentals
d. Entertainment, recreation and amusement
expenses
e. Other expenses such as repairs or those incurred
by farmers and other persons in agribusiness
Requisites for deductibility of business expenses
a. Ordinary AND necessary;
Page 69 of 290
TAXATION LAW
ORDINARY - normal and usual in relation to
the taxpayer's business and surrounding
circumstances; need not be recurring
NECESSARY - appropriate and helpful in the
development of taxpayer's business or are proper
for the purpose of realizing a profit or
minimizing a loss
b. Paid or incurred during the taxable year;
c. 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;
d. 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);
e. Legitimately paid (not a BRIBE, kickback, or
otherwise contrary to law, morals, public policy);
f. 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;
g. Amount must be reasonable.
Note: The expenses allowable to a non-resident alien
or a foreign corporation consist of only such expenses
as are incurred in carrying on any business or trade
conducted within the Philippines exclusively. [Sec. 77
RR 2]
COHAN Rule: This relief will apply if the taxpayer
has shown that it is usual and necessary in the trade
to entertain and to incur similar kinds of expenditures,
there being evidence to show the amounts spent and
the persons entertained, though not itemized. In such
a situation, deduction of a portion of the expenses
incurred might be allowed even if there are no receipts
or vouchers. Absence of invoices, receipts or
vouchers, particularly lack of proof of the items
constituting the expense is fatal to the allowance of
the deduction [Gancayco v. Collector, G.R. No. L-13325,
(1961)]
Substantiation requirement Sec. 34(A)(1)(b),
NIRC: No deduction from gross income shall be
allowed unless the taxpayer shall substantiate with
sufficient evidence, such as official receipts or other
adequate records: (1) the AMOUNT of the expense
being deducted, and (2) the DIRECT
CONNECTION or relation of the expense being
deducted to the development, management,
U.P. LAW BOC TAXATION I
operation and/or conduct of the trade, business or
profession of the taxpayer.
When o ACCRUE e pen e : all e en e ae
that 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.
Kinds of business expenses
These are:
a. Salaries, wages and other forms of compensation
for personal services actually rendered, including
the grossed-up monetary value of the fringe
benefit subjected to fringe benefit tax which tax
should have been paid
b. Travelling expenses
c. Cost of materials
d. Rentals and/or other payments for use or
possession of property
e. Repairs and maintenance
f. Expenses under lease agreements
g. Expenses for professionals
h. Entertainment expenses
i. Political campaign expenses
j. Training expenses
k. Others
Salaries, wages and other forms of compensation
for personal services actually rendered, including
the grossed-up monetary value of the fringe
benefit subjected to fringe benefit tax which tax
should have been paid
Given for personal services must be actually rendered
and reasonable.
For income payment to be allowed as deduction, the
withholding tax must have been paid [RR No. 12-
2013].
Bonuses are deductible when:
a. made in good faith
b. given as additional compensation for personal
services actually rendered
c. such payments, when added to the stipulated
salaries, do not exceed a reasonable
compensation for the services rendered
Traveling expenses
a. This include transportation expenses and meals
and lodging [Secs. 65 and 66, Rev. Reg. No. 2]
b. Expenses must be reasonable and necessary.
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TAXATION LAW
c. M be inc rred or paid hile a a from
home
d. Tax home is the principal place of business, when
referring o a a from home
e. Incurred or paid in the conduct of trade or
business.
Note: However, necessary transportation expenses of
the taxpayer (which are different from the
transportation expenses included in the term ra el
e pen e ) in i a home are ded c ible. Th , a
taxpayer operating its business in Manila is allowed
transportation expenses from its office to its
c omer place of b ine and back. B he
transportation expenses of an employee from his
residence to its office and back are not deductible as
they are considered personal expenses.
Cost of materials
Deductible only to the amount that they are actually
consumed and used in operation during the year for
which the return is made, provided that their cost has
not been deducted in determining the net income for
any previous year.
Rentals and/or other payments for use or
possession of property
Required as a condition for continued use or
possession of property.
For purposes of trade business or profession.
Taxpayer has not taken or is not taking title to the
property or has no equity other than that of
lessee, user, or possessor.
On the accrual basis, rent is deductible as expense
when liability is incurred during the period of use.
On cash basis, rent is deductible when it is
incurred and paid.
If the advance payment is a prepaid rental, such
payment is taxable income to the lessor in the
year when it was received. However, an advance
payment is not deductible expense of the lessee
until the period is used. [Valencia and Roxas]
Repairs and maintenance
Incidental or ordinary repairs are deductible. Repairs
which neither materially add to the value of the
property nor appreciably prolong its life, but keep it
in an ordinarily efficient working condition, may be
deducted as expenses, provided the plant or property
account is not increased by the amount of such
expenditure. The life of the asset referred to is the
probable, normal, useful life for the purpose of the
allowance for the return of the capital investment
U.P. LAW BOC TAXATION I
not what the life that would have been if no repairs
had been made after the property was damaged by a
casualty. Since the repairs prolonged the lives of the
said vessels of petitioners, the disallowance must be
sustained. [Visayan Transportation Co. v. CTA, CTA
Case No. 1119, (1964)]
Extraordinary repairs are not deductible they are
capital expenditures
Repairs which add material value to the property
or appreciably prolong its life
Repairs in the nature of replacement, to the extent
that they arrest deterioration and appreciably prolong
the life of the property, should be charged against the
depreciation reserves if such account is kept. [Sec. 68,
Rev. Regs. 2]
All maintenance expenses on account of non-
depreciable vehicles for taxation purposes are
disallowed in its entirely. [RR No. 12-2012]
Expenses under lease agreements
Requisites for deductibility:
a. Required as a condition for continued use or
possession;
b. For purposes of the trade, business or
possession;
c. Taxpayer has not taken or is not taking title to the
property or has no equity other than that of
lessee, user, or possessor.
Expenses for professionals
Deductible in the year the professional services are
rendered, not in the year they are billed, provided that
the all e en i pre en .
A :
a. Fixing a right to income or liability to pay; and
b. The availability of reasonably accurate
determination of such income or liability.
The all-e en e doe no demand ha he
amount of income or liability be known absolutely; it
only requires that a taxpayer has at its disposal the
information necessary to compute the amount with
reasonable accuracy, which implies something less
than an exact or completely accurate amount.
[Commissioner v. Isabela Cultural Corporation, G.R. No.
172231 (2007)]
A professional may claim as deductions the cost of
supplies used by him in the practice of his profession,
expenses paid in the operation and repair of
Page 71 of 290
TAXATION LAW
transportation equipment used in making
professional calls, dues to professional societies and
subscriptions to professional journals. [Mamalateo]
Entertainment/Representation expenses
These are entertainment, amusement and recreation
(EAR) expenses incurred or paid during the year that
are directly connected to the development,
management and operation of the trade, business or
profession of the taxpayer.
Requisites for deductibility:
a. Reasonable in amount.
b. Paid or incurred during the taxable period.
c. Directly connected to the development,
management, and operation of the trade,
business or profession of the taxpayer, or that are
directly related to or in furtherance of the
conduct thereof.
d. Not to exceed such ceiling as the Secretary of
Finance prescribe (under RR 10-02, in no case to
exceed 0.50% of net sales for sellers of goods or
properties or 1% of net revenues for sellers of
services, including taxpayers engaged in the
exercise of profession and use or lease of
properties)
e. Not incurred for purposes contrary to law,
morals, public policy or public order.
f. Must be substantiated with sufficient evidence
such as receipts and/or adequate records.
Exclusions from EAR expenses:
a. Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship
b. Expenses for charitable or fund raising events
c. Expenses for bona fide business meeting of
stockholders, partners or directors
d. Expenses for attending or sponsoring an
employee to a business league or professional
organization meeting
e. Expenses for events organized for promotion
marketing and advertising, including concerts,
conferences, seminars, workshops, conventions
and other similar events; and
f. Other expenses of a similar nature.
Political campaign expenses
Amount expended for political campaign purposes or
payments to campaign funds are NOT deductible
either as business expenses or as contribution [CTA
Case No. 695, April 30, 1969, citing Mertens]
U.P. LAW BOC TAXATION I
Training expenses
Under Section 30 of the Tax Code, as implemented
by Sec. 20 of the Revenue Regulations No. 2,
organization and pre-operating expenses of a
corporation (including training expenses) are
considered as capital expenditures and are therefore,
not deductible in the year they are paid or incurred.
But taxpayers who incur these expenses and
subsequently enter the trade or business to which the
expenditures relate can elect to amortize these
expenditures over a period not less than sixty (60)
months. [BIR Ruling 102-97, Sept. 29, 1997]
This rule, however, does not apply to a situation
where an existing corporation incurs these same
expenditures for the purpose of expanding its
business in a new line of trade, venture or activity.
OTHERS
a. Expenses Allowable to Private Educational
Institutions
In addition to the expenses allowable as
deductions under the NIRC, a private proprietary
educational institution may at its OPTION, elect
either:
1. To deduct expenditures otherwise
considered as capital outlays or depreciable
assets incurred during the taxable year for
the expansion of school facilities, OR
2. To deduct allowances for depreciation
thereof.
Thus, where the expansion expense has been
claimed as a deduction, no further claims for
yearly depreciation of the school facilities are
allowed.
b. Advertising Expenses
The media advertising expenses which were
found to be inordinately large and thus, not
ordinary, and which were incurred in order to
pro ec he a pa er brand franchi e hich i
analogous to the maintenance of goodwill or title
o one proper , are no ordinar and nece ar
expenses but are capital expenditures, which
should be spread out over a reasonable period of
time. [CIR v. General Foods Phils. Inc, G.R. No.
143672 (2003)]
Page 72 of 290
TAXATION LAW
2. Interest
Requisites for deductibility
a. There is a valid and existing indebtedness.
b. The indebtedness is that of the taxpayer
c. The indebtedness is connected with the
a pa er rade, profe ion, or b ine .
d. The interest must be legally due.
e. The interest must be stipulated in writing.
f. The taxpayer is LIABLE to pay interest on the
indebtedness.
g. The indebtedness must have been paid or
accrued during the taxable year.
h. The interest payment arrangement must not be
between related taxpayers
i. The interest must not be incurred to finance
petroleum operations.
j. 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, 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:
U.P. LAW BOC
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 Grantor and
Fiduciary; or
e. Fiduciary of a trust and fiduciary of another trust
if the same person is a grantor with respect to
each trust; or
f. Fiduciary and Beneficiary
INTEREST SUBJECT TO SPECIAL RULES
a. Interest paid in advance
No deduction shall be allowed if within the
taxable year an individual taxpayer reporting
income on cash basis incurs an indebtedness on
which an interest is paid in advance through
discount or otherwise.
But the deduction shall be allowed in the year the
indebtedness is paid
b. 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
c. 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
A deduction in full in the year when incurred;
A capital expenditure for which the taxpayer
may claim only as a deduction the periodic
amortization of such expenditure.
Should the taxpayer elect to deduct the interest
payments against its gross income, the taxpayer
cannot at the same time capitalize the interest
payments. In other words, the taxpayer is not
entitled to both the deduction from gross income
and the adjusted (increased) basis for determining
gain or loss and the allowable depreciation
charge. [Paper Industries Corp. v. Commissioner, G.R.
Nos. 106949-50 (1995)]
Page 73 of 290
TAXATION I TAXATION LAW
d. 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]
This limitation is apparently intended to counter
the tax arbitrage scheme where a taxpayer obtains
an interest-bearing loan and places the proceeds
of such loan in investments that yield interest
income subject to preferential tax rate of 20%
final withholding tax. [Valencia and Roxas]
3. Taxes
Taxes Proper: Refers to national and local taxes
Requisites for deductibility
a. Such tax must be:
b. Paid or incurred within the taxable year;
c. Paid or incurred in connection with the
taxpayer rade, profession or business;
d. Imposed directly on the taxpayer;
e. Not specifically excluded by law from being
ded c ed from he a pa er gro income.
The following taxes are deductible:
a. Import duties;
b. Business tax;
c. Professional/occupation tax;
d. Privilege and excise tax;
e. DST;
f. Motor vehicle registration fees;
g. Real property tax;
h. Electric energy consumption tax; and
i. Interest on delinquent taxes.
Non-deductible taxes
General Rule: All taxes, national or local, paid or
incurred during the taxable year in connection with
the taxpayer's profession, trade or business, are
deductible from gross income
Exceptions:
a. Philippine income tax, except Fringe Benefit
Taxes;
b. Income tax imposed by authority of any foreign
country, if taxpayer avails of the Foreign Tax
Credit (FTC)
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
U.P. LAW BOC TAXATION I TAXATION LAW

deduction from gross income of citizens and The following may claim tax credits:
domestic corporations subject to the limitations set a. Resident citizens
forth by law. b. Domestic corporations, which include all
partnerships except general professional
Treatments of surcharges/interests/fines for partnerships
delinquency c. Members of general professional partnerships
The amount of deductible taxes is limited to the basic d. Beneficiaries of estates or trusts
tax and shall not include the amount for any surcharge
or penalty on delinquent taxes. However, interest on The following may NOT claim tax credits:
delinquent taxes, although not deductible as tax, can a. Non-resident citizens
be deducted as interest expense at its full amount. b. Aliens, whether resident or non-resident
[CIR v. Palanca, G.R. No. L-16626 (1966)] c. Foreign corporations, whether resident on non-
resident
Although interest payment for delinquent taxes is not
deductible as tax, the taxpayer is not precluded Note: Tax credits for foreign taxes are allowed only for
thereby from claiming said interest payment as income derived from sources outside the Philippines.
deduction as such. [CIR v. Vda. de Prieto, G.R. No. L- The above taxpayers are not entitled to tax credit; they
13912 (1960)] are taxable only on income derived from Philippine
sources.
Treatment of special assessment
Special assessments and other taxes assessed against Limitations on Tax Credit.
local benefits of a kind tending to increase the value [Per Country Limit] The amount of tax credit shall not
of the property assessed are non-deductible from exceed the same proportion of the tax against which
gross income. such credit is taken, which the taxpayer's taxable
income from sources within such country bears to his
Tax credit vis-à-vis deduction entire taxable income for the same taxable year; and
Tax credit amount allowed by law to reduce the [Worldwide Limit] The total amount of the credit
Philippine income tax due, subject to limitations, on shall not exceed the same proportion of the tax
account of taxes paid or accrued to a foreign country against which such credit is taken, which the
taxpayer's taxable income from sources without the
Tax Credit Tax Deduction Philippines taxable bears to his entire taxable income
Taxes are deductible for the same taxable year.
Taxes are deductible
from gross income in
from the Phil. Income Formula:
computing the taxable
tax itself
income Limit #1 Per Country Limit
Effect: Reduces Effect: Reduces taxable Taxable
Philippine income tax income upon which the Income Per
liability tax liability is calculated Foreign
Sources: Only foreign Country Limit on
income taxes may be Sources: Deductible Phil. Income
x = amount of
claimed as credits taxes (e.g. business tax, Tax
Worldwide tax credit
against Philippine excise tax)
Taxable
income tax.
Income
An amount subtracted from an individual's or entity's
tax liability to arrive at the total tax liability. A tax
credit reduces the taxpayer's liability, compared to a
deduction which reduces taxable income upon which
the tax liability is calculated. A credit differs from
deduction to the extent that the former is subtracted
from the tax while the latter is subtracted from
income before the tax is computed. [CIR v. Bicolandia
Drug Corp., G.R. No. 148083 (2006)]

Page 74 of 290
U.P. LAW BOC TAXATION I
Limit #2 World Limit
Taxable
Income Per
Foreign
Limit on
Country Phil.
amount
x Income =
of tax
Worldwide Tax
credit
Taxable
Income
Note: Computation of FTC: Limit #2 applies where
taxes are paid to two or more foreign countries.
Allowable tax credit is the lower between the tax
credit computed under Limit #1 and that computed
under Limit#2.
FTC Limitations lowest of the 3:
a. Actual FTC
b. For taxes paid to one foreign country
c. For taxes paid to 2 or more foreign countries
4. Losses
Requisites for deductibility
a. Loss must be that of the taxpayer (e.g., losses of
the parent corp. cannot be deducted by its
subsidiary);
b. Actually sustained and charged off within the
taxable year;
c. Incurred in trade, business or profession;
d. 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;
e. Sustained in a closed and completed transaction;
f. Not compensated for by insurance or other form
of indemnity;
g. Not claimed as a deduction for estate tax
purposes;
h. 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
i. 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.
In case a non-depreciable vehicle is sold at a loss, the
loss incurred from the sale of non- depreciable vehicle
is not allowed as a deduction. [RR No. 2-2013]
Page 75 of 290
TAXATION LAW
No loss is recognized in the following.
a. Merger, consolidation, or control securities
(where no gains are recognized either);
b. Exchanges not solely in kind;
c. Related taxpayers (see above (c) Interest
expense incurred to acquire property for use in
trade/business/profession)
d. Wash sales;
e. Illegal transactions
OTHER TYPES OF LOSSES
a. Capital losses
1. Incurred in the sale or exchange of capital
assets (allowable only to the extent of capital
gains, 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)
2. Resulting from securities becoming
worthless and which are capital assets
(considered loss from sale or exchange) on
last day of the taxable year
3. Losses from short sales of property;
4. Losses due to failure to exercise privileges or
options to buy or sell property.
b. Securities becoming worthless
Loss in shrinkage in value of stock through
fluctuation in the market is not deductible from gross
income. (To be deductible, the loss must be actually
suffered when the stock is disposed of.)
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
U.P. LAW BOC TAXATION I
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. Net Operating Loss Carry Over (NOLCO)
Net operating loss (NOL) is the excess of allowable
deductions over gross income for any taxable year
immediately preceding the current taxable year.
NOLCO: The NOL of the business or enterprise
which had not been previously offset as deduction
from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive
taxable years immediately following the year of such
loss, provided however, that any net loss incurred in
a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction.
[Sec. 34(3)(D), NIRC]
Exception: Mines other than oil and gas wells, where a
net operating loss without the benefit of incentives
provided for under EO No. 226 (Omnibus
Investments Code) incurred in any of the first ten (10)
years of operation may be carried over as a deduction
from taxable income for the next five (5) years
immediately following the year of such loss.
Requisites for NOLCO
a. The taxpayer was not exempt from income tax
the year the loss was incurred;
b. There has been no substantial change in the
ownership of the business or enterprise wherein:
c. AT LEAST 75% of nominal value of outstanding
issued shares is held by or on behalf of the same
persons; or
d. 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
a. 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.
Page 76 of 290
TAXATION LAW
b. 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 the
NOLCO is not interrupted by the fact that the
corporation is subject to MCIT during such three-year
period.
Other Losses
a. Abandonment losses in petroleum operation and
producing well.
b. Losses due to voluntary removal of building
incident to renewal or replacements are
deductible from gross income.
c. 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)
d. Losses from sales or exchanges of property
between related taxpayers are not recognized, but
the gains are taxable.
e. Losses of farmers incurred in the operation of
farm business are deductible.
5. Bad debts
Debts resulting from the worthlessness or
uncollectibility, in whole or in part, of amounts due
the taxpayer actually ascertained to be worthless and
the corresponding receivable should have been
written off or charged off within the taxable year.
A debt is worthless when after taking reasonable steps
to collect it, there is no likelihood of recovery at any
time in the future.
Requisites for deductibility
a. Valid and legally demandable debt due to the
taxpayer
b. Debt is connected with the taxpayer's trade,
business or practice of profession;
c. Debt was not sustained in a transaction entered
into between related parties;
U.P. LAW BOC TAXATION I
d. 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
e. 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:
a. Banks as creditors BSP Monetary Board shall
ascertain the worthlessness and uncollectibility of
the debt and shall approve the writing off
b. Receivables from an insurance or surety company
(as debtor) may be written off as bad debts only
when such company is declared closed due to
insolvency or similar reason
The taxpayer must show that the debt is indeed
uncollectible even in the future. He must prove that
he exerted diligent efforts to collect:
a. Sending of statement of accounts
b. Collection letters
c. Giving the account to a lawyer for collection
d. Filing the case in court [Phil. Refining Corp. v. CA,
G.R. No. 118794 (1996)]
In ascertaining the debt to be worthless, it is not
enough that the taxpayer acted in good faith. He must
show that he had reasonably investigated the relevant
facts from which it became evident, in the exercise of
sound, objective business judgment, that there
remained no practical, but only a vague prospect that
the debt would be paid [Collector v. Goodrich, G.R. No.
L-22265 (1967)]
Rev. Reg. No. 5-1999
Ac all a cer ained o be or hle
Determination of worthlessness must depend upon
the particular facts and circumstances of the case. A
taxpayer may not postpone a bad debt deduction on
the basis of a mere hope of ultimate collection or
because of a continuance of attempts to collect, where
there is no showing that the surrounding
circumstances differ from those relating to other
notes which were charged off in a prior year.
Accounts receivable may be written off as bad debts
even without conclusive evidence that they had
definitely become worthless when:
a. the amount is insignificant; and
Page 77 of 290
TAXATION LAW
b. collection through court action may be more
costly to the taxpayer.
Ac ally charged off from the taxpa er book of
acco n Receivable which has actually become
worthless at the end of the taxable year has been
cancelled and written off. Mere recording in the
books of account of estimated uncollectible accounts
does not constitute a write-off.
EFFECT OF RECOVERY OF BAD DEBTS
Tax Benefit Rule on Bad Debts
Bad debts claimed as deduction in the preceding
year(s) but subsequently recovered shall be included
a par of he a pa er gro income in he ear of
such recovery the extent of the income tax benefit of
said deduction. Also called the equitable doctrine of
tax benefit.
Requisites:
a. Allowance must be reasonable
b. Charged off during the taxable year from the
a pa er book of acco n .
c. Does not exceed the acquisition cost of the
property.
6. Depreciation
An annual reasonable allowance to reduce the
wasteful value of the tangible fixed assets resulting
from wear and tear and normal obsolescence
For intangible assets, the annual allowance to reduce
their useful value is called amortization.
Requisites for Deductibility
a. It must be reasonable.
b. It must be charged off during the year.
c. The asset must be used in profession, trade or
business.
d. The asset must have a limited useful life.
The depreciable asset must be located in the
Philippines if the taxpayer is a nonresident alien or a
foreign corporation. [Valencia and Roxas]
No depreciation shall be allowed for yachts,
helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the threshold amount of
P2,400,000, nle he a pa er main line of
business is transport operations or lease of
transportation equipment and the vehicles purchased
are used in the operations. [RR No. 12-2012]
U.P. LAW BOC TAXATION I TAXATION LAW

Methods of computing depreciation allowance i. in accordance with a National Priority Plan

(cost- salvage value) ÷ determined by NEDA (otherwise, subject to
Straight-line statutory limit)
estimated life
(cost salvage value) x j. Donations to Certain Foreign Institutions or
Rate of Depreciation* International Organizations which are fully
Declining balance deductible in compliance with agreements,
*rate = 1÷ estimated treaties or commitments entered into by the
life Government of the Philippines and the foreign
(remaining life ÷ SYD) institutions or international organizations or in
Sum-of-the-year-digit pursuance of special laws
x (cost- salvage value)
(SYD) k. Donations to Accredited Non-government
÷
Any other method Organizations subject to conditions set forth in
which may be RR No. 13-98 NGO means a non-stock non-
prescribed by the profit domestic corporation or organization:
Secretary of Finance l. Organized and operated exclusively for:
upon the 1. scientific,
recommendation of the 2. research,
CIR 3. educational,
4. character-building and youth and sports
development,
7. Charitable and other contributions
5. health,
6. social welfare,
Requisites for deductibility
7. cultural or
a. Actually PAID or made to the ENTITIES or
8. charitable purposes, or
institutions specified by law;
9. a combination thereof,
b. Made within the TAXABLE year.
c. It must be EVIDENCED by adequate receipts
No part of the net income of which inures to the
or records.
benefit of any private individual
d. For Contributions Other than Money: The
amount shall be BASED on the acquisition cost
Directly utilizes contributions for the active conduct
of the property (i.e., not the fair market value at
of the activities constituting the purpose or function
the time of the contribution).
for which it is organized, not later than 15th day of
e. For Contributions subject to the statutory
the month following the close of its taxable year in
limitation: It must NOT EXCEED 10%
which contributions are received, unless an extended
(individual) or 5% (corporation) of he a pa er
period is granted by the Secretary of Finance, upon
taxable income before charitable contributions
recommendation of the CIR
AMOUNT THAT MAY BE DEDUCTED
Administrative expense, on an annual basis, must not
exceed 30% of total expenses for the taxable year
Kinds of Contributions:
a. Contributions deductible in full;
Upon dissolution, its assets would be distributed to
b. Contributions subject to the statutory limit.
another accredited NGO organized for a similar
purpose or purposes, OR to the State for public
Contributions Deductible in Full:
purpose, OR would be distributed by a competent
a. Donations to the Government of the Philippines,
court of justice to another accredited NGO to be used
or to any of its agencies, or political subdivisions,
in such manner as in the judgment of said court shall
including fully owned government corporations
best accomplish the general purpose for which the
b. Exclusively to finance, provide for, or to be used
dissolved organization was organized.
in undertaking priority activities in
c. Education
Contributions subject to the Statutory Limit:
d. Health
These contributions are not deductible in full as
e. Youth and sports development
specified by the law or such deduction has not met
f. Human settlements
the requirements to be deducted in full.
g. Science and culture, and
h. Economic development

Page 78 of 290
U.P. LAW BOC
Those made to:
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
c. Religious
d. Charitable
e. Scientific
f. youth and sports development
g. cultural
h. educational purposes or
i. rehabilitation of veterans
j. Social welfare institutions
k. 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 he a pa er' /donor income deri ed
from trade, business or profession computed
before the deduction for contributions and
donations
The amount deductible is the actual contribution or
the statutory limit computed, whichever is lower
8. Contributions to pension trusts
Contribution to a pension trust may be claimed as
deduction as follows:
a. Amount contributed for the present/normal
service cost 100% deductible
b. Amount contributed for the past service cost
1/10 of the amount contributed is deductible in
year the contribution is made, the remaining
balance will be amortized equally over nine
consecutive years
General Rule: An employer establishing or maintaining
a pension trust to provide for the payment of
reasonable pensions to his employees shall be allowed
as a deduction, a reasonable amount transferred or
paid into such trust in excess of the contributions to
such trust made during the taxable year.
Requisites for deductibility of payments to
pension trusts
Page 79 of 290
TAXATION I TAXATION LAW
a. There must be a pension or retirement plan
established to provide for the payment of
reasonable pensions to employees;
b. The pension plan is reasonable and actuarially
sound;
c. It must be funded by the employer;
d. The amount contributed must no longer be
bjec o he emplo er con rol or di po i ion;
and
e. The payment has not theretofore been allowed
before as a deduction.
9. Deductions under special laws
a. Special deductions for productivity bonus and
manpower training under the Productivity
Incentives Act of 1990
b. Deductions for training expenses of qualified
jewelry enterprises (Jewelry Industry
Development Act of 1998)
c. Deductions under the Adopt-a-School Act of
1998
d. Deductions under the Expanded Senior Citizens
Act of 2003. [Domondon]
d. Optional Standard Deduction
1. Individuals, except non-resident aliens
May be taken by an individual in lieu of itemized
deductions except those earning purely compensation
income.
If an individual opted to use OSD, he is no longer
allowed to deduct cost of sales or cost of services.
Amount: 40% of gross sales or gross receipts (under
RA 9504, effective July 6, 2008)
Requisites:
a. Taxpayer is a citizen or resident alien;
b. Ta pa er income i no en irel from
compensation;
c. Taxpayer signifies in his return his intention to
elect this deduction; otherwise he is considered as
having availed of the itemized deductions;
d. Election is irrevocable for the year in which
made; however, he can change to itemized
deductions in succeeding years.
U.P. LAW BOC TAXATION I
2. 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.
The OSD is 40% of its gross income.
The domestic and resident foreign corporation shall
keep such records pertaining to his gross income as
defined in Sec. 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.
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].
3. Partnerships
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.
General Professional Partnerships (GPP)13
GPP is not subject to income tax imposed pursuant
to Sec. 26 of the Tax Code, as amended. However,
the partners shall be liable to pay income tax on their
separate and individual capacities for their respective
distributive share in the net income of the GPP.
The GPP is not a taxable entity for income tax
purposes since it is only acting as a "pass-through"
entity where its income is ultimately taxed to the
partners comprising it. Section 26 of the Tax Code, as
amended, likewise provides that "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." As such, a GPP may claim
either the itemized deductions allowed under Section
34 of the Code or in lieu thereof, it can opt to avail of
the OSD allowed to corporations in claiming the
deductions in an amount not exceeding forty percent
(40%) of its gross income.
13
This provision was inserted by TRAIN amending Sec. 34
(L): T a a a a a a a
comprising such partnership may avail of the optional
Page 80 of 290
TAXATION LAW
In computing taxable income defined under Section
31 of the Tax Code, as amended, the following may
be allowed as deductions:
a. Itemized expenses which are ordinary and
necessary, incurred or paid for the practice of
profession; OR
b. Optional Standard Deduction (OSD).
The distributable net income of the partnership may
be determined by claiming either itemized deductions
or OSD. The share in the net income of the
partnership, actually or constructively received, shall
be reported as taxable income of each partner. The
partners comprising the GPP can no longer claim
further deduction from their distributive share in the
net income of the GPP and are not allowed to avail
of the 8% income tax rate option since their
distributive share from the GPP is already net of cost
and expenses. [RR No. 08-2018]
e. Premium Payments on Health
and/or Hospitalization
Insurance of an Individual
Taxpayer
Section 34 (M) of the NIRC has been repealed by
TRAIN law. Premium Payments on Health and/or
Hospitalization Insurance of an Individual Taxpayer
are no longer deductions from gross income.
f. Personal and Additional
Exemptions
Section 35 of the NIRC has been repealed by TRAIN
law. Personal Exemptions for individual taxpayers are
no longer allowed.
g. Items Not Deductible
General rule: In determining deductions, one of the
general rules is that deductions must be paid or
inc rred in connec ion i h he a pa er rade,
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.
standard deduction only once, either by the general
professional partnership or the partners comprising the
a .
U.P. LAW BOC TAXATION I TAXATION LAW

Exceptions: In computing taxable net income, no 4. Between the grantor and the fiduciary of a trust
deduction shall be allowed with respect to: 5. Between the fiduciary of a trust and the fiduciary
1. Personal, living or family expenses (note: they are of another trust if the same person is a grantor
not deductible from compensation and with respect to each trust
business/professional income 6. Between the fiduciary of a trust and a beneficiary
2. Any amount paid out for new buildings or for of such trust [Section 36(B), NIRC]
permanent improvements (capital expenditures),
or betterments made to increase the value of any Relevant points regarding related taxpayers
property or estate 1. Payment of interest is not deductible.
3. Any amount expended in restoring property 2. Bad debts are not deductible.
(major repairs) or in making good the exhaustion 3. Losses from sales or exchanges of property are
thereof for which an allowance [for depreciation not deductible.
or depletion] is or has been made
4. Premiums paid on any life insurance policy Summary Table for Taxation of Individuals (all
covering the life of any officer, employee, or any individual taxpayers, including non-resident aliens)
person financially interested in the trade or Tax
Classification Taxable Income
business carried on by the taxpayer, individual or Rates
corporate, when the taxpayer is directly or Income from
indirectly a beneficiary under such policy Resident sources within and
5. Interest expense and bad debts between related 0%-35%
Citizen outside the
parties [Sec. 36(B), NIRC)] Philippines
6. Losses from sales or exchanges of property Income from
between related taxpayers. Non-Resident
sources within the 0%-35%
7. Non-deductible interest should the taxpayer Citizen
Philippines
elect to deduct interest payments against its gross Income from
income, he cannot at the same time capitalize Resident Alien sources within the 0%-35%
such interest and claim depreciation on the Philippines
undepreciated cost which includes the interest. Non-resident
[PICOP v. Commissioner, G.R. No. 106949-50 Income from
Alien Engaged
(1995)] sources within the 0%-35%
in Trade or
8. Non deductible taxes Philippines
Business
9. Non-deductible losses Non-resident
10. Losses on Wash Sales (except if by dealer in Alien Not Income from
securities in ordinary course of exempt Engaged in sources within the 25%
corporations) These are: Trade or Philippines
a. Proprietary Educational Institutions and Business
hospitals
b. Government owned and controlled
corporations 4. Income Tax on Individuals
c. Others
a. Income Tax on Resident
Related Parties [Sec. 34(B)] Citizens, Non-Resident Citizens
1. Between members of a family (which shall
include only his brothers and sisters, spouse, and Resident Aliens
ancestors and lineal descendants)
2. Between an individual and a corporation more 1. Coverage Income from All Sources
than 50% in value of the outstanding stock of Within and Without the Philippines;
which is owned, directly or indirectly, by or for Exception
such individual except in the case of
distributions in liquidation a. Resident Citizens
3. Between two corporations more than 50% in
value of the outstanding stock of each of which A Filipino resident citizen is taxable on income from
is owned, directly or indirectly by or for the same all sources (within and without the Philippines)
individual

Page 81 of 290
U.P. LAW BOC TAXATION I
b. Non-resident Citizens
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)
Other considerations:
1. A Filipino citizen working and deriving abroad as
an Overseas Contract Worker is taxable only on
income from sources WITHIN the Philippines.
2. OCW refers to Filipino citizens in foreign
countries, who are physically present in a foreign
country as a consequence of their employment in
that country. Their salaries and wages are paid by
an employer abroad and is not borne by an entity
or person in the Philippines. They must be duly
registered with the Philippine Overseas
Employment Administration (POEA) with valid
Overseas Employment Certificate (OEC).
3. An OCW income ari ing o of hi o er ea
employment is exempt from income tax.
c. Resident Aliens
A resident alien is taxable only on income from
sources WITHIN the Philippines.
A resident alien is an individual whose residence is
in the Philippines and who is not a Filipino citizen.
An alien actually present in the Philippine who is not
a mere transient or sojourner is a resident of the
Philippines for purposes of the income tax. Whether
he is a transient or not is determined by his intentions
with regard to the length and nature of his stay. A
mere floating intention indefinite as to time, to return
to another country is not sufficient to constitute him
Page 82 of 290
TAXATION LAW
a transient. If he lives in the Philippines and has no
definite intention to stay, he is a resident.
One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary
for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at
all times to return to his domicile abroad when the
purpose of which he came has been consummated or
abandoned. [Sec. 5, RR No. 2]
2. Taxation on Compensation Income
Income arising from an 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)] It
includes, but is not limited to salaries and wages,
commissions, tips, allowances, bonuses, Fringe
Benefits of rank and file EEs and other forms of
compensation.
a. 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
Salary earnings received periodically for a
regular work other than manual labor, such
as monthly salary of an employee
Wages all remuneration (other than fees
paid to a public official) for services
performed by an employee for his employer,
including the cash value of all remuneration
paid in any medium other than cash. [Sec.
78A, NIRC]
b. Separation pay/retirement benefit
not otherwise exempt
Retirement pay a lump sum payment
received by an employee who has served a
company for a considerable period of time
and has decided to withdraw from work into
privacy. [RR 6-82, Sec. 2b]
General rule: Retirement pay is taxable
U.P. LAW BOC TAXATION I
Exceptions:
1. SSS or GSIS retirement pays.
2. Retirement pay (R.A. 7641) due to old
age provided the following requirements
are met:
a. The retirement program is
approved by the BIR
Commissioner;
b. It must be a reasonable benefit plan.
(fair and equitable)
c. The retiree should have been
employed for 10 years in the said
company;
d. The retiree should have been 50
years old or above at the time of
retirement; and
e. It should have been availed of for
the first time.
Separation pay taxable if voluntarily
availed of. It shall not be taxable if
involuntary i.e. Death, sickness, disability,
reorganization /merger of company and
company at the brink of bankruptcy or for
any cause beyond the control of the said
official or employee
c. Bonuses, 13th month pay, and other
benefits not exempt
Tips and Gratuities those paid directly to
the employee (usually by a customer of the
employer) which are not accounted for by
the employee to the employer. (taxable
income but not subject to withholding tax)
[RR NO. 2-98, Sec. 2.78.1]
Thirteenth month pay and other benefits -
Not taxable if the total amount received is
P90,000 or less. Any amount exceeding
P90,000 is taxable. [Sec. 32(7)(e), NIRC]
Overtime Pay premium payment received
for working beyond regular hours of work
which is included in the computation of
gross salary of employee. It constitutes
compensation.
d. D
Fees received by an employee for the
services rendered to the employer including
a director fee of the company, fees paid to
the public officials such as clerks of court or
sheriffs for services rendered in the
Page 83 of 290
TAXATION LAW
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 fair market value of the thing taken in
payment is the measure of the income
subject to tax.
b. Exclusions
1. Fringe benefit subject to tax
(See Gross Income above for the discussion of
Taxable and Non-taxable fringe benefits)
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]
Where the recipient of the fringe benefit is not a rank
and file employee, and the said benefit is not tax-
exempt, then the same shall not be included in the
compensation income of such employee subject to
tax. The fringe benefit [tax] is instead levied upon the
employer, who is required to pay. [Domondon]
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 he emplo ee ork or po i ion, he
value of that privilege need not be included as
compensation [Henderson v. Collector (1961)]
2. De minimis benefits
Facilities or privileges of relatively small value
furnished by an employer to his employees and are as
a means of promoting the health, goodwill,
contentment, or efficiency of his employees.
These are exempt from fringe benefit tax and
compensation income tax.
3. 13th month pay and other benefits and
payments specifically excluded from taxable
compensation income
Gross benefits received by employees of public and
private entities provided that the total exclusion shall
not exceed P90,000 (amounts in excess are considered
compensation income)
U.P. LAW BOC TAXATION I
Benefits include:
1. Benefits received by government employees
under RA 6686;
2. Benefits received by employees pursuant to PD
851 (13th Month Pay Decree);
3. Benefits received by employees not covered by
PD 851 as amended by Memorandum Order No.
28; and,
4. Other benefits such as productivity incentives
and Christmas bonus.
c. Minimum Wage Earners
Minimum wage earners shall be exempt from the
payment of income tax on their taxable income per
RA 9504.
MWEs receiving other income from the conduct of
trade, business, or practice of profession, except
income subject to final tax, in addition to
compensation income are not exempted from income
tax from their entire income earned during the taxable
year. This rule, notwithstanding, the statutory
minimum wage, holiday pay, overtime pay, night shift
differential pay, and hazard pay shall still be exempt
from withholding tax [RR No. 10-2008].
3. Taxation of Business Income/Income
From 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. (0-
35% For citizens, resident aliens & NRA Engaged in
trade or business or the 8% tax on gross sales or
receipts, on the option of the taxpayer; 25% in case of
NRANETB)
Individuals earning purely business or
professional income
Individuals earning income purely from self-
employment and/or practice of profession whose
14
SECTION 24. Income Tax Rates.
(A) Rates of Income Tax on Individual Citizen and Individual
Resident Alien of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. The tax
shall be computed in accordance with and at the rates
established in the following schedule:
xxx
(b) Rate of Tax on Income of Purely Self-employed
Individuals and/or Professionals Whose Gross Sales or
Gross Receipts and Other Non-operating Income Does
Not Exceed the Value-added Tax (VAT) Threshold as
Page 84 of 290
TAXATION LAW
gross sales/receipts and other non-
operating income does not exceed the VAT threshold
as provided under Section 109 (BB) of the Tax Code,
as amended, shall have the option to avail of:
a. The graduated rates under Section 24 (A) (2) (a)
of the Tax Code, as amended; OR
b. An eight percent (8%) tax on gross sales or
receipts and other non-operating income in
excess of two hundred fifty thousand pesos
(P250,000.00) in lieu of the
graduated income tax rates under Section 24 (A)
and the percentage tax under Section 116 all
under the Tax Code, as amended.
Individuals earning mixed income
For mixed income earners, the income tax rates
applicable are:
a. The compensation income shall be subject to
the tax rates prescribed under Section 24 (A) (2)
(a) of the Tax Code, as amended; AND
b. The income from business or practice of
profession shall be subject to the following:
1. If the gross sales/receipts and other non-
operating income do not exceed the VAT
threshold, the individual has the option to be
taxed at:
a. Graduated income tax rates prescribed
under Section 24 (A) (2) (a) of
the Tax Code, as amended; OR
b. Eight percent (8%) income tax rate
based on gross sales/receipts and other
non-operating income in lieu of the
graduated income tax rates and
percentage tax under Section 116 of the
Tax Code, as amended.
2. If the gross sales/receipts and other non-
operating income exceeds the VAT
threshold, the individual shall be subject to
the graduated income tax rates prescribed
under Section 24 (A) (2) (a) of the Tax Code,
as amended.
[RR No. 08-2018 implementing RA No. 10963
(TRAIN Law) specifically Sec. 24 (A)(2)(b) & (c)14]
Provided in Section 109(BB). Self-employed individuals
and/or professionals shall have the option to avail of an
eight percent (8%) tax on gross sales or gross receipts
and other non-operating income in excess of Two
hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Subsection (A)(2)(a) of
this Section and the percentage tax under Section 116 of
this Code.
(c) Rate of Tax for Mixed Income Earners. Taxpayers
earning both compensation income and income from
U.P. LAW BOC TAXATION I
4. Taxation of Passive Income
Passive Income Subject to Final Tax
Final a mean a i hheld from o rce, and he
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:
a. Interest income
b. Royalties
c. Dividends from domestic corporations
d. Prizes and other winnings
a. Interest income
1. on any currency bank deposit, yield or any other
monetary benefit from deposit substitutes, trust
funds and similar arrangements - 20% final tax
2. under the expanded foreign currency deposit
system (EFCDS) - 15% final tax for residents,
exempt if non-residents15
Treatment of income from long-term deposits
On long-term deposit or investment certificates
(LTDIC) in banks (e.g., savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments, which
have maturity of 5 years or more) exempt
Should LTDIC holder pre-terminate LTDIC before
the 5th year, a final tax shall be imposed on the entire
income based on the remaining maturity:
4 years to less than 5 years 5%
3 years to less than 4 years 12%
less than 3 years 20%
b. Royalties
(See summary table, infra)
business or practice of profession shall be subject to the
following taxes:
(1) All Income from Compensation The rates prescribed
under Subsection (A)(2)(a) of this Section.
(2) All Income from Business or Practice of Profession
(a) If Total Gross Sales and/or Gross Receipts and Other
Non-operating Income Do Not Exceed the VAT Threshold
as Provided in Section 109(BB) of this Code. The rates
prescribed under Subsection (A)(2)(a) of this Section on
taxable income, or eight percent (8%) income tax based
on gross sales or gross receipts and other non-operating
income in lieu of the graduated income tax rates under
Subsection (A)(2)(a) of this Section and the percentage
tax under Section 116 of this Code.
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TAXATION LAW
c. Dividends from domestic corporation
1. cash and/or property dividends actually or
constructively received by an individual from
2. a domestic corporation
3. a joint stock company
4. insurance or mutual fund companies
5. regional operating headquarters of multinational
companies
6. share of an individual in the distributable net
income after tax of a partnership (except a
general professional partnership) of which he is a
partner
7. share of an individual member or co-venturer in
the net income after tax of an association, a joint
account, or a joint venture or consortium taxable
as a corporation
Rate:
1. 10% for residents (RC, RA) and non-resident
citizens (NRC);
2. 20% for NRAETB (non-resident aliens engaged
in trade or business)
A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax.
However, 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. 73B, NIRC]
In other words, stock dividends are generally not
subject to tax as long as there are no options in lieu of
the shares of stock.
(b) If Total Gross Sales and/or Gross Receipts and Other
Non-operating Income Exceeds the VAT Threshold as
Provided in Section 109(BB) of this Code. The rates
prescribed under Subsection (A)(2)(a) of this Section.
15
SECTION 24. Income Tax Rates.
(B) Rate of Tax on Certain Passive Income:
(1) Interests, Royalties, Prizes, and Other Winnings – x x x
That interest income received by an individual taxpayer
(except a nonresident individual) from a depository bank
under the expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and one-half
fifteen percent (7 1/2%) (15%) 11 of such interest income x x
x.
U.P. LAW BOC
On the other hand, a stock dividend constitutes
income if it gives the shareholder an interest different
from that which his former stockholdings
represented.
d. Prizes and other winnings
1. Winnings, except Philippine Charity sweepstakes
/ lotto winnings which does not exceed P10,000
20%
2. Winnings from PCSO not more than P10,000
shall be exempt from tax.16
3. Prizes exceeding P10,000 20%
4. Prizes not exceeding P10,000 shall be subjected
to the graduated income tax rates.
Prize, differentiated from winnings:
A prize is the result of an effort made (e.g., prize in a
beauty contest), while winnings are the result of a
transaction where the outcome depends upon chance
(e.g., betting).
For interest from foreign currency loans granted by
FCDUs to residents other than Offshore Banking
Units (OBUs) or other depository banks under the
expanded system tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
For interest from foreign currency loans granted by
OBUs to residents other than OBUs or local
commercial banks, including branches of foreign
banks that may be authorized by the BSP to transact
business with OBUs - tax rate is 10% if payors are
RESIDENTS, whether individuals or corporations.
Gross income from all sources within the Philippines
derived by non-resident cinematographic film
owners, lessors or distributors tax rate is 25% if
payee is: (a) non-resident alien individual, or (b) non-
resident foreign corporation. The term
cinema ographic film incl de mo ion picture
films, films, tapes, discs and other such similar or
related products.
Informer re ard gi en o per on ho ol n aril
provide definite and sworn information that lead to
or was instrumental in the discovery of fraud or
violation of the provisions of the NIRC or special
laws being administered by the BIR and resulted in
16
SECTION 24. Income Tax Rates.
(B) Rate of Tax on Certain Passive Income:
(1) Interests, Royalties, Prizes, and Other Winnings – x x x
prizes (except prizes amounting to Ten thousand pesos
(P10,000) or less which shall be subject to tax under
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TAXATION I TAXATION LAW
the actual recovery or collection of revenues,
surcharges and fees and/or the conviction of the
guilty party or parties, and/or the imposition of any
fine or penalty or the actual collection of a
compromise amount, in case of amicable settlement,
shall be subject to income tax, collected as a final
withholding tax, at the rate of 10%, pursuant to Sec.
282 of the NIRC [RR 16-2010]
Passive income not subject to tax
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:
1. Four (4) years to less than five (5) years - 5%;
2. Three (3) years to less than four (4) years -
12%; and
3. Less than three (3) years - 20%.
Any income of nonresidents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax.
5. Taxation of Capital Gains
a. 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
(0.6 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.
Subsection (A) of Section 24; and other winnings (except
winnings amounting to Ten thousand pesos (P10,000) or
less from Philippine Charity Sweepstakes and Lotto winnings
which shall be exempt), derived from sources within the
Philippines x x x.
U.P. LAW BOC TAXATION I TAXATION LAW

Requirements:
2. Shares not listed and traded in the stock a. Sale or disposition by a natural person of his
exchange subject to final tax principal residence,
b. The proceeds of which is fully utilized in
On sale, barter, exchange or other disposition of acquiring/constructing a new principal
shares of stock of a domestic corporation not listed residence,
and traded through a local stock exchange, held as a c. Such acquisition/construction taking place
capital asset within 18 calendar months from the date of
sale or disposition,
On the net capital gain: Final Tax of 15% d. The taxpayer notifies the Commissioner
within 30 days from the sale/disposition
Tax on income derived from sale of shares through a prescribed return of his intention
not listed in the SE to avail of the exemption,
Rates before TRAIN Under TRAIN e. The tax exemption can only be availed of
5% on sale of stocks not once every 10 years.
over P100,000 plus 10%
Final Tax of 15% Tax treatment: Exempt from capital gains tax
on amount in excess of
P100,000 (CGT). If there is no full utilization of the proceeds
of sale or disposition, the portion of the gain
Net capital gain: selling price less cost presumed to have been realized from the sale or
Selling price: consideration on the sale OR fair disposition shall be subject to CGT.
market value of the shares of stock at the time of the
sale, whichever is higher How taxable portion and tax determined:
Cost: original purchase price 𝐻𝐼𝐺𝐻𝐸𝑅 𝑜𝑓 𝐺𝑟𝑜𝑠𝑠 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒
𝑜𝑟
b. Income from the sale of real property 𝐹𝑀𝑉 @ 𝑠𝑎𝑙𝑒
situated in the Philippines
The historical cost or adjusted basis of the real
What property covered property sold or disposed shall be carried over to the
Property located in the PH classified as capital assets new principal residence built or acquired.

What transactions covered Computation for the basis of new principal

Sales, exchanges, or other disposition of real property residence:
(classified as capital assets), including pacto de retro sales
and other forms of conditional sales of the following: Historical cost of old principal
citizens, resident aliens, NRAETB, NRANETB, residence XXX
domestic corporations. Add: Additional cost to acquire new
principal residence* XXX
Adjusted cost bases of the new
Tax rate principal residence XXX
General rule: 6% of whichever is higher of:
1. Gross selling price, or *Additional cost to acquire new
2. Fair market value (determined in accordance with principal residence:
Sec. 6(E), NIRC). Cost to acquire new principal
residence XXX
Exception: Less: Gross selling price of old
1. In case of sales made to the government, any of principal residence (XXX)
its political subdivisions or agencies, or to Additional cost to acquire new
GOCCs, it can be taxed either: principal residence XXX
a. Under Sec. 24(D)(1), NIRC 6% CGT, or
b. Under Sec. 24(A), NIRC, at the option of the
taxpayer.
2. In case of the sale of or disposition of their
principal residence by natural persons

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U.P. LAW BOC
c. Income from the sale, exchange, or other
disposition of other capital assets
Other properties shall be subject to income tax
1. At the graduated income tax rates, if the seller is
an individual;
2. Long-term capital gains: only 50% is recognized.
3. Short-term capital asset transactions: 100%
subject to tax. [Sec. 39(B), NIRC]
Determination of whether short- or long-term:
Short-term if held for 12 months or less; otherwise, it
is a long-term capital gain.
At 30% corporate income tax, if the seller is a
corporation.
Rule: Capital gain/loss is recognized in full.
Capital assets shall refer to all real properties held by
a taxpayer, whether or not connected with his trade
or business, and which are not included among the
real properties considered as ordinary assets under
Section 39(A)(1) of the NIRC.
Ordinary assets shall refer to all real properties
specifically excluded from the definition of capital
assets under Section 39(A)(1) of the NIRC, namely:
1. Stock in trade of a taxpayer or other real property
of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close
of the taxable year; or
2. Real property held by the taxpayer primarily for
sale to customers in the ordinary course of his
trade or business; or
3. Real property used in trade or business (i.e.,
buildings and/or improvements) of a character
which is subject to the allowance for depreciation
provided for under Sec. 34(F) of the Code; or
4. Real property used in trade or business of the
taxpayer
b. Income Tax on Non-Resident
Aliens Engaged in Trade or
Business
A non-resident alien is an individual whose
residence and citizenship is not in the Philippines.
One who comes to the Philippines for a definite
purpose which, in its nature, may be promptly
accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary
Page 88 of 290
TAXATION I TAXATION LAW
for its accomplishment, and to that end the alien
makes his home temporarily in the Philippines, he
becomes a resident, though it may be his intention at
all times to return to his domicile abroad when the
purpose of which he came has been consummated or
abandoned. [Sec. 5, RR No. 2]
In general, 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 shall be deemed a non-resident alien
doing business in the Philippines.
Intended stay in the Philippines:
1. Up to 180 days Non-resident alien not engaged
in trade or business
2. More than 180 days but less than 1 year Non-
resident alien engaged in trade or business
3. 1 year or more Resident alien
General Rule: 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.
Cash and/or property dividends
The following shall be subject to an income tax of
twenty percent (20%) on the total amount thereof:

1. Cash and/or property dividends from:
a. A domestic corporation;
b. A joint stock company;
c. An insurance or mutual fund company;
d. A regional operating headquarters of
multinational company;
e. 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;
f. The share of a nonresident alien individual in
the net income after tax of an association, a
joint account, or a joint venture taxable as a
corporation of which he is a member or a co-
venturer;
2. Interests 

3. Royalties (in any form); and 

4. Prizes (except prizes amounting to Ten

thousand pesos (P10,000) or less which shall be
subject to graduated tax) and other winnings
(except PCSO / lotto winnings which shall not
exceed P10,000)
U.P. LAW BOC TAXATION I TAXATION LAW

the PH as interest, cash and/or property dividends,

Except: rents, salaries, wages, premiums, annuities,
1. The following Royalties shall be subject to a final compensation, remuneration, emoluments, or other
tax of ten percent (10%) on the total amount fixed or determinable annual or periodic or casual
thereof:
 gains, profits, and income, and capital gains, a tax
2. On books as well as other literary works; and equivalent to 25% of such income.
3. On musical compositions
4. Cinematographic films and similar works shall be The preferential tax treatment 15% shall not be
subject to twenty-five percent (25%) of the gross applicable to regional headquarters (RHQs), regional
income 
 operating headquarters (ROHQs), offshore banking
5. Interest income from long-term deposit or units (OBUs) or petroleum service contractors and
investment in the form of savings, common or subcontractors registering with the Securities and
individual trust funds, deposit substitutes, Exchange Commission (SEC) after January 1, 2018.
investment management accounts and other [Sec. 25 (F), NIRC (this provision was added by
investments evidenced by certificates in such TRAIN)]
form prescribed by the Bangko Sentral ng
Pilipinas (BSP) shall be exempt from the tax 
 d. Individual Taxpayers Exempt
from Income Tax
But should the holder of the certificate pre-
terminate the deposit or investment before the Individual Taxpayers exempt from income tax are:
fifth (5th) year, a final tax shall be imposed on the 1. Senior Citizens (with qualifications) 

entire income and shall be deducted and withheld 2. Minimum wage earners 

by the depository bank from the proceeds of the 3. Exemptions granted under international
long-term deposit or investment certificate based

agreements 

on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; All individuals and entities claiming exemption from
Three (3) years to less than four (4) years - imposition of taxes on income and, consequently,
12%; and 
 from withholding taxes are required to provide a copy
Less than three (3) years - 20%. 
 of a valid, current and subsisting tax exemption
certificate or ruling, as per existing administrative
Capital gains issuances and any issuance that may be issued from
Capital gains realized from sale, barter or exchange of time to time, before payment of the related income.
shares of stock in domestic corporations not traded
through the local stock exchange, and real properties The tax exemption certificate or ruling must explicitly
shall be subject to the similar tax prescribed on recognize the grant of tax exemption, as well as the
citizens and resident aliens. corresponding exemption from imposition of
withholding tax. Failure on the part of the taxpayer to
1. Sale, barter or exchange of Shares of stock in present the said tax exemption certificate or ruling as
domestic corporation not traded 15% of net herein required shall subject him to the payment of
capital gains appropriate withholding taxes due on the transaction.
2. Sale, barter or exchange of real properties [RMC No. 8-2014]
6% of gross selling price or current FMV
whichever is higher 1. Senior Citizens

c. Income Tax on Non-Resident
Aliens Not Engaged in Trade or
Business [Sec. 25 (B)]
There shall be levied, collected, and paid for each
taxable year upon the entire income received from all
sources within the PH by every NRANETB within
Generally, Senior Citizens are still taxable individual.
However, if they are considered as MWEs, rules on
MWE will apply.
Who are 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

Page 89 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

gross income earned by the senior citizen during
the taxable year does not exceed the amount of
his personal exemptions (BPE and APE).
2. Minimum Wage Earners
Compensation income including overtime pay,
holiday pay and hazard pay, earned by minimum
wage earners who has no other returnable
income are NOT taxable and not subject to
withholding tax on wages [RA 9504]

Rule: they shall be exempt from payment of income 3. Exemptions Granted Under
tax on their taxable income.
 International Agreements

Limit: Ho e er, if he recei e o her benefi in See RMC No, 31-2013, April 12, 2013 taxation of
excess of the allowable statutory amount of P90,000, compensation income of Philippine nationals and
then he shall be taxable on the exceeds benefits as well alien individuals employed by foreign
as his salaries, wages, and allowances, just like an governments/embassies/diplomatic missions and
employee receiving compensation income beyond the international organizations situated in the Philippines.
statutory minimum wage.
The Government of the Philippines is a signatory of
[T]he treatment of bonuses and other benefits that [a certain international agreements and a party to
minimum wage earner] receives from the employer in different tax treaties which specifically provide for the
excess of the [ 90,000] ceiling cannot but be the same exemption of certain persons or entities from taxes
as the prevailing treatment prior to R.A. 9504 - imposed by the Philippines.
anything in excess of 30,000 is taxable; no more, no
less. The treatment of this excess cannot operate to Examples of these tax exemptions are those accorded
disenfranchise the MWE from enjoying the to diplomats or ambassadors of other countries here
exemption explicitly granted by R.A. 9504. [Soriano v. in the Philippines. The World Health Organization is
Secretary of Finance, G.R. No. 184450 (2017)] also tax exempt upon an international agreement [CIR
v. Gotamco, G.R. No. L-31092 (1987)]
TAXATION OF COMPENSATION INCOME
OF A MINIMUM WAGE EARNER
a. Statutory minimum wage earner shall refer to
rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the
Department of Labor and Employment. [Sec.22
GG, as amended by RA 9504]
b. Minimum wage earner shall refer to a worker
in the private sector paid the statutory minimum
wage, or to 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. [Sec.22 HH, as
amended by RA 9504]

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

c. Income also subject to tax exemption: holiday

pay, overtime pay, night shift differential, and
hazard pay

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U.P. LAW BOC TAXATION I TAXATION LAW

SUMMARY TABLES OF RATES

Citizens,
Interest, Royalties, Prizes and Other Winnings NRAETB NRANETB
Residents
Interest from any currency bank deposit 20% 20% 25%
Yield or any other monetary benefit from deposit substitute 20% 20% 25%
Yield or any other monetary benefit from trust funds and similar
20% 20% 25%
arrangements
Royalties, in general 20% 20% 25%
Royalties on books as well as other literary works and musical
10% 10% 25%
compositions
Prizes exceeding P10,000 20% 20% 25%
Other winnings (except Philippine Charity Sweepstakes and
20% 20% 25%
Lottowinnings not exceeding P10,000)
15%
Interest incomes received from a depositary bank under Note: NRC
Exempt Exempt
expanded foreign currency deposit system exempt (RR 1-
2011)
Interest income from long-term deposit or investment
evidenced by certificates prescribed by BSP. If preterminated
before fifth year, a final tax shall be imposed based on remaining
maturity Exempt Exempt 25%
4 years to less than 5 years 5% 5% 25%
3 years to less than 4 years 12% 12% 25%
Less than 3 years 20% 20% 25%
Citizens,
Cash and/or Property Dividends NRAETB NRANETB
Residents
Cash and/or property dividends actually or constructively
received from a domestic corp. or from a joint stock corp.,
insurance or mutual fund companies and regional operation 10% 20% 25%
headquarters of multinational companies (beginning Jan. 1,
2000)
Share of an individual in the distributable net income after tax of
a PARTNERSHIP (other han a general professional 10% 20% 25%
partnership) (beginning Jan. 1, 2000)
Share of an individual in the net income after tax of an
ASSOCIATION, a JOINT ACCOUNT, or a JOINT
10% 20% 25%
VENTURE or CONSORTIUM taxable as a corporation, of
which he is a member or a co-venturer (beginning Jan. 1, 2000)

Sec. 24 (C). Capital Gains Tax from Sale of Shares of Stock of a Citizens,
NRAETB NRANETB
domestic corporation NOT TRADED in the Stock Exchange Residents
Tax base: Net Capital Gain 15% 15% 15%

Sec. 24 (D). Capital Gains Tax from Sale of Real Property Citizens,
NRAETB NRANETB
Classified as Capital Asset Residents
Tax base: Gross selling price or current fair market value, whichever
is higher
Tax Rate 6% 6% 6%

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U.P. LAW BOC TAXATION I TAXATION LAW

Resident Non-Resident
Category of Citizen Alien Citizen NRAETB NRANETB
income Within the Within the Within the Within the
All sources
Philippines Philippines Philippines Philippines
Based on Taxable (i.e. Net) Income
Compensation/
Business/ Schedular Income Tax Rates (i.e. 0% to 35% (Sec. 24, NIRC) (See table
Profession below)
For those earning purely business or professional income or mixed
Prizes of income, the taxpayer can opt to avail of the 8% tax on gross sales/receipts
P10,000 or less in lieu of graduated rates for the business/professional income portion
upon the option of the taxpayer
Interest from
any currency
bank deposit,
etc.

Royalties, in Gross Income Within the Philippines (GIW) 20% Final Withholding
general Tax

Winnings/
Prizes (except
prizes P10,000
and below)
Royalties from
books, literary GIW 25%
GIW 10% Final Withholding Tax
works, musical
compositions
Interest from
long-term
EXEMPT; However:
deposit or
In case of pre-termination, with remaining maturity of:
investment
4 years to less than 5 years -5% on entire income
certificates,
3 years to less than 4 years 12% on entire income
which have a
less than 3 years 20% on entire income
maturity of 5
years or more
Cash/ Property
Dividends from
a domestic
corporation, etc.,
OR share in the
distribute net GIW 10% Final Withholding Tax GIW 20%
income after tax
of a partnership
(except a general
professional
partnership), etc.
Interest
(Expanding
Foreign GIW 15% Final Withholding Tax Exempt
Currency
Deposit System)
Prizes Subject to schedular rates if not exceeding P10,000

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U.P. LAW BOC TAXATION I TAXATION LAW

Winnings on
Philippine
Exempt if P10,000 and below
Sweepstakes/
Lotto
Capital Gains on
Sale of Shares of
Domestic Corp Net capital gains: 15% Final Tax
(not traded in a
domestic stock
exchange
Capital Gains on
Sale of Real
Gross Selling Price or FMV, whichever is higher 6% Final Withholding Tax
Property in the
Philippines
Sale of Shares of
Domestic Corp. 0.6 of 1% of the Selling Price (Stock Transaction Tax)
(traded in a
domestic stock Note: Stock Transaction Tax is not an income tax, but a business (percentage) tax
exchange)
Sale of Real
Property located
Schedular Income Tax Rates (i.e. 0% to 35%) (Sec. 24, NIRC)
Abroad
For those earning purely business or professional income or mixed income, the taxpayer can
Sale of Shares of
opt to avail of the 8% tax on gross sales/receipts in lieu of graduated rates for the
Foreign Corp.
business/professional income portion upon the option of the taxpayer
Passive Income
from Abroad

SCHEDULE OF INCOME TAX RATES FOR INDIVIDUAL CITIZENS, RESIDENTS, AND

NRAETB

RANGE OF
TAX DUE (a+b)
TAXABLE INCOME
Basic Amount (a) Additional Rate (b)
0 to 250,000 - -
Over 250,000 but not 20% of excess over
-
more than 400,000 250,000
Over 400,000 but not 25% of excess over
30,000
more than 800,000 400,000
Over 800,000 but not 30% of excess over
130,000
over 2,000,000 800,000
Over 2,000,000 but not 32% of excess over
490,000
over 8,000,000 2,000,000
35% of excess over
Over 8,000,000 2,410,000
8,000,000

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U.P. LAW BOC TAXATION I TAXATION LAW

COMPUTATIONS [RR 08-2018]

Pure Compensation Income

Illustration: Mr. CSO earned, aside from his basic wage, additional pay of P140,000.00 which consists of the overtime
pay P80,000.00, night shift differential P30,000.00, hazard pay P15,000.00, and holiday pay P15,000.00.
He has P5,000 mandatory contributions (SSS, Pag-Ibig, Phil-health, etc.) and P11,000 non-taxable benefits.

Total Compensation Income P135,000.00

Add: Overtime, night shift differential, hazard,
and holiday pay 140,000.00

Total Income P275,000.00

Less: Mandatory contributions P5,000.00
Non-taxable benefits 11,000.00 16,000.00

Net taxable income P259,000.00

Tax due (20% in excess of P250,000) 1,800

Mixed-income (i.e. compensation income and business income/income from the practice of profession
opted to avail of 8% tax on business/professional income)

Illustration: Mr. MAG, a Financial Comptroller of JAB Company, earned annual compensation in 2018 of
P1,500,000.00, inclusive of 13th month and other benefits in the amount of P120,000.00 but net of mandatory
contributions to SSS and Philhealth. Aside from employment income, he owns a convenience store, with gross sales
of P2,400,000. His cost of sales and operating expenses are P1,000,000.00 and P600,000.00, respectively, and with
non-operating income of P100,000.00.

a. His tax due for 2018 shall be computed as follows if he opted to be taxed at eight percent (8%) income tax rate
on his gross sales for his income from business:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other benefits (max) 90,000.00

Taxable Compensation Income P1,410,000.00

Tax due:
1. On Compensation:
On P800,000.00 P130,000.00
On excess (P1,410,000 - P800,000) x 30% 183,000.00

Tax due on Compensation Income P313,000.00

2. On Business Income:
Gross Sales P2,400,000.00
Add: Non-operating Income 100,000.00

Taxable Business Income P2,500,000.00

Multiplied by income tax rate 8%

Tax Due on Business Income P200,000.00

Total Income Tax Due (Compensation and Business) P513,000.00

Page 94 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

* The option of 8% income tax rate is applicable only to taxpayer's income from
business, and the same is in lieu of the income tax under the
graduated income tax rates and the percentage tax under Section 116 of
the Tax Code, as amended.
* The amount of P250,000.00 allowed as deduction under the law for taxpayers
earning solely from self-employment/practice of profession, is not applicable for
mixed income earner under the 8% income tax rate option.
* The P250,000.00 mentioned above is already incorporated in the first tier of the
graduated income tax rates applicable to compensation income.
|||

Mixed-income (i.e. compensation income and business income/income from the practice of profession)

Illustration: Same facts for Mr. MAG. His tax due for 2018 shall be computed as follows if he did not opt for the
eight percent (8%) income tax based on gross sales/receipts and other non-operating income:

Total compensation income P1,500,000.00

Less: Non-taxable 13th month pay and other
benefits-max 90,000.00

Taxable Compensation Income P1,410,000.00

Add: Taxable Income from Business
Gross Sales P2,400,000.00
Less: Cost of Sales 1,000,000.00

Gross Income P1,400,000.00

Less: Operating Expenses 600,000.00

Net Income from Operation P800,000.00

Add: Non-operating Income 100,000.00 900,000.00

Total Taxable Income P2,310,000.00

Tax Due:
On P2,000,000.00 P490,000.00
On excess (P2,310,000 - 2,000,000) x 32% 99,200.00

Total Income Tax P589,200.00

* The taxable income from both compensation and business shall be combined for
purposes of computing the income tax due if the taxpayer chose to be subject under the
graduated income tax rates.

Page 95 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Pure Business/Professional Income (Opted to be taxed at 8% of gross sales or receipts)

Illustration: Ms. EBQ operates a convenience store while she offers bookkeeping services to her clients. In 2018, her
gross sales amounted to P800,000.00, in addition to her receipts from bookkeeping services of P300,000.00. She
already signified her intention to be taxed at 8% income tax rate in her 1st quarter return.
Her income tax liability for the year will be computed as follows:

Gross Sales Convenience Store P800,000.00

Gross Receipts Bookkeeping 300,000.00

Total Sales/Receipts P1,100,000.00

Less: Amount allowed as deduction under Sec. 24 (A) (2) (b) 250,000.00

Taxable Income P850,000.00

Tax Due:
8% of P850,000.00 P68,000.00

* The total of gross sales and gross receipts is below the VAT threshold of
P3,000,000.00.
* Taxpayer's source of income is purely from self-employment, thus she is entitled
to the amount allowed as deduction of P250,000.00 under Sec. 24 (A) (2) (b) of
the Tax Code, as amended.
* Income tax imposed herein is based on the total of gross sales and gross receipts.
* Income tax payment is in lieu of the graduated income tax rates under
subsection (A) hereof and percentage tax due, by express provision of law.

Pure Business/Professional Income (Opted to be taxed at schedular rates)

Illustration: Ms. EBQ above, failed to signify her intention to be taxed at 8% income tax rate on gross sales in her
initial Quarterly Income Tax Return, and she incurred cost of sales and operating expenses amounting to
P600,000.00 and P200,000.00, respectively, or a total of P800,000.00, the income tax shall be computed as follows:

Gross Sales/Receipts P1,100,000.00

Less: Cost of Sales 600,000.00

Gross Income P500,000.00

Less: Operating Expenses 200,000.00

Taxable Income P300,000.00

Tax Due:
On excess (P300,000 - P250,000) x 20% P10,000.00

Page 96 of 290
U.P. LAW BOC TAXATION I
5. Income Tax on Corporations
a. Income Tax on Domestic
Corporations and Resident
Foreign Corporations
Domestic Corporations
1. A corporation created and organized in the
Philippines or under its laws (the law of
incorporation test). [Sec. 22 (C), NIRC]
2. Taxable on all income derived from sources
within and without the Philippines; and
Resident Foreign Corporations
1. A corporation organized under the laws of a
foreign country, which is engaged in trade or
business in the Philippines. [See Doing
B ine defini ion nder he FIA abo e]
2. Taxable only on income derived from sources
within the Philippines.
3. 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.
4. 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 Philippines of the foreign head office
shall thus be taxable to the Philippine branch.
But, when the head office of a foreign
corporation independently and directly invested
in a domestic corporation without the funds
passing through its Philippine branch, the
taxpayer, with respect to the tax on dividend
income, would be the non-resident foreign
corporation itself and the dividend income shall
be subject to the tax similarly imposed on non-
resident foreign corporations. [Marubeni v.
Commissioner, G.R. No. 76573 (1989)]
1. Regular Tax
Default income tax. Except as otherwise provided,
income tax of 30% is imposed on taxable income.
Applies equally to both: (a) Domestic corporations (on
income from within and without the Philippines) and
(b) Resident Foreign Corporations (on income from within
the Philippines)
Page 97 of 290
TAXATION LAW
Normal Corporate Income Tax Rate: 30% of
Taxable Income
Gross Income xxx
Less: Allowable Deductions xxx
Taxable Income xxx
Optional gross income tax (GIT)
Section 27 (A), 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 allow corporations the
option to be taxed at 15% of gross income as defined
therein, after the following conditions have been
satisfied:
Tax effort ratio 20% of GNP
Ratio of income tax
collection to total tax 40%
revenues
VAT tax effort 4% of GNP
Ratio of Consolidated
Public Sector Financial 0.90%
Position (CPSFP) to GNP
At present, the OGIT has not been implemented in
the Philippines.
The option of GIT is available to corporation whose
ratio of Cost of Sales to Gross Sales does not exceed 55%.
The election of GIT by a corporation is irrevocable
for 3 consecutive taxable years during which it is
qualified under the scheme.
Note: Gross income for GIT is the same as Gross
income for MCIT [see infra] except in GIT of sale of
service, cost of services is not deducted.
2. Minimum Corporate Income Tax
(MCIT)
a. Applies to domestic corporations and RFCs
whenever such corporations (i) have zero or
negative taxable income, or whenever the (ii)
MCIT is greater than the normal income tax due.
b. Imposed beginning the fourth taxable year from the
taxable year the corporation commenced its
business operations. For purposes of MCIT, the
taxable year in which business operations
commenced shall be the year when the
U.P. LAW BOC TAXATION I TAXATION LAW

corporation registers with the BIR (not in which

the corporation started commercial operations). Direct cost of services all direct costs and expenses
c. Tax rate: 2% of Gross Income necessarily incurred to provide the services required
by the customers and clients including (i) salaries and
GROSS INCOME employee benefits of personnel, consultants and
specialists directly rendering the service and (ii) cost
a. Merchandising and Manufacturing of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and
Gross Sales xxx cost of supplies. In the case of banks, it includes
Less: Sales Returns xxx interest expense.
Sales Discounts xxx
Pointers
Allowances xxx MCIT is in the nature of a tax credit, not an allowable
Cost of Goods Sold xxx xxx deduction. Its purpose is to prevent corporations
Gross Income xxx from escaping being taxed by including frivolous
expenses in their statement of income.
If apart from deriving income from core business Is the Minimum Corporate Income Tax (MCIT)
activities there are other items of gross income an addition to the regular or normal income tax?
realized or earned by the taxpayer which are subject No, the MCIT is not an additional tax. The MCIT is
to the normal corporate income tax, they must be compared with the regular income tax, which is due
included as part of gross income for computing from a corporation. If the regular income is higher
MCIT. [Sec. 27 (E), NIRC; RR 12-2007] than the MCIT, then the corporation does not pay the
MCIT.
Thi mean ha he erm gro income ill al o
include all items of gross income enumerated under Coverage
Section 32(A) of the NIRC, except: (a) income The MCIT covers domestic and resident foreign
exempt from income tax, and (b) income subjected to corporations which are subject to the regular income
FWT. tax. Corporations subject to a special corporate tax
system do not fall within the coverage of the MCIT.
Cost of goods sold
1. In general includes all business expenses These special corporations are those in G.3. Income
directly incurred to produce the merchandise to Tax on Special Corporations. These include: Proprietary
bring them to their present location and use. educational institutions, nonprofit hospitals, OBUs,
2. Trading or merchandising includes invoice cost FCDUs, ROHQs, firms registered in
of the goods sold, plus import duties, freight in PEZA/BCDA/other ecozones, International
transporting the goods to the place where the
Carriers 

goods are actually sold including insurance while
the goods are in transit.
For corporations whose operations or activities are
3. manufacturing include all costs of production
partly covered by regular income tax and special
of finished goods, such as raw materials used,
income tax system, MCIT shall apply on operations
direct labor and manufacturing overhead, freight
covered by the regular corporate income tax system.
cost, insurance premiums and other costs
incurred to bring the raw materials to the factory
What amount of income tax is paid by the
or warehouse.
corporation to the BIR?

b. Sale of Service Whichever is higher between the normal tax and the
Gross Receipts xxx minimum corporate income tax
Less: Sales Returns xxx
Illustration:
Sales Discounts xxx E Co., a domestic trading corporation, in its fourth
Allowances xxx year of operations had a gross profit from sales of
Cost of Services xxx xxx P300,000 and net taxable income of P100,000. How
much was the income tax paid by the corporation for
Gross Income xxx the year?

Page 98 of 290
U.P. LAW BOC TAXATION I TAXATION LAW

Any excess of the minimum corporate income tax

MCIT (P300,000 x 2%)
Normal Income Tax (P100,000 x 30%)
Income Tax to be paid for the year
(whichever is higher)
Carry forward of excess minimum tax
P6,000 over the normal income tax shall be carried forward
P30,000 on an annual basis. The excess can be credited against
the normal income tax in the next three (3) succeeding
P30,000 taxable years. [Sec. 27(E)(2)] In the year to which
carried forward, the normal tax should be higher than
the MCIT.

Sample Computation of MCIT Carry Forward:

A domestic corporation had the following data on computations of the normal tax (NT) and the minimum corporate
income tax (MCIT) for five years.

Yr 4 Yr 5 Yr 6 Yr 7 Yr 8
MCIT 80K 50K 30K 40K 35K
NT 20K 30K 40K 20K 70K

The excess MCIT over NT carried-forward as follows:

Year 4 Year 5 Year 6 Year 7 Year 8

MCIT 80,000 50,000 30,000 40,000 35,000
NT 20,000 30,000 40,000 20,000 70,000

Excess MCIT over NT

(MCIT NT) 60,000(a) 20,000(b) n/a 20,000(c) n/a

Income Tax to be paid

(Higher of MCIT or NT) 80,000 50,000 40,000 40,000 70,000
Less: MCIT carry forward n/a n/a (40,000) (a) n/a (20,000) (a)
(20,000) (b)
Tax Due 80,000 50,000 0 40,000 30,000

(a) 60k excess MCIT from year 4 is credited against the normal tax to be paid in year 6 and 8.
(b) 20k excess MCIT from year 5 is credited against the normal tax to be paid in year 8.
(c) 20k excess MCIT from year 7 will be credited against future normal tax to be paid.

Page 99 of 290
U.P. LAW BOC TAXATION I
Relief from MCIT [Sec. 27 (E)(3), NIRC]
The Secretary of Finance may suspend imposition of
MCIT on any corporation which sustained substantial
losses on account of (LMB):
a. 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
b. Force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency),
or
c. Legitimate business reverses (substantial
losses due to fire, robbery, theft or other
economic reasons).
Quarterly MCIT Computation
The computation and the payment of MCIT shall
likewise apply at the time of filing the quarterly
corporate income tax. In the computation of the tax
due for the taxable quarter, if the quarterly MCIT is
higher than the quarterly normal income tax, the tax
due to be paid for such taxable quarter at the time of
filing the quarterly corporate income tax return shall
be 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).
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
Page 100 of 290
TAXATION LAW
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.
Excess MCIT from the previous taxable year/s shall
not be allowed to be credited against the annual
MCIT due as the same can only be applied against
normal income tax.
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.
3. Branch Profit Remittance Tax [Sec. 28
(A) (5), NIRC]
a. Applies to non-resident foreign corporations.
Imposed on profits remitted by the Philippine
branch to the head office.
b. Collected as Final Withholding Tax [Sec.57,
NIRC]
Taxable transaction any profit remitted by a
branch to its head office
Tax Rate and Base 15% final tax based on the
total profits applied or earmarked for remittance
without any deduction for the tax component (except
those activities registered with PEZA).
a. The following are not treated as branch profits
unless effectively connected with the conduct of
trade or business in the Philippines:
b. Interests, dividends, rents, royalties (including
remuneration for technical services),
c. salaries, wages,
d. premiums, annuities, emoluments, or
e. other fixed or determinable annual, periodic or
casual gains, profits, income and capital gains
received during each taxable year from all sources
within the Philippines
4. Allowable Deductions
a. Itemized Deductions
1. Expenses
2. Interest
3. Taxes
4. Losses
5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and mines
U.P. LAW BOC TAXATION I
8. Charitable and other contributions
9. Research and development
10. Pension trusts
b. Optional Standard Deductions (OSD)
In lieu of itemized deductions, standard deduction of
40% of gross income.
5. Taxation of Passive Income
Interest from deposits and yield or any other
monetary benefit from deposit substitutes and
from trust funds and similar arrangements and
royalties
a. 20% final tax on: (i) interest on any currency bank
deposit, (ii) yield or any other monetary benefit
from deposit substitutes, trust funds and similar
arrangements, and (iii) royalties
b. same for Domestic Corporations and Resident
Foreign Corporations
c. Collected as Final Withholding Tax [Sec.57,
NIRC]
Interest Income derived by a domestic
corporation from depository bank under the
expanded foreign currency deposit system
[Section 27 (D)(1), NIRC17]
a. 15% final income tax
b. same for Domestic Corporations and Resident
Foreign Corporations
c. Collected as Final Withholding Tax [Sec.57,
NIRC]
Inter-corporate dividends
a. Exempt dividends received from a domestic
corporation by a domestic corporation/resident
foreign corporation
b. same for Domestic Corporations and Resident
Foreign Corporations
17
SECTION 27. Rates of Income Tax on Domestic
Corporations.
(D) Rates of Tax on Certain Passive Incomes.
(1) Interest from Deposits and Yield or Any Other Monetary
Benefit from Deposit Substitutes and from Trust Funds and
Similar Arrangements, and Royalties. 17 A final tax at the
rate of twenty percent (20%) is hereby imposed upon the
amount of interest on currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from
trust funds and similar arrangements received by domestic
corporations, and royalties, derived from sources within the
Philippines: Provided, however, That interest income derived
by a domestic corporation from a depository bank under the
expanded foreign currency deposit system shall be subject
Page 101 of 290
TAXATION LAW
6. Taxation of Capital Gains
Capital gain from sale of shares of stock not
traded in the stock exchange

a. Final tax on net capital gains realized during the
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation not listed and traded through a local
stock exchange: 15% of net capital gains [Section
27 (D)(2), NIRC18]
b. For Resident Foreign Corporations, and
Nonresident Foreign Corporations
c. First P100k 5%
d. Amount in excess of P100k 10% [Section 28
(7)(c), NIRC]
Capital gains realized from the sale, exchange, or
disposition of lands and/or buildings
a. 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% ; If it is a
Resident Foreign Corp., it is subject to the regular
corporate income tax rate of 30%
b. The capital gains tax is applied on the gross
selling price, or the current fair market value at
the time of the sale, whichever is higher. Any gain
or loss on the sale is immaterial because there is
a conclusive presumption by law that the sale
resulted in a gain.
c. applicable to domestic corporations only
d. Tax treatment is similar to that of individuals.
b. Income Tax on Non-Resident
Foreign Corporations [Sec. 28
(B), NIRC]
Non-Resident Foreign Corporations
to a final income tax at the rate of seven and one-half fifteen
percent (7 1/2%) (15%) of such interest income.
18
SECTION 27. Rates of Income Tax on Domestic
Corporations.
(D) Rates of Tax on Certain Passive Incomes.
(2) Capital Gains from the Sale of Shares of Stock Not
Traded in the Stock Exchange. 18 A final tax at the rates
prescribed below of fifteen percent (15%) shall be imposed
on net capital gains realized during the taxable year from the
sale, exchange or other disposition of shares of stock in a
domestic corporation except shares sold or disposed of
through the stock exchange.:
U.P. LAW BOC TAXATION I
1. A corporation organized under the laws of a
foreign country, which is not engaged in trade or
business in the Philippines. [See D g B e
definition under the FIA in B.7.2. Corporations]
2. Taxable only on income derived from sources
within the Philippines.
3. Income taxes on nonresident foreign
corporations are collected as Final Withholding
Tax under Sec.57, NIRC.
General rule
1. Except as otherwise provided, the tax is 30% of
gross income received during each taxable year from
all sources within the Philippines
2. This includes: interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed
or determinable annual, periodic or casual gains,
profits and income, and capital gains (except
capital gains on the sale of shares not traded in
the stock exchange)
Tax on certain Nonresident Owners, Lessors or
Distributors:
1. Non-resident cinematographic film owner, lessor or
distributor 25% of gross income from all
sources within the Philippines
2. Non-resident owner or lessor of vessels chartered
by Philippine nationals 4.5% of gross rentals,
lease or charter fees from leases or charters to
Filipino citizens or corporations, as approved by
the Maritime Authority
3. Non-resident owner or lessor of aircraft,
machineries and other equipment 7.5% of gross
rentals, charters or other fees
Tax on Interest on foreign loans: contracted on or
after August 1, 1986 20% [Sec. 28 (B) (5) (a), NIRC]
Tax on Intercorporate dividends
1. Intercorporate Dividend 15% on dividends
received from domestic corporations, if the
country in which the nonresident foreign
corporation is domiciled allows a tax credit of at
lea 15% for a e deemed paid in he
Philippines
2. 15% foreign tax credit represents the difference
between the regular income tax of 30% on
corporations and the 15% tax on dividends ( a
paring credi )
3. If the country within which the NRFC is
domiciled does NOT allow a tax credit, the tax is
30% on dividends received from a domestic
corporation.
Page 102 of 290
TAXATION LAW
Tax on Capital gain from sale of shares of stock
not traded in the stock exchange

1. Final tax on net capital gains realized during the
taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation not listed and traded through a local
stock exchange:
a. First P100k 5%
b. Amount in excess of P100k 10%
2. same for Nonresident Foreign Corporations
c. Income Tax on Special
Corporations
1. Domestic Corporations
a. Proprietary Educational Institutions and
Non-profit Hospitals [Sec. 27 (B), NIRC]
Tax Rate and Base 10% tax on taxable 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.
Unrelated trade, business or other activity any
trade, business or other activity, the conduct of which
is not substantially related to the exercise or
performance by such educational institution or
hospital of its primary purpose or function.
Proprietary educational institution any private
school maintained and administered by private
individuals or groups with an issued permit to operate
from the DECS, CHED or TESDA. [Sec. 27(B),
NIRC]
b. Government-owned or Controlled
Corporations, Agencies or
Instrumentalities [Sec. 27 (C), NIRC]
GOCCs
General rule: GOCCs are taxable as any other
corporation engaged in similar business, industry or
activity
Exceptions:
Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local water districts (LWDs)
U.P. LAW BOC
[Sec. 27(C), NIRC19]
Government agencies or instrumentalities
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 government
performing governmental functions may be subject to
tax. Where it is done precisely to fulfill a constitutional
mandate and national policy, no one can doubt its
wisdom. [Mactan Cebu Airport v Marcos, G.R. No.
120082 (1996)]
c. Depository Banks (Foreign Currency
Deposit Units) [Sec. 27 (D) (3), NIRC]
Income derived by a depository bank under the
expanded foreign currency deposit system from:
1. foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks, including branches of foreign
banks authorized by the BSP to transact business
with foreign currency depository system units
and other depository banks under the EFCDS
exempt from income tax
except net income from transactions specified by the
Secretary of Finance upon recommendation by
the Monetary Board subject to regular income
tax payable by banks
2. foreign currency loans granted to residents (other
than offshore banking units in the Philippines)
interest income subject to a final tax of 10%
3. income of nonresidents, individuals or corporations,
from transactions with depository banks under
the EFCDS exempt from income tax
4. same for Domestic Corporations and Resident
Foreign Corporations
5. similar treatment to OBUs
2. Resident Foreign Corporations
a. International Carrier Doing Business in
the Philippines
Tax Rate and Base 2.5% on Gross Philippine
Billings (GPB)
19
SECTION 27. Rates of Income Tax on Domestic
Corporations.
(C) Government-owned or -Controlled Corporations,
Agencies or Instrumentalities.19 The provisions of existing
special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government
Service and Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation
Page 103 of 290
TAXATION I TAXATION LAW
International Air Carriers, GPB means:
1. gross revenue derived from (a) carriage of
persons, excess baggage, cargo and mail (b)
originating from the Philippines in a continuous
and uninterrupted flight, (c) irrespective of the
place of sale or issue and the place of payment of
the ticket or passage document
2. tickets revalidated, exchanged and/or indorsed to
another international airline part of GPB if
passenger boards a plane in a port or point in the
PH
3. flights which originate from the PH, but
transshipment of passenger takes place at a port
outside PH on another airline part of GPB only
the aliquot portion of the cost of the ticket
corresponding to the leg flown from the PH to
transshipment point [RR 15-2002]
Air Canada vs. CIR (CTA Case No. 6572):
1. A foreign airline company selling tickets in the
Philippines through their local agents shall be
considered as resident foreign corporation
engaged in trade or business in the country.
2. The absence of flight operations within the
Philippine territory cannot alter the fact that the
income received was derived from activities
within the Philippines.
3. The test of taxability is the source, and the source
is that activity which produced the income.
International Shipping, GPB means:

Gross revenue for (a) passenger, cargo or mail (b)
originating from the Philippines up to final
destination, (c) regardless the place of sale or
payments of the passage or freight documents.
b. Off-shore Banking Units [Sec. 28 (A) (4),
NIRC]
Income derived by OBUs authorized by the BSP
from:
1. foreign currency transactions with nonresidents, other
OBUs, local commercial banks, including
branches of foreign banks authorized by the BSP
to transact business with OBUs exempt from
income tax
(PHIC), and the local water districts (LWD) and the
Philippine Charity Sweepstakes Office (PCSO), shall pay
such rate of tax upon their taxable income as are imposed
by this Section upon corporations or associations engaged in
a similar business, industry, or activity.
U.P. LAW BOC TAXATION I
2. except net income from transactions specified by the
Secretary of Finance upon recommendation by
the Monetary Board subject to regular income
tax payable by banks
3. foreign currency loans granted to residents (other
than offshore banking units in the Philippines)
interest income subject to a final tax of 10%
4. income of nonresidents, individuals or corporations,
from transactions with OBUs exempt from
income tax
5. similar treatment to FCDUs
c. Resident Depositary Banks (Foreign
Currency Deposit Units)
Income derived by a depository bank under the
expanded foreign currency deposit system from:
1. foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks, including branches of foreign
banks authorized by the BSP to transact business
with foreign currency depository system units
and other depository banks under the EFCDS
exempt from income tax
except net income from transactions specified by the
Secretary of Finance upon recommendation by
the Monetary Board subject to regular income
tax payable by banks
2. foreign currency loans granted to residents (other
than offshore banking units in the Philippines)
interest income subject to a final tax of 10%
3. income of nonresidents, individuals or corporations,
from transactions with depository banks under
the EFCDS exempt from income tax
Page 104 of 290
TAXATION LAW
4. same for Domestic Corporations and Resident
Foreign Corporations
5. similar treatment to OBUs
d. Regional or Area Headquarters and
Regional Operating Headquarters of
Multinational Companies [Sec. 28 (A) (6),
NIRC]
Regional or area headquarters
1. branch established in the Philippines by
multinational companies and which headquarters
do not earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries,
or branches in the Asia-Pacific Region and other
foreign markets [Sec. 22 (DD), NIRC]
2. not subject to income tax
Regional operating headquarters
1. branch established in the Philippines by
multinational companies which are engaged in any
of the following services: (i) general administration and
planning; (ii) business planning and coordination;
(iii) sourcing and procurement of raw materials
and components; (iv) corporate finance advisory
services; (v) marketing control and sales
promotion; (vi) training and personnel
management; (vii) logistic services; (viii) research
and development services and product
development; (ix) technical support and
maintenance; (x) data processing and
communications; and (xi) business development.
[Sec. 22 (EE), NIRC]
2. tax of 10% of their taxable income
U.P. LAW BOC TAXATION I TAXATION LAW

SUMMARY OF TAX BASES AND RATES OF SPECIAL CORPORATIONS

Tax
Type of Corporation Tax Base
Rate
Domestic Corporations
Proprietary Educational Institutions and Hospitals (Non-
Taxable income from all sources 10%
profit)
Depository Banks (Foreign Currency Deposit Units)
With respect to income derived under the expanded foreign Exempt (except that net income from
currency deposit system from certain foreign currency such transactions is subject to the
transactions regular income tax payable by banks)
With respect to interest income from foreign currency loans
to residents other than offshore banking units in the
Philippines or other depository banks under the expanded
system Amount of interest income 10%
Resident Foreign Corporation
International Carriers Gross Philippines Billings 2.5%
Offshore Banking Units Exempt (except that net income from
With respect to income derived by offshore banking units such transactions is subject to the
from certain foreign currency transactions regular income tax payable by banks)
With respect to interest income derived from foreign
currency loans granted to residents other than offshore
banking units or local commercial banks Amount of interest income 10%
Resident Depository Banks (Foreign Currency Deposit
Units)
With respect to income derived under the expanded foreign Exempt (except that net income from
currency deposit system from certain foreign currency such transactions is subject to the
transactions regular income tax payable by banks)
With respect to interest income from foreign currency loans
to residents other than offshore banking units in the
Philippines or other depository banks under the expanded
system Amount of interest income 10%
Regional Operation Headquarters of Multinational Taxable income from within the
10%
Companies Philippines
Non-Resident Foreign Corporation
Non-resident cinematographic film owners, lessors or
Gross income from the Philippines 25%
distributors
Non-resident owner or lessor of vessels charted by Gross rentals, lease and charter fees
4.5%
Philippines nationals from the Philippines
Non-resident owner or lessor of aircraft, machineries or Gross rentals, lease and charter fees
7.5%
other equipment from the Philippines

corporation, by permitting earnings and profits to

d. Improperly Accumulated
Earnings Tax
[Sec. 29, NIRC, as implemented by RR 2-2001]
Rule: In addition to other income taxes, there is
imposed for each taxable year a tax equal to 10% of the
improperly accumulated taxable income.
Applies to every corporation formed or availed for
the purpose of avoiding the income tax with respect
to its shareholders or the shareholders of any other
accumulate instead of being divided or distributed.
Rationale: It is a tax in the nature of a penalty to the
corporation for the improper accumulation of its
earnings, and a deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividends tax
on the earnings distributed to them.
The touchstone of the liability is the purpose behind the
accumulation of the income and not the consequences
of the accumulation.

Page 105 of 290

U.P. LAW BOC TAXATION I TAXATION LAW

Sample computation (RMC No. 35-2011)

Taxable Income for the Year xxxx

Add:
(a) Income subjected to Final Tax xxxx
(b) NOLCO xxxx
(c) Income exempt from tax xxxx
(d) Income excluded from gross income xxxx xxxx
xxxx
Less:
Income Tax paid xxxx
Dividends declared/paid xxxx xxxx
Total xxxx
Add: Retained Earnings from prior years xxxx
Accumulated Earnings as of end of current year xxxx
Less: Amount that may be retained (100% of Paid-Up
Capital) xxxx
IAE xxxx
Multiply by: IAET Rate 10%
IAET xxxx

Accumulation for Reasonable needs under RR 2-

Effect of imposition of IAET
1. Once the profit has been subjected to IAET, the
same shall no longer be subjected to IAET in
later years even if not declared as dividend.
2. Profits which have been subjected to IAET,
when finally declared as dividends, shall
nevertheless be subject to tax on dividends.
3. In applying the above rules, dividends shall be
deemed to have been paid out of the most
recently accumulated profits (LIFO: last in, first
out).
Reasonable needs of the business: The use of
undistributed earnings and profits for the reasonable
needs of the business would generally not make the
accumulated or undistributed earnings subject to the
tax.
2001
1. Accumulation of earnings up to 100% of paid-up
capital;
2. Definite corporate expansion projects requiring
considerable capital expenditure (approved by
Board of Directors or equivalent body);
3. Building, Plant or Equipment Acquisition
(approved by Board of Directors or equivalent
body)
4. compliance with any Loan Covenant or pre-
existing obligation (established under a legitimate
business agreement);
5. required by Law or applicable regulations to be
retained;
6. in case of subsidiaries of foreign corporations in the
Philippines, undistributed earnings reserved for
Investments within the Philippines

Immediacy Test: The term "reasonable needs of the Coverage:

business" means (1) the immediate needs of the
business, including (2) reasonably anticipated needs.
The corporation should be able to prove (1) an
immediate need for the accumulation of the earnings
and profits, or (2) the direct correlation of anticipated
needs to such accumulation of profits.
1. IAET applies to: domestic corporations
classified as closely- held corporations.
2. IAET does not apply to:
1. Banks and other non-bank financial
intermediaries;
2. Insurance companies;
3. Publicly-held corporations;
4. Taxable partnerships;
3. General professional partnerships;
4. Non- taxable joint ventures; and

Page 106 of 290

U.P. LAW BOC TAXATION I
5. Enterprises registered with PEZA (RA 7916),
BCDA (RA 7227), and other special economic zones
declared by law which enjoy a special tax rate in
lieu of other taxes.
Closely-held corporations are those:
1. at least 50% in value of the outstanding capital
stock; or
2. at least 50% of the total combined voting power
of all classes of stock entitled to vote
3. is owned directly or indirectly by or for not more
than 20 individuals. Domestic corporations not
falling under the aforesaid definition are,
therefore, publicly- held corporations.
N.B. the same definition and rules as in Tax on IPO
in Sec. 127 (B), NIRC; not the same as close
corporation under The Corporation Code]
Rules in determining if a corporation is closely-
held:
1. Stock Not Owned by Individuals. - Stock
owned directly or indirectly by or for a
corporation, partnership, estate or trust shall be
considered as being owned proportionately by its
shareholders, partners or beneficiaries.
2. Family and Partnership Ownership. - An
individual shall be considered as owning the
stock owned, directly or indirectly, by or for his
famil , or b or for hi par ner. Famil of an
indi id al incl de hi ibling ( he her b
whole or half-blood), spouse, ancestors and lineal
descendants.
3. Option to Acquire Stocks. - If any person has
an option to acquire stock, such stock shall be
considered as owned by such person. An option
to acquire such an option and each one of a series
of option shall be considered as an option to
acquire such stock.
4. Constructive Ownership as Actual
Ownership. - Stock constructively owned by
reason of the application of (a) or (c) shall, for
purposes of applying (1) or (2), be treated as
actually owned by such person. But stock
constructively owned by the individual by reason
of the application of (b) shall NOT be treated as
owned by him for purposes of again applying
such paragraph in order to make another the
constructive owner of such stock.
BIR Ruling 025-02
The ownership of a domestic corporation for
purposes of determining whether it is a closely held
corporation or a publicly held corporation is
ultimately traced to the individual shareholders of the
parent company.
Page 107 of 290
TAXATION LAW
Where at least 50% of the outstanding capital stock or
at least 50% of the total combined voting power of all
classes of stock entitled to vote in a corporation is
owned directly or indirectly by at least 21 or more
individuals, the corporation is considered as a
publicly-held corporation, thus, exempt from IAET.
Determination of Purpose to Avoid Income Tax
1. Being a holding or investment company is
prima facie evidence of purpose to avoid
dividend tax. Holding or investment company
corporation having practically no activities except
holding property, and collecting the income
therefrom or investing the same;
2. Accumulation in excess of reasonable needs
is determinative of the purpose to avoid dividend
tax. Prima facie instances of this include: (i)
investment of substantial earnings and profits in
unrelated business or in stock or securities of
unrelated business; (ii) investment in
bonds and other long-term securities; (iii)
accumulation of earnings in excess of 100%
of paid-up capital
3. The controlling intention of the taxpayer is that
which is manifested at the time of accumulation,
not subsequently declared intentions which are
merely the product of afterthought.
4. A speculative and indefinite purpose will not
suffice. Definiteness of plan/s coupled with
action/s taken towards its consummation are
essential.
e. Exemption from Tax on
Corporations
Tax exempt corporations [Sec. 30, NIRC]
1. Labor, agricultural or horticultural organization
non-profit
2. mutual savings bank or cooperative bank non-
stock, non-profit, operated for mutual purposes
3. Beneficiary society, order, or association
operating for the exclusive benefits of their
members; includes: fraternal organization
operating under the lodge system; or mutual aid
association or a nonstock corporation organized
by employees providing life, sickness, accident,
or other benefits exclusively to the members
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, provided that no part
of its income or asset belong to or inure to the
benefit of any individual
U.P. LAW BOC TAXATION I
6. Business league, chamber of commerce, or board
of trade Non-profit; no part of net income
inures to the benefit of an individual
7. Civic league or organization Non-profit;
operating exclusively for the promotion of social
welfare
8. Non-stock and non-profit educational
institutions
9. Government educational institutions
10. Organizations of a purely local character whose
income consists solely of assessment, duties and
fees collected from their members to meet
e pen e ; incl de : farmer or o her m al
typhoon or fire insurance company, mutual ditch
or irrigation company and mutual or cooperative
telephone company
11. Farmer , fr i gro er , and like association
whose primary function is to market the product
of their members
Notwithstanding the provisions in the preceding
paragraphs, the income of the foregoing
organizations from (1) their properties, real or
personal, or from (2) their activities conducted for
profit regardless of the disposition made of such
income, shall be subject to tax imposed under the
NIRC.
N.B. this means capital gains tax, tax on passive
income, etc. applies to these otherwise exempt
organizations.
f. Tax on General Partnerships,
General Professional
Partnerships, Co-Ownerships,
Joint Ventures and Consortiums
1. General Partnerships
Partnerships where all or part of their income is
derived from the conduct of trade or business. It is
treated as a corporation. [Sec.22 (B), NIRC].
General rule: The partnership is subject to the same
rules and rates as corporations.
Exceptions: A par ner hare in he par ner hip
distributable net income is deemed actually or
constructively received by the partners in the same
taxable year. [Sec. 73(D), NIRC]. Consequently:
a. such share will be subjected to dividend tax
(10%) whether actually distributed or not.
b. there can never be an instance of improperly
accumulated taxable income; note that RR 2-
Page 108 of 290
TAXATION LAW
2001 provides that IAET does not apply to
taxable partnerships.
Distributable net income of the partnership is its
taxable income less the normal corporate income tax
(30%).
A Pa b to the general partnership
fund is a capital investment and is not taxable income
of the partnership.
2. General Professional Partnerships
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. [Sec 22 (B), NIRC]
Rules
a. A GPP as such shall not be subject to the income
tax. It is not a taxable entity for income tax
purposes.
b. The partners shall be liable for income tax only
in their separate and individual capacities.
c. Each partner shall report as gross income his
distributive share in the net income of the GPP,
actually or constructively received.
d. In computing the distributive share of the
partners, the net income of the GPP shall be
computed in the same manner as a corporation.
[Sec. 26, NIRC]
e. 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.
GPP is not a taxable entity
The GPP is deemed to be no more than a mere
mechanism or a flow-through entity in the generation
of income by, and the ultimate mechanism
distribution of such income to the individual partners.
[Tan v. Commissioner, G.R. No. 109289 (1994)]
But the partnership itself is required to file income tax
returns for the purpose of furnishing information as
to the share in the gains or profits which each partner
shall include in his individual return. [RR 2- 1998]
The share of an individual partner in the net profit of
a general professional partnership is deemed to have
been actually or constructively received by the partner
in the same taxable year in which such partnership net
income was earned, and shall be taxed to them in their
individual capacities, whether actually distributed or
not, at the graduated income tax ranging from 5% to
32%.
U.P. LAW BOC TAXATION I
Because the principle of constructive receipt is
applied to undistributed profits of GPPs, the actual
distribution to the partners of such tax-paid profits in
another year should no longer be liable to income tax.
[Mamalateo]
3. Co-ownerships
There is co-ownership whenever the ownership of an
undivided thing or right belongs to different persons.
[Art. 484, NCC] It may be created by succession or
donation.
When Co-ownership is not subject to tax
When the co-o ner hip ac i i ie are limi ed merel
to the preservation of the co-owned property and to
the collection of the income from the property. Each
co-owner is taxed individually on his distributive
share in the income of the co-ownership. [De Leon]
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. [Valencia and Roxas]
Automatically converted into an unregistered
partnership the moment the said common properties
and/or the incomes derived from them are used as a
common fund with intent to produce profits for the heirs
in proportion to their respective shares in the
inheritance as determined in a project partition either
duly executed in an extrajudicial settlement or
approved by the court in the corresponding testate or
intestate proceeding. [Ona v. CIR, G.R. No. L-19342
(1972)]
4. Joint Ventures and Consortiums
To con i e a join en re, cer ain fac or are
essential. Each party to the venture must make a
contribution, not necessarily of capital, but by way of
services, skill, knowledge, material or money; profits
must be shared among the parties; there must be a
joint proprietary interest and right of mutual control
Page 109 of 290
TAXATION LAW
over the subject matter of the enterprise; and usually,
there is single business transaction.
General rule: An unincorporated joint venture is taxed
like a corporation. The share of the joint venture
partners will no longer be taxable to them because
they partake in the nature of intercorporate dividends.
Exception: 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 the joint
venture partners will be taxed on their respective
shares in the income of the joint ventures. [Sec. 22(B),
NIRC]
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.
6. Filing of Returns and
Payment of Income Tax
a. Definition of a Tax Return and
Information Return
Tax Return
Tax return refers to a formal report prepared by the
taxpayer or his agent in a prescribed form showing an
enumeration of taxable amounts and description of
taxable transactions, allowable deductions, amount of
tax and tax payable to the government.
Examples of tax returns are:
1. BIR Form Nos. 1700 and 1701 Annual Income
Tax Returns for Individual
2. BIR Form No. 1702 Annual Income Tax
Return for Corporations and Partnerships
3. BIR Form No. 1800 Donor Ta Re rn
4. BIR Form No. 1801 Estate Tax Return
Information Return
Any individual not required to file an income tax
return may nevertheless be required to file an
information return pursuant to rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the Commissioner. [Sec.
51(A)(3), NIRC]
U.P. LAW BOC TAXATION I
Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the
Commissioner an annual information return
containing the list of payees and income payments,
amount of taxes withheld from each payee and such
other pertinent information as may be required by the
Commissioner. [Sec. 58(C), NIRC]
Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall,
on or before January thirty-first (31st) of the
succeeding year, submit to the Commissioner an
annual information return containing a list of
employees, the total amount of compensation income
of each employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of
the statement referred to in the preceding paragraph,
and such other information as may be deemed
necessary. [Sec. 83(B), NIRC]
b. Period to File Income Tax
Return of Individuals and
Corporations
1. Individuals
Income tax return of an individual who is not on a
substituted basis shall be filed on or before April 15
of each year covering income of the preceding taxable
year. [Sec. 51 (C)(1), NIRC]
An individual whose taxable income does not exceed
Two hundred fifty thousand pesos (P250,000) under
Section 24(A)(2)(A): Provided, That a citizen of the
Philippines and any alien individual engaged in
business or practice of profession within the
Philippine shall file an income tax return, regardless
of the amount of gross income. [Sec. 51 (A)(2)(a),
NIRC20]
Individuals subject to capital gains tax [Sec. 51
(C)(2), NIRC]:
a. Sale of shares not traded thru a local stock
exchange file a return within 30 days from the
transaction, and a final consolidated return on or
before April 15 of each year covering all stock
transactions of the preceding taxable year
20
SECTION 51. Individual Return
(A) Requirements.
(2) The following individuals shall not be required to file an
income tax return:
(a) An individual whose gross taxable income does not
exceed Two hundred fifty thousand pesos (P250,000) his
total personal and additional exemptions for dependents
under Section 35 24(A)(2)(a): Provided, That a citizen of the
Philippines and any alien individual engaged in business or
practice of profession within the Philippines shall file an
income tax return, regardless of the amount of gross income.
Page 110 of 290
TAXATION LAW
b. Sale of real property file a return within 30
days from each sale
Individuals deriving self-employment income (as
sole source of income or mixed) must file quarterly
return of summary declaration of gross income and
deductions, and a final or adjustment [Sec. 74 (A),
NIRC21].
Period Due Date for Filing
Return
Q1 Return May 15 of the same year
Q2 Return August 15 of the same year
November 15 of the same
Q3 Return
year
April 15 of the following
Annual Return
year
Self-employment income consists of earnings derived
by the individual from the practice of profession or
conduct of trade or business, as a sole proprietor or
as a member in a general professional partnership.
[Sec. 74 (A), NIRC]
Filing of these returns shall be in lieu of filing of a
declaration of estimated income under Sec. 74, NIRC,
primarily for the reason that the procedure prescribed
in Sec. 74 may not reasonably approximate the correct
amount of tax to be paid. [De Leon citing Rev. Regs. No.
2-93]
2. Corporations
Domestic corporations and resident foreign
corporations shall file quarterly corporate income tax
returns within 60 days after the end of the calendar or
fiscal quarter used, and annual corporate income tax
return on or before the 15th day of the fourth month
following the close of the calendar year or fiscal year,
as the case may be [Sec. 74, NIRC].
21
SECTION 74. Declaration of Income Tax for Individuals.
(A) In General. Except as otherwise provided in this
Section, every individual subject to income tax under Sections
24 and 25(A) of this Title, who is receiving self-employment
income, whether it constitutes the sole source of his income
or in combination with salaries, wages and other fixed or
determinable income, shall make and file a declaration of his
estimated income for the current taxable year on or before
April May 15 of the same taxable year.
U.P. LAW BOC TAXATION I
The filing of the tax returns by a corporation using
the calendar year:
Period Due Date for Filing
Return
Q1 Return May 31 of the same year
Q2 Return August 31 of the same year
Q3 Return November 30 of the same
year
Annual Return April 15 of the following
year
Return of Corporation Contemplating
Dissolution or Reorganization. within 30 days
after the adoption of the plan for dissolution or
reorganization (including corporations notified of
possible involuntary dissolution by the SEC), render
a correct return to the CIR, verified under oath,
setting forth the terms of such plan and such other
information required by rules and regulations. Prior
to the issuance by the SEC of the Certificate of
Dissolution or Reorganization, the corporation shall
secure a certificate of tax clearance from the BIR which
shall be submitted to the SEC. [Sec. 52 (C), NIRC]
Return on Capital Gains Realized from Sale of
Shares of Stock not Traded in the Local Stock
Exchange file a return within 30 days from the
transaction, and a final consolidated return on or
before the 15th day of the fourth month following the
close of the taxable year [Sec. 52 (D), NIRC]
PAYMENT OF INCOME TAX
General rule: The total amount of tax imposed by this
Title (Tax on Income) shall be paid by the person
subject thereto at the time the return is filed.
Exception: When the tax due is in excess of P2,000, the
taxpayer other than a corporation may elect to pay the
tax in 2 equal installments: the first installment paid at
the time the return is filed and the second installment,
on or before October 15 following the close of the
calendar year. [Sec. 56 (A)(2), NIRC22]
22
(2) Installment Payment.22 When the a tax due is in
excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation, may elect to pay the tax in two (2) equal
installments in which case, the first installment shall be paid
at the time the return is filed and the second installment on
or before July October 15 following the close of the calendar
Page 111 of 290
TAXATION LAW
c. Persons Liable to File Income
Tax Returns
1. Individual Taxpayers
a. General Rule and Exceptions (Sec. 51(A),
NIRC)
General Rule: The following are required to file income
tax return:
1. Resident citizen
2. Non-resident citizen, on income from sources
within the Philippines
3. Resident alien, on income from sources within
the Philippines
4. Non-resident alien engaged in trade or business
or in the exercise of profession in the Philippines,
on income from sources within the Philippines
Exceptions: The following shall not be required to file
income tax return:
1. Individuals whose gross income does not exceed
P250,000 except citizen and alien individuals
engaged in business or practice of profession
within the Philippines who shall file income tax
returns regardless of the amount of gross income.
2. Individuals with respect to pure compensation income
from sources within the Philippines, the income
tax on which has been withheld; except when such
compensation has been derived from more than
one employer.
3. Individuals whose sole income has been subjected to
final withholding tax (pursuant to Sec. 57(A),
NIRC).
4. Minimum wage earner (as defined in Sec. 22(HH),
NIRC)
5. Individuals who are exempt from income tax
pursuant to the provisions of the Tax Code and
other laws.
SPECIAL PROVISIONS
Married individuals (whether citizens, resident or
nonresident aliens) who do not derive income purely
from compensation, shall file only one consolidated
return to cover the income of both spouses for the
taxable year, but where it is impracticable for the
spouses to file one return, each spouse may file a
separate return of income but the returns so filed shall
year, if any installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid
becomes due and payable together with the delinquency
penalties.
U.P. LAW BOC
be consolidated by the BIR for verification. [Sec. 51
(D), NIRC]
The income of unmarried minors is a tax liability of
the minor but where such income is derived from
property received from a living parent, the income
shall be included in the return of the parent except
(a) hen he donor a ha been paid on ch
property, or (b) when the transfer of such property is
e emp from he donor a . [Sec. 51 (E), NIRC]
If the taxpayer is unable to make his return, such as
when he suffers from disability, the return may be
made by his duly authorized agent or representative
or by the guardian or other person charged with the
care of the taxpayer or his property; the principal and
his representative or guardian assuming responsibility
for penalties for erroneous, false or fraudulent
returns. [Sec. 51 (F), NIRC]
b. Substituted Filing
Applicable to individual taxpayers:
1. receiving purely compensation income,
regardless of amount
2. from only one employer in the Philippines for the
calendar year, and
3. the income tax of which has been withheld
correctly by the employer
The certificate of withholding filed by their respective
emplo er , d l amped recei ed b he BIR, shall
be tantamount to the substituted filing of income tax
returns by the employee. [Sec. 51-A, NIRC23 (new
provision added by TRAIN)]
c. Corporate Taxpayers [Sec. 52(A), NIR]
All corporations subject to income tax shall render
quarterly income tax returns and a final or adjustment
return, except foreign corporations not engaged
in trade or business in the Philippines.
The return shall be filed by the President, Vice-
President or other principal officer, and shall be
sworn to by such officer and by the treasurer or
assistant treasurer.
23
SECTION. 51-A. Substituted Filing of Income Tax
Returns by Employees Receiving Purely Compensation
Income. Individual taxpayers receiving purely
compensation income, regardless of amount, from only
one employer in the Philippines for the calendar year,
the income tax of which has been withheld correctly by
the said employer (tax due equals tax withheld) shall not
Page 112 of 290
TAXATION I TAXATION LAW
d. Where to File Income Tax
Returns
1. Individuals
Except in cases where the CIR otherwise permits, the
return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality in
which such person has his legal residence or principal place
of business in the Philippines, or if there be no legal
residence or place of business in the Philippines, with
the Office of the Commissioner [Sec. 51(B), NIRC]
2. Corporations
Except in cases where the CIR otherwise permits, the
return shall be filed with an authorized agent bank,
Revenue District Officer, Collection Agent or duly
authorized Treasurer of the city or municipality
having jurisdiction over the place where the corpo a
principal office is located and where its books of accounts
and other data are kept; otherwise, the returns shall be
filed and the tax paid thereon with the Office of the
Commissioner of Internal Revenue. [Sec. 77(A),
NIRC]
e. Penalties for Non-Filing of
Returns
Failure to file any return and pay the tax due: a
penalty equivalent to 25% of the amount due.
[Sec. 248(A)(1), NIRC]
Willful neglect to file the return: a penalty
equivalent to 50% of the tax or deficiency tax.
[Sec. 248(B), NIRC]
Failure to file information returns: P1,000 for
each failure upon notice and demand by the CIR
unless due to reasonable cause not willful neglect
provided the aggregate amount for all such failures
during the calendar year shall not exceed P25,000.
[Sec. 250, NIRC]
be required to file an annual income tax return. The
certificate of withholding filed by the respective
emplo ers, dul stamped recei ed b the BIR, shall be
tantamount to the substituted filing of income tax
returns by said employees.
U.P. LAW BOC TAXATION I
7. Withholding of Taxes
a. Concept of Withholding Taxes
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.
In addition, the withholding tax that should have been
withheld and remitted to the BIR as well as the
penalties for non-, late or erroneous payment of the
withholding tax such as surcharges and deficiency
interest are assessed by the BIR. [Mamalateo]
The withholding tax system was devised for three
primary reasons: first, to provide the taxpayer a
convenient manner to meet his probable income tax
liability; second, to ensure the collection of income
tax which can otherwise be lost or substantially
reduced through failure to file the corresponding
returns and third, to improve the governments cash
flow. This results in administrative savings, prompt
and efficient collection of taxes, prevention of
delinquencies and reduction of governmental effort
to collect taxes through more complicated means and
remedies. [C a be f Rea E a e a d B de A c.,
Inc. v. Romulo, G.R. No. 160756 (2010)]
b. Kinds of Withholding Taxes
IN GENERAL
1. Final Withholding tax The amount of income
tax withheld by the withholding agent is
constituted as a full and final payment of the
Page 113 of 290
TAXATION LAW
income tax due from the payee on the said
income.
The liability for payment of the tax rests primarily
on the payor as withholding agent. Thus, in case
of his failure to withhold the tax or in case of
under withholding, the deficiency tax shall be
collected from the payor/withholding agent. The
payee is not required to file an income tax return
for the particular income.
2. Creditable Withholding tax Under the
creditable withholding tax system, taxes withheld
on certain income payments are intended to equal
or at least approximate the tax due of the payee
on said income.
The income recipient is still required to file an
income tax return, to report the income and/or
pay the difference between the tax withheld and
the tax due on the income. Taxes withheld on
income payments covered by the expanded
withholding tax and compensation income are
creditable in nature.
WITHHOLDING TAXES IN THE NIRC
1. Withholding tax at source [Sec 57, NIRC]
Withholding of final tax of certain income
Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation
of the CIR, the tax imposed or prescribed by the
NIRC on certain specified items of income shall be
withheld by payor-corporation and/or person.
N.B. Sec. 57 contains an extensive list of taxes. This
items of income include taxes on certain passive
incomes (interest, dividends), capital gains tax (shares
not traded, real property), branch profit remittance
tax, and certain payments to nonresident aliens
/foreign corporations.]
Withholding of creditable tax at source The
Secretary of Finance may, upon the recommendation
of the CIR, 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 1% but not more than 32%,
which shall be credited against the income tax liability
of the taxpayer for the taxable year. Provided, That,
beginning January 1, 2019, the rate of withholding
shall not be less than one percent (1%) but not
U.P. LAW BOC TAXATION I TAXATION LAW

more than fifteen percent (15%) of the income

payment. [Sec. 57 (B), NIRC24]

2. Withholding tax on wages [Sec 79(A), NIRC]

Except in the case of minimum wage earner, every
employer making payment of wages shall deduct and
withhold upon such wages a tax determined in
accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon
recommendation of the CIR.

3. Withholding of VAT [Sec 114 (C), NIRC]

The government (political subdivisions,
instrumentalities, agencies, GOCCs) shall deduct and
withhold final VAT of 5% of gross payment on
purchase of goods and services subject to VAT. If the
payment is for lease or use of properties to a
nonresident owner, withholding tax shall be 12%.

Note: Beginning January 1, 2021, the VAT

withholding system shall shift from final to a
creditable system. (Under the TRAIN Law)

24
As amended by TRAIN

Page 114 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

TAXATION II
Taxation Law

Page 115 of 290

U.P. LAW BOC TAXATION II
C. Transfer Taxes
1. Estate Tax
a. Basic Principles, Concept, and
Definition
Death is the source of the taxing power. It is the
power to transmit or the transmission from the dead
to the living on which the tax is based. The tax accrues
as of the death of the decedent by operation of law.
[Lorenzo v. Posadas, G.R. No. L-43082 (1937)]
1. E a e a accr e a he ime of he deceden
death, but the obligation to pay the same is
different and is fixed by law. The tax is measured
by the value of the property AT THE TIME OF
DEATH.
2. Estate tax is measured (i.e., tax base) by the value
at that time of such property as passes to him (i.e.,
death). Subsequent appreciation or depreciation
is immaterial;
3. Estate taxation is governed by the statute in force
at the time of the death of the decedent. Tax laws
cannot be given retroactive effect unless they
explicitly provide for it. [Sec. 5, RR-2-2003]
Inheritance taxes, which were imposed on the right of
the heirs to receive property upon the death of the
decedent (Act No. 2601 effective on July 1, 1916),
were repealed by PD 69 on January 1, 1973 and were
integrated into the estate tax. They are no longer
imposed under the current NIRC.
Estate tax is an excise tax on the right of transmitting
property at the time of death and on the privilege that
a person is given in controlling to a certain extent the
disposition of his property to take effect upon death.
[Vitug and Acosta at 211]
b. Nature, Purpose, and Object
It is a transfer tax (i.e. an excise tax on the right of
transmitting property), not a property tax. Compared
to old inheritance, it is a tax on the right to transfer
and not the right to inherit property.
Purpose: To tax the shift of economic benefits and
enjoyment of property from the dead to the living.
Page 116 of 290
TAXATION LAW
Taxable objects/subjects:
1. Right/privilege of the deceased person to
transmit his/her estate to his/her lawful heirs and
beneficiaries at the time of death;
2. Certain transfers, during his lifetime, which are
made by law as equivalent to testamentary
disposition.
Justification Theories for the Imposition of
Estate Tax
1. Benefits-received theory The State collects
the tax because of the services it renders in the
distribution of the estate of the decedent, either
by law or in accordance with his will.
2. Privilege theory or state partnership theory
Succession to the property of a deceased person
is not a right but a privilege granted by the State
and consequently, the legislature can
constitutionally burden such succession with a
tax. The State collects the tax because of the
protection it provides in the acquisition of large
e a e . Hence, he S a e i a ilen or pa i e
par ner in he acc m la ion of aid large
property.
3. Ability-to-pay theory Receipt of inheritance,
which is in the nature of unearned wealth or
windfall, places assets into the hands of the heirs
and beneficiaries. This creates an ability to pay
the tax and thus contributes to government
income.
4. Redistribution of wealth theory The
imposition of estate tax reduces the property
received by the successor, which helps promote
a more equitable distribution of wealth in society.
The taxes paid by the rich are programmed for
disbursement by Congress for the benefit of the
poor in terms on social services, education,
health, etc.
c. Time and Transfer of Properties
The rights to the succession are transmitted from the
moment of the death of the decedent. [Art. 777, Civil
Code]
The deceden e a e incl de proper o he e en
of the interest therein of the decedent at the time of
his death. [Sec. 85(A)]
Estate taxation is governed by the statute in force at
the time of death of the decedent. Estate tax accrues
as of the death of the decedent and the accrual of the
tax is distinct from the obligation to pay the same.
Upon the death of the decedent, succession takes
U.P. LAW BOC TAXATION II
place and the right of the State to tax the privilege to
transmit the estate vests instantly upon death. [Sec. 3,
RR 2-2003]
N.B. Note that in transfers for insufficient
consideration, the value to be included in the estate is
the excess of the FMV at time of death over the value
of the consideration received at the time of transfer.
The executor or administrator shall not deliver a
distributive share to any party interested in the estate
despite the transfer of properties and rights at the
time of death, unless there is a certification from CIR
that estate tax has been paid. [Sec.94, NIRC]
Time of death governs:
1. The determination of he e en of he deceden
interest for computing his gross estate.
2. The statute that governs estate taxation.
3. The accrual of the estate tax.
TAXABLE TRANSFERS
Taxable transfers are complete when the transferor
divests himself of all economic beneficial interest in
himself or his estate.
1. Transfers Mortis Causa. These are gratuitous
transfers that take effect after death, either testate
or intestate. These transfers are subject to estate
tax.
A donation which purports to be one inter
vivos but withholds from the donee the right to
dispose of the donated property during the
donor's lifetime is in truth one mortis causa. In a
donation mortis causa, the right of disposition is
not transferred to the donee while the donor is
still alive. The requisites of a testamentary
disposition should be fulfilled. [Maglasang v Heirs
of Cabatingan, G.R. No. 131953 (2002)]
Characteristics:
a. It conveys no title or ownership to the
transferee before the death of the transferor;
or what amounts to the same thing, that the
transferor should retain the ownership (full
or naked) and control of the property while
alive;
b. That before his death, the transfer should be
revocable by the transferor at will, ad nutum;
but revocability may be provided for
indirectly by means of a reserved power in
the donor to dispose of the properties
conveyed;
Page 117 of 290
TAXATION LAW
c. That the transfer should be void if the
transferor should survive the transferee.
[Maglasang v Heirs of Cabatingan, supra.]
2. Transfers Inter Vivos. Gratuitous transfers that
take effect during the lifetime of the donor. (See
Donor Ta for req i i e )
General Rule: Donation Inter Vivos are subject to
Don Ta .
Exceptions: Donation Inter Vivos are subject to
Estate Tax when it is treated by law as substitutes
for testamentary dispositions (i.e., transfers
which are inter vivos in form but mortis causa in
substance)
a. Transfers in Contemplation of Death [Sec.
85(B), NIRC]
b. Revocable transfers [Sec. 85(C), NIRC]
c. Transfers of property arising under general
power of appointment [Sec. 85(D), NIRC]
d. Transfers for insufficient consideration [Sec.
85(G), NIRC]
Note: These transfers would be included in the
computation of the gross value of estate. See
further discussion in the valuation of Gross
Estate.
d. Classification of Decedent
Estate Tax applies only to individuals. The decedent
may be classified into:
1. Citizen (RC/NRC)
2. Resident alien (RA); or
3. Non-resident alien (NRA).
Concept of residence
For p rpo e of e a e a a ion, re idence refer o
domicile, the permanent home or the place to which
whenever absent, one intends to return (animus
revertendi), and depends on facts and circumstances, in
the sense that they disclose intent. It is therefore, not
necessarily the actual place of residence. [Corre v Tan
Corre, G.R. No. L-10128 (1956)]
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 the residence/domicile
of owner thereof. Situs is the domicile or residence of
the owner. [Collector v Fisher, G.R. No. L-11622 (1961)]
U.P. LAW BOC TAXATION II TAXATION LAW

5. Shares or rights in any partnership, business or

Exception:
When it is inconsistent with express provisions of law.
Exception to the exception; Rule of Reciprocity.
Intangible Properties which are considered
situated in the Philippines [Sec 104, NIRC]
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
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:
1. 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
2. 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. [Sec. 104, NIRC]

e. Gross Estate vis-à-vis Net Estate

Gross Estate Net Estate
Value at the time of a a Value of the estate after all deductions have been made
property wherever situated against the gross estate; subject to the graduated tax
HOWEVER, in the case of a NRA at the time of his death, rates. [Sec. 6, RR 2-2003]
only that part of the entire gross estate which is situated in
the Philippines shall be included in his taxable estate. [Sec This is the TAX BASE.
85, NIRC]

Formula for Estate Tax

Gross Estate (Sec. 85)
Less: Deductions (Sec. 86)
-------------------------------------------------------
Net estate before share of surviving spouse (if married)
Less: Net share of the surviving spouse in the conjugal property (Sec. 86(C))
-------------------------------------------------------
= Net taxable estate
Multiply by: Tax rate (Sec. 84)
-------------------------------------------------------
= Estate Tax Due
Less: Tax Credit, if any (Sec. 86(E), or 110 (B))
-------------------------------------------------------
= Estate Tax Due, if any

f. Determination of Gross Estate and Net Estate (and Composition)

Summary of the Composition of the Gross Estate and Exclusions, Deductions therefrom
RC/NRC/RA NRA
Composition and Determination of GROSS Estate [Sec. 85, NIRC]
The al e of he follo ing a he ime of he deceden The al e of he follo ing a he ime of he deceden
death: death:

Page 118 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

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.
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 85(H) and Sec 87, NIRC]
a. Separate property of the surviving spouse [Sec. 85 (H), NIRC]
b. GSIS proceeds/ benefits
c. Accruals from SSS
d. Proceeds of life insurance where the beneficiary is irrevocably appointed
e. Proceeds of life insurance under a group insurance taken by employer
f. War damage payments and Benefits received from US Veterans Administration
g. Transfer by way of bona fide sales
h. Transfer of property to the National Government or to any of its political subdivisions
i. Merger of usufruct in the owner of the naked title [Sec. 87 (A), NIRC]
j. Properties held in trust by the decedent. Transmission of inheritance or legacy by fiduciary heir or legatee to the
fideicommissary [Sec. 87 (B), NIRC]
k. Transmission from the first heir, legatee, or done in favor of another beneficiary, in accordance with the desire of
their predecessor [Sec. 87 (C), NIRC]
l. Acquisition and/or transfer expressly declared as not taxable
m. Bequests, devises, legacies or transfers to social welfare, cultural and charitable institutions, provided that not more
than 30% of said transfer shall be used for administration purposes [Sec. 87 (D), NIRC]
Deductions from GROSS estate to arrive at the NET estate
Ordinary deductions
Ordinary deductions25
a. Expenses, losses, indebtedness, taxes. (ELIT)
a. Proportionate deductions for (ELIT)26
Funeral expenses*
Funeral expenses*
Judicial expenses*
Judicial expenses*
Claims against the estate
Claims against the estate
Claims against insolvent persons
Claims against insolvent persons
Unpaid mortgage and debt
Unpaid mortgage and debt
Taxes
Taxes
Losses
Losses
b. Vanishing deductions
b. Vanishing deductions
c. Transfers for public use
c. Transfers for public use
d. Amounts received under R.A. 4917
No Amounts received under R.A. 4917
Special deductions
No special deductions except Standard Deduction of
e. Family home (max P10M)
P500,000.
f. Standard deduction (P5M)
g. Medical expenses*
Share in conjugal property
Share in conjugal property
* Funeral expenses, judicial expenses, and medical expenses are no longer allowed under the TRAIN ACT.

25
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 t a a a a NOT a
Philippines. [Sec. 86 (D), NIRC; Sec 7, RR 2-2003]

26
Formula for Proportionate Deductions of NRA: Allowable Deduction = 𝑥 𝐸𝐿𝐼𝑇

Page 119 of 290

U.P. LAW BOC TAXATION II
VALUATION OF GROSS ESTATE [Sec. 88,
NIRC]
General Rule: Gross Estate = FMV at the time of the
deceden dea h
Real Property
1. Appraised value, whichever is higher between:
a. FMV, as determined by the Commissioner
of Internal Revenue (CIR) (zonal value) or
b. FMV, as shown in the schedule of values
fixed by the Provincial or City Assessor.
2. 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
1. FMV at the time of death.
2. If none, acquisition cost for recently acquired
properties or the current market price for the
previously acquired properties. [Sec. 40(B),
NIRC]
3. Stocks, bonds, and other securities.
a. 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, RR 02-
2003]
b. If unlisted stocks = book value at time of
death (ordinary common shares) or par
value (preferred shares)
N.B: Bonds, mortgages, and Certificates of
Stocks are taxable at the place where they are
physically located.
4. 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.
g. Items to be Included in Gross
Estate
Items to be included in the Gross Estate
[Sec. 85, NIRC]
27
Renumbered by TRAIN Law.
Page 120 of 290
TAXATION LAW
1. Property owned by the decedent actually and
physically present in his estate at the time of his
death;
2. Deceden in ere ;
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 [Sec.
86(A)(3)27]; and
DECEDENT S INTEREST [S . 85(A), NIRC]
This includes any interest having value or capable of
being valued which is owned by the decedent
existing at the time of death, such as dividend
declared on or before death, but is received by the
estate after death, partnership profits which have
accrued before his death, but received after death.
This also includes those transferred by the decedent
at the time of his death.
Note: When decedent had relinquished his interest
BEFORE his death, he could not be deemed to have
transmitted interest in such property at his death.
TRANSFERS IN CONTEMPLATION OF
DEATH [Sec. 85(B), NIRC]
The erm in con empla ion of dea h , a ed in
estate taxation, does not refer to the general
expectation of death. The words mean that it is the
thought of death, as a controlling motive, which
induces the disposition of the property for the
p rpo e of a oiding he a . The deceden mo i e i
a question of fact. Thus, the imminence of death
may afford convincing evidence of the impelling
cause of transfer. However, it is a contemplation of
death and not necessarily contemplation of imminent
death to which the statute refers. These transfers
should be without or with insufficient considerations.
The law does not specify the number of years prior to
a deceden dea h within which a transfer can be
considered in contemplation of death. [De leon]
U.P. LAW BOC
TRANSFERS WITH RETENTION OR
RESERVATION OF CERTAIN RIGHTS
These are transfers with retention or reservation of
certain rights that result to the incapacity of transferee
to freely enjoy and dispose of the property until the
ran feror dea h, and he ran fer ma be regarded
as having been intended to take effect in possession
or enjo men a he ran feror dea h. The e do no
include bona fide sale for an adequate and full
consideration.
REVOCABLE TRANSFERS [Sec. 85(C), NIRC]
General Rule: A transfer is a revocable transfer where:
1. There is a transfer by trust or otherwise,
2. The enjoyment thereof was subject at the date of
his death to any change through the exercise of a
power (in whatever capacity exercisable) by:
a. The decedent alone;
b. The decedent in conjunction with any other
person without regard to when or from what
source the decedent acquired such power, to
alter, amend, revoke, or terminate; or
c. Where any such power is relinquished in
contemplation of the decedent death.
Exception: Bona fide sale for an adequate and full
consideration in money or mone or h
Note: The power to alter, amend or revoke shall be
con idered o e i on he da e of he deceden death
even though:
1. The exercise of the power is subject to a
precedent giving of notice, or
2. The alteration, amendment or revocation takes
effect only on the expiration of a stated period
after the exercise of the power, whether or not
on or before the date of he deceden dea h
notice has been given or the power has been
exercised.
If notice has not been given or the power has not
been exercised before the date of his death, such
notice shall be considered to have been given, or the
power exercised, on the date of his death.
TRANSFER OF PROPERTY UNDER
GENERAL POWER OF APPOINTMENT
[Sec. 85(D), NIRC]
Power of Appointment the right to designate the
person or property who shall enjoy and possess
certain property from a donor or a prior decedent.
Page 121 of 290
TAXATION II TAXATION LAW
1. General Power of Appointment: when it gives
to the decedent the power to appoint any person
he pleases including himself. He had a power
exercisable in favor of himself, his creditors or
creditors of his estate [AmJur]
2. Special Power of Appointment: when the
decedent
a. can appoint only among a designated class of
persons other than himself, his estate, the
creditors of his estate, or
b. if the power of appointment is expressly not
exercisable in favor of the decedent, his
estate, his creditors, or creditors of his estate.
General Rule: Property over which the decedent held a
power of appointment is excluded in his gross estate
Exception: Included in the gross estate if the property
arises under a general power of appointment
exercised by the decedent:
1. By will; or
2. By deed executed in contemplation of or
intended to take effect in possession or
enjoyment at or after his death; or
3. By deed under which he has retained for his life
or any period not ascertainable without reference
to his death or for any period which does not in
fact end before his death
a. The possession or enjoyment of, or the right
to the income from the property; or
b. The right either alone or in conjunction with
any person, to designate the persons who
shall enjoy or possess the property or the
income therefrom.
TRANSFERS FOR INSUFFICIENT
CONSIDERATION [Sec. 85(G), NIRC]
Transfers, trusts, interests, rights, or powers
(denominated as transfer in contemplation of death,
revocable transfer and property passing under general
power of appointment) made, created, exercised or
relinq i hed for a con idera ion in mone or mone
worth, but is NOT a bona fide sale for an adequate
and f ll con idera ion in mone or mone or h.
The value to be included in the gross estate is the
excess of the fair market value of the property at the
ime of he deceden dea h o er he con idera ion
received.
Example:
Case A: If bona fide sale no value shall be included in
the gross estate
U.P. LAW BOC TAXATION II
Case B: If not a bona fide sale - the excess of the fair
market value at the time of death over the value of the
consideration received by the decedent shall form part
of his gross estate.
Case C: If inter vivos transfer is proven
fictitious/simulated total value of the property at
the time of death included in the gross estate.
Case Case Case
Over
A B C
FMV, transfer 2,000 1,500 2,500
FMV, death 2,500 2,000 2,000
Consideration received 2,000 800 0 insured. The transfer is absolute and the insured
Value included in the 0 1,200 2,000
Gross Estate
The transfer for insufficient consideration must fall
under any of the following:
1. Transfer in contemplation of death;
2. Revocable transfer, or
3. Property passing under a GPA.
Otherwise, the tax imposed is donor a .
PROCEEDS OF LIFE INSURANCE [Sec.
85(E), NIRC]
Inclusion of proceeds of life insurance to the gross
estate depends on i) designated beneficiary; ii)
revocability of the insurance; iii) period and source of
funds used in premiums.
When included in the gross estate
Proceeds of life insurance taken out by the decedent
on his own life shall be included in the gross estate
in the following cases:
1. Beneficiary is the estate of the deceased, his
executor or administrator, irrespective of
whether or not the insured retained the power of
revocation; or
2. Beneficiar i o her han he deceden e a e,
executor or administrator, when designation of
beneficiary is not expressly made irrevocable.
When not taxable
1. Irrevocably designated; how done
a. By expressly stating it in the policy (the
designation of a beneficiary is PRESUMED
to be revocable);
b. By not changing the beneficiary during the
lifetime of the insured. This was added in
Sec. 11, RA 10607 (2013) which provides
ha , The in red hall ha e he right to
Page 122 of 290
TAXATION LAW
change the beneficiary he designated in the
polic (i.e., i re ocable), nle he ha
expressly waived this right in said policy.
Notwithstanding the foregoing, in the event
the insured does not change the
beneficiary during his lifetime, the
designation shall be deemed irrevocable.
2. Accident insurance proceeds as the Tax Code
specifically mentions only life insurance policies
3. Proceeds of a group insurance policy taken out
by a company for its employees.
4. Amount receivable by any beneficiary irrevocably
designated in the policy of insurance by the
did not retain any legal interest in the insurance
5. Amount receivable by any beneficiary irrevocably
designated in the policy of insurance by the
insured. The transfer is absolute and the insured
did not retain any legal interest in the insurance
6. Proceeds of insurance policies issued by the GSIS
to government officials and employees, which are
exempt from all taxes; [PD 1146]
7. Benefits accruing under the SSS law [RA 1161]
8. Proceeds of life insurance payable to heirs of
deceased members of military personnel [RA
360]
CAPITAL OF THE SURVIVING SPOUSE
[Sec.85(H), NIRC]
It is NOT part of the gross estate of the deceased
spouse.
To determine the conjugal or separate character
of proceeds, the following factors are considered:
1. Policy was taken before marriage Source of
funds determines ownership of the proceeds of
life insurance
2. Policy was taken during marriage
3. Beneficiary is estate of the insured Proceeds are
presumed conjugal; hence, one-half share of the
surviving spouse is not taxable
4. Beneficiary is third person Proceeds are payable
to beneficiary even in premiums were paid out of
the conjugal
CLAIMS AGAINST INSOLVENT PERSONS
For estate tax purposes, an insolvent is a person
whose properties are not sufficient to satisfy, whether
fully or partially, his debts. A judicial declaration of
insolvency is not required but the incapacity of the
debtor should be proven. As a rule, regardless of the
amount the debtor is unable to pay, the full amount
of the claim against the insolvent person should
be included in the gross estate of the decedent.
U.P. LAW BOC TAXATION II
The portion of the claim which is not collectible
should be allowed as a deduction from the gross
estate.
h. Deductions and Exclusions from
Estate
Deductions and/or losses already deducted from
gross income can no longer be deducted from gross
estate. Further, deductions should not be
compensated for by any insurance or extrajudicial
settlement. Otherwise, they are not valid deductions.
1. Ordinary Deductions
a. Expenses, Losses, Indebtedness and
Taxes, Etc. (ELIT)
1. FUNERAL EXPENSES [Sec. 86 (A)(1)(a)]
Funeral expenses are no longer allowed as deductions
under TRAIN LAW.
2. JUDICIAL EXPENSES OF
ESTAMENTARY AND INTESTATE
PROCEEDINGS [Sec. 86 (A)(1)(b)]
Judicial expenses are no longer allowed as deductions
under the TRAIN LAW.
3. CLAIMS AGAINST THE ESTATE [Sec. 86
(A)(2)28]
Claim generall mean: (i) deb or demand 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, G.R. No. 140944 (2008)]
Requisites for Deductibility of Claims Against
the Estate: [Sec. 86 (A)(3)(i), RR 2-2003].
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.
(NOTE: Funeral expenses, judicial expenses,
28
Renumbered by TRAIN Law.
Page 123 of 290
TAXATION LAW
and medical expenses are no longer allowed
as deductions under the TRAIN ACT.)
b. The liability was contracted in good faith and for
adequate and full consideration in money or
mone or h
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 collect from the
decedent must not have prescribed.
e. They must be reasonably certain in amount, and
substantiated.
Substantiation Requirements [Sec. 86 (A)(2)(ii),
RR 2-2003].
In case of simple loan (including advances):
a. The debt instrument must be duly notarized
at the time the indebtedness was incurred, such
as promissory note or contract of loan, except for
loans granted by financial institutions where
notarization is not part of the business
practice/policy of the financial institution-lender.
b. Duly notarized Certification from the
creditor as to the unpaid balance of the debt,
including interest as of the time of death. If the
creditor is:
CORPORATION: sworn certification should be
signed by the President, or Vice-President, or
other principal officer of the corporation.
PARTNERSHIP: sworn certification should be
signed by any of the general partners.
BANK/FINANCIAL INSTITUTIONS:
Certification shall be executed by the branch
manager of the bank/financial institution which
monitors and manages the loan of the decedent-
debtor.
INDIVIDUAL: sworn certification should be
signed by him.
In any of these cases, the one who should certify
must not be a relative of the borrower within
the 4th civil degree, either by consanguinity or
affinity, except when a copy of the promissory
note or other evidence of the indebtedness must
is filed with the RDO having jurisdiction over the
borrower within 15 days from the execution
thereof.
U.P. LAW BOC TAXATION II
c. Proof of financial capacity of the creditor to
lend the amount at the time the loan was granted,
as well as its latest audited balance sheet with
a detailed schedule of its receivable showing the
unpaid balance of the decedent-debtor
In case the creditor is an individual who is no
longer required to file ITRs with the Bureau, a
duly notarized declaration by the creditor of his
capacity to lend at the time when the loan was
granted without prejudice to verification that may
be made by the BIR to substantiate such
declaration of the creditor.
If the creditor is a non-resident, the executor/
administrator or any of the legal heirs must
submit a duly notarized declaration by the
creditor of his capacity to lend at the time when
the loan was granted, authenticated or certified to
as such by the tax authority of the country where
the non-resident creditor is a resident
d. A statement under oath executed by the
administrator or executor of the estate reflecting
the disposition of the proceeds of the loan if it
was contracted within 3 years prior to the
death of the decedent.
If the unpaid obligation arose from purchase of
goods or services:
a. Pertinent documents evidencing the purchase of
goods or service, such as sales invoice/delivery
receipt (for sale of goods), or contract for the
services agreed to be rendered (for sale of
services), as duly acknowledged, executed and
signed by decedent-debtor and creditor, and
statement of account given by the creditor as duly
received by the decedent-debtor
b. Duly notarized certification from the creditor as
to the unpaid balance of the debt, including
interest as of the time of death.
c. Certified true copy of the latest audited balance
sheet of the creditor with a detailed schedule of
its receivable showing the unpaid balance of the
decedent-debtor. Moreover, a certified true copy
of the updated latest subsidiary ledger/records of
the debtor-decedent, should likewise be
submitted.
Where the settlement is made through the Court
in a testate or intestate proceeding, pertinent
documents filed with the Court evidencing the
29
Renumbered by TRAIN Law.
Page 124 of 290
TAXATION LAW
claims against the estate, and the Court Order
approving the said claims, if already issued, in
addition to the documents mentioned in the
preceding paragraphs.
4. CLAIMS AGAINST INSOLVENT
PERSONS [Sec. 86 (A)(3)29, NIRC]
These are claims of the estate (i) against insolvent
persons (ii) which are not collectible. To be deductible
from the gross estate:
Additional Requirements:
1. The incapacity of the debtor to pay his obligation
should be proven, although a judicial declaration
of insolvency is not required;
2. The full amount owed by the insolvent must first
be incl ded in he deceden gro e a e; and
3. 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.
5. UNPAID MORTGAGES, LOSSES AND
TAXES [Sec. 86(A)(4), NIRC30]
Unpaid Mortgages
Requisites for Deductibility [Sec. 6(A)(5)(a), RR 2-2003]
a. The al e of he deceden in ere herein,
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
mone or h.
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
deceden in ere herein, ho ld al a form par
of the taxable gross estate. [Sec. 6(5), 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
30
Id.
U.P. LAW BOC TAXATION II
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.
6 MONTHS from deceden dea h; 1 r. under
the TRAIN Act. Therefore, all casualty losses
AFTER the prescribed period from the payment
of tax are not deductible.
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 [Sec. 86(A)(5)31]
a.k.a. VANISHING DEDUCTIONS
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, subject to transfer
a , ei her donor a or e a e a .
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.
31
Renumbered by TRAIN Law.
Page 125 of 290
TAXATION LAW
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
pre en deceden dea h.
4. Previous taxation of property The estate tax
on he prior cce ion, or he donor a on he
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 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
proper in pre en deceden gro e a e,
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
deceden or he donor a .
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:
U.P. LAW BOC TAXATION II TAXATION LAW

a. Expenses, losses, indebtedness, and taxes
(ordinary deductions), and
b. Transfers for public use as the amount
otherwise deductible for property previously
a ed bear o he al e of he deceden
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
Within 1 year prior to the death of the
100%
present decedent
More than 1 year but not more than 2
80%
years prior to the death of the decedent
More than 2 years but not more than 3
60%
years prior to the death of the decedent
More than 3 years but not more than 4
40%
years prior to the death of the decedent
More than 4 years but not more than 5
20%
years prior to the death of the decedent
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**
the share of surviving spouse. It is deducted from the
exclusive property of the decedent.
c. Transfers for Public Purpose [Sec.
86(A)(6)32]
These are:
1. dispositions in a last will and testament or
transfers to take effect after death
2. 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,
3. 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
491733 [Sec. 86(A)(8), NIRC34]
An amo n recei ed b he heir from he deceden
employer as a consequence of the 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 availed once.
2. Benefits granted in case of separation beyond the
control of the employee.

= Final Basis 2. Special Deductions

Multiplied by Deduction Rate
VANISHING DEDUCTION
**Proportionate Deduction:
𝐼𝑛𝑖𝑡𝑖𝑎𝑙 𝐵𝑎𝑠𝑖𝑠
𝑥 𝐸𝐿𝐼𝑇
𝐺𝑟𝑜𝑠𝑠 𝑒𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑑𝑒𝑐𝑒𝑑𝑒𝑛𝑡
Note: Amount of Vanishing Deductions is NOT
subtracted from the value of the CPG to determine
a. Family Home [Sec. 86(A)(7), NIRC;35
6(D), RR 2-2003]
It is the dwelling house, including the land on which
it is situated, where the husband and wife, or a head
𝑇𝑃𝑈
of the family, and members of their family reside, as
certified to by the Barangay Captain of the locality. It
is deemed constituted on the house and lot from the
time it is actually occupied as the family residence and

32
Renumbered by TRAIN Law. Philippines, by deducting from the value of the gross estate
33
An Act Providing that Retirement Benefits of
Employees of Private Firms shall not be subject to (4)(7) The Family Home. An amount equivalent to the
attachment, levy, execution or any tax whatsoever current fair market value of the decedent's family home:
34
Renumbered by TRAIN Law. Provided, however, That if the said current fair market value
35
SECTION 86. Computation of Net Estate. For the exceeds One Ten million pesos (P1,000,000) (P10,000,000),
purpose of the tax imposed in this Chapter, the value of the the excess shall be subject to estate tax. As a sine qua non
net estate shall be determined: condition for the exemption or deduction, said family home
(A) Deductions Allowed to the Estate of a Citizen or a a a a
Resident. In the case of a citizen or resident of the the barangay captain of the locality.

Page 126 of 290

U.P. LAW BOC TAXATION II
considered as such for as long as any of its
beneficiaries actually resides therein. [Arts. 152 and
153, Family Code]
Temporary absence from the constituted family home
due to travel or studies or work abroad, etc. does not
interrupt actual occupancy. The family home is
generally characterized by permanency, that is, the
place to which, whenever absent for business or
pleasure, one still intends to return. [Sec. 6(D), RR 2-
2003]
It must be part of the ACP or CPG, or the exclusive
property of the decedent. It may also be constituted
by an unmarried head of a family on his or her own
property.
For purposes of availing this deduction, a person may
constitute only one family home. [Sec. 6(D), RR 2-
2003 citing Art. 161, Family Code]
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.36
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 exten of he deceden in ere ( he her
conjugal/community or exclusive property),
whichever is lower, but in no case shall the
deduction exceed P10,000,000. The decedent
was married or if single, was a head of the family.
4. Along with the decedent, any of the beneficiaries
must be dwelling in the family home.
5. 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
deceden gro e a e.
36
The requirement for certification by the barangay captain
has been removed by TRAIN.
37
SECTION 86. Computation of Net Estate. For the
purpose of the tax imposed in this Chapter, the value of the
net estate shall be determined:
(A) Deductions Allowed to the Estate of a Citizen or a
Resident.39 In the case of a citizen or resident of the
Philippines, by deducting from the value of the gross estate
(1) Standard Deduction. An amount equivalent to Five
million pesos (P5,000,000).
Page 127 of 290
TAXATION LAW
Beneficiaries of a Family Home [Sec. 6(D)(a),
RR 2-2003]
1. The husband and wife, or an unmarried person
who is the head of a family; and
2. Their parents, ascendants, descendants, brothers
and sisters, whether the relationship be legitimate
or illegitimate, who are living in the family home
and who depend upon the head of the family for
legal support.
b. Standard Deduction [Sec. 86(A)(1),
NIRC37]
An amount equivalent to five million pesos
(P5,000,000) shall be deducted from the gross estate
without need of substantiation. For Nonresident
Aliens, the Standard Deduction is P500,000 [Sec. 86
(B)(1)38].
c. Medical Expenses [Sec. 86(A)(6); Sec.
6(F), RR 2-2003]
Under TRAIN LAW, medical expenses are no longer
allowed as deduction.
3. Net Share Of Surviving Spouse In
Cpg/Acp [Sec. 86(C), Nirc In Relation
To Sec. 6(H), Rr 2-2003]
(Compare with Capital of Surviving Spouse which is
excluded from the gross estate).
The amount deductible is the net share of the
surviving spouse in the CPG. The net share is
equivalent to ½ of 50% of the conjugal property after
deducting the obligations chargeable to such
property. Net share of the surviving spouse is neither
an ordinary nor a special deduction.
38
SECTION 86. Computation of Net Estate. For the
purpose of the tax imposed in this Chapter, the value of the
net estate shall be determined:
(B) Deductions Allowed to Nonresident Estates. In the case
of a nonresident not a citizen of the Philippines, by deducting
from the value of that part of his gross estate which at the time
of his death is situated in the Philippines:
(1) Standard Deduction. An amount equivalent to Five
hundred thousand pesos (P500,000);
U.P. LAW BOC TAXATION II
EXCLUSIONS
a. Capital of the Surviving Spouse [Sec. 85(H),
NIRC]
Capital: property of the spouses brought into
marriage. Strictly speaking, capital under the Civil Law
refers to the property brought by the husband to the
marriage while that brought into the marriage by the
wife known is as paraphernal property. [Domondon]
b. Exemptions under special laws
1. Benefits received by members from the
GSIS and the SSS by reason of death
Exclusive Property of Each Spouse
If ACP governs property relations
The community of property shall consist of all the
property owned by the spouses at the time of the
celebration of the marriage or acquired thereafter. [Art.
91, Family Code]
The following are excluded from the community
property:
Property acquired by gratuitous title by either
spouse, and the fruits as well as the income
thereof, if any, unless it is expressly provided by The following are exclusive property of each spouse:
the donor, testator, or grantor that they shall
form part of the community property.
Property for personal and exclusive use of either
spouse; however, jewelry shall form part of the
community property.
Property acquired 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]
Property acquired during the marriage is
presumed to belong to the community, unless it
is proved that it is one of those excluded
therefrom.
Page 128 of 290
TAXATION LAW
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
If CPG governs property relations
The husband and wife place in a common fund the
proceeds, products, fruits, and income from their separate
properties and those acquired by either or both spouses
through their efforts or by chance, and, upon dissolution
of the marriage or of the partnership, the net gains or
benefits obtained by either or both spouses shall be
divided equally between them, unless otherwise agreed in
marriage settlements. [Art. 106, Family Code]
That which is brought to the marriage as his or
her own
That which each acquires DURING the marriage
by gratuitous title
That which is acquired by right of redemption,
by barter or by exchange with property
belonging to only one of the spouses
That which is purchased with exclusive money of
the wife or the husband [Art. 109, Family Code]
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]
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.
U.P. LAW BOC TAXATION II TAXATION LAW

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:
present or future property or both;
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:
Where net estate does not exceed P200,000. [Sec. 84, NIRC] [THIS IS NO LONGER APPLICABLE UNDER THE
TRAIN ACT.]

The following transmissions shall not be taxed:

1. Merger of the usufruct in the owner of the naked title
2. Transmission or delivery of the inheritance or legacy by the fiduciary heir or legatee to the fideicomissary
3. The transmission from the first heir, legatee, or done in favor of another beneficiary in accordance with the
desire of the predecessor
4. 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)

i. Tax Credit for Estate Taxes Paid LIMITATIONS ON CREDIT

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.
1. 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.
Tax Credit Limit (Computation)
𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
𝑥 𝑃ℎ 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
2. 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

Page 129 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

is taken, which the decedent's net estate situated The lower of the two amounts for each foreign
outside the Philippines taxable under the tax code country will be added to get the total tax credit
bears to his entire net estate. allowed under Limitation a.

Tax Credit Limit (Computation) Amount allowed

𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦 (whichever is lower)
𝑥 𝑃ℎ 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥 Country G
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
(300/1500 x 3,000
Compare the tax credit allowed under Limitation A 15,000) 3,000
and Limitation B. The lower of the two amounts is Actually paid to
5,000
the final allowable tax credit. In this case, the amount Country G
computed under Limitation A (4,400) is lower, thus it Country H
becomes the final allowable tax credit. (150/1500 x 1,500
15,000) 1,400
If there is only one foreign country involved, both Actually paid to
limitations will yield the same answer. 1,400
Country H
Tax Credit allowed under
The resulting amount will be compared to the actual 4,400
Limitation a
tax paid to the foreign country. The lower amount will
be the final allowable tax credit. Solution Limitation b:
Apply Formula b. The result after applying the
Illustration: formula above is compared to the tax actually paid in
total to foreign countries.
Net Estate Philippines (reduced by P1,050,000 The lower of the two amounts will be added to get the
all allowable deductions, except total tax credit allowed under Limitation b.
standard deduction)
Country G Net Estate 300,000
450/1500 x 4,500
Country H Net Estate 150,000 15,000
Tax paid/incurred: Total foreign 6,400
Philippines 15,000 income taxes
Country G 5,000 paid
Country H 1,400 Tax credit 4,400
Net Estate Philippines (reduced by P1,050,000 allowed under
all allowable deductions, except Limitation a
standard deduction)
j. Filing of Notice of Death
Net taxable estate is P500,000 (1,050,000 + 300,000
+ 150,000 1,000,000 standard deduction). The [Sec. 89, NIRC] Repealed by the TRAIN ACT (RA
Philippine estate tax on P500,000 is P15,000. 10963)

Solution Limitation a k. Estate Tax Return

Apply Formula a. The result after applying the [Secs. 90-91, NIRC]
formula above is compared to the tax actually paid for
each foreign country. When Required (Copies in duplicate) [Sec. 90
(A), NIRC39]

39
SECTION 90. Estate Tax Returns.
(A) Requirements. In all cases of transfers subject to the
tax imposed herein, or where, though exempt from tax, the
gross value of the estate exceeds Two hundred thousand
pesos (P200,000), or regardless of the gross value of the
estate, where the said estate consists of registered or
registrable property such as real property, motor vehicle,
shares of stock or other similar property for which a clearance
from the Bureau of Internal Revenue is required as a condition
precedent for the transfer of ownership thereof in the name of
the transferee x x x

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U.P. LAW BOC TAXATION II
Regardless of the gross value of the estate, when the
said estate consists of registered or registrable
property such as real property, motor vehicle, shares
of stock or other similar property for which a
clearance from the Bureau of Internal Revenue is
required as a condition precedent for the transfer of
ownership thereof in the name of the transferee.
Contents [Sec. 90 (A), NIRC40]
The executor, or the administrator, or any of the legal
heirs, as the case may be, shall file a return under oath
in duplicate, setting forth:
1. The value of the gross estate of the decedent at
the time of his death, or in case of a nonresident,
not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
2. The deductions allowed from gross estate in
determining the net taxable estate; and
3. Such part of such information as may at the time
be ascertainable and such supplemental data as
may be necessary to establish the correct taxes.
4. For estate tax returns showing a gross value
exceeding P5,000,000 - there must be a statement
duly certified to by a Certified Public Accountant
containing the following:
a. Itemized assets of the decedent with their
corresponding gross value at the time of his
death, or in the case of a non-resident, not a
citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
b. Itemized deductions from gross estate
allowed in Section 86; and
c. The amount of tax due whether paid or still
due and outstanding.
Period for Filing [Sec. 90 (B), NIRC41]
General Rule: Filed within 1 year from the decedent's
death.
40
SECTION 90. Estate Tax Returns.
(A) Requirements. x x x the executor, or the administrator,
or any of the legal heirs, as the case may be, shall file a return
under oath in duplicate, setting forth:
(1) The value of the gross estate of the decedent at the time
of his death, or in case of a nonresident, not a citizen of the
Philippines, of that part of his gross estate situated in the
Philippines;
(2) The deductions allowed from gross estate in determining
the estate as defined in Section 86; and
(3) Such part of such information as may at the time be
ascertainable and such supplemental data as may be
necessary to establish the correct taxes.
Provided, however, That estate tax returns showing a gross
value exceeding Two Five million pesos (P2,000,000)
(P5,000,000) shall be supported with a statement duly
Page 131 of 290
TAXATION LAW
Exception [Sec. 90 (C), NIRC]
The CIR shall have authority to grant, in meritorious
cases, a reasonable extension not exceeding 30 days
for filing the return.
Who will file: executor, administrator, or any of the
legal heirs, as the case may be, under oath. If there is
no executor or administrator appointed, qualified, and
acting within the Philippines, any person in actual or
constructive possession of any property of the
decedent may file this return.
Where to file the estate tax return and pay the tax
due [Sec. 9, RR 2-2003]
Resident Citizen (RC and RA)
The executor or administrator shall register the estate
of the decedent and secure a new TIN from the RDO
where the decedent was domiciled at the time of his
death and shall file the estate tax return and pay the
corresponding estate tax with:
1. An authorized agent bank (AAB), or
2. Revenue District Officer (RDO), or
3. Collection Officer, or
4. Duly authorized Treasurer of the city or
municipality in which the decedent was domiciled
at the time of his death
Non-resident decedent (NRA/NRC) with
executor or administrator in the Philippines
The estate tax return shall be filed with and the TIN
for the estate shall be secured from the RDO where
such executor or administrator is registered.
If the executor or administrator is not registered, the
estate tax return shall be filed with and the TIN for
the estate shall be secured from the RDO having
certified to by a Certified Public Accountant containing the
following:
(a) Itemized assets of the decedent with their corresponding
gross value at the time of his death, or in the case of a
nonresident, not a citizen of the Philippines, of that part of his
gross estate situated in the Philippines;
(b) Itemized deductions from gross estate allowed in Section
86; and
(c) The amount of tax due whether paid or still due and
outstanding.
41
SECTION 90. Estate Tax Returns.
(B) Time for Filing. For the purpose of determining the
estate tax provided for in Section 84 of this Code, the estate
tax return required under the preceding Subsection (A) shall
be filed within six (6) months one (1) year from the
death.
U.P. LAW BOC TAXATION II
jurisdiction over the execu or or admini ra or legal
residence.
Non-resident decedent does not have an
executor or administrator in the Philippines
The estate tax return shall be filed with and the TIN
for the estate shall be secured from the Office of the
Commissioner through RDO 39 QC.
The foregoing provisions notwithstanding, the CIR
may continue to exercise his power to allow a
different venue/place in the filing of tax returns.
Payment: Pay as you file
At the time the return is filed by the executor,
administrator or the heirs.
The executor or administrator, or if there is none
appointed, qualified, and acting within the
Philippines, then any person in actual or constructive
possession of any property of the decedent. The
estate tax shall be paid by the executor or
administrator before the delivery of the distributive
share in the inheritance to any heir or beneficiary.
Exception: In meritorious cases, the CIR may grant a
reasonable extension not exceeding 30 days from
filing.
Extension of Payment [Sec. 9(E), RR 2-2003]
The CIR may allow an extension of payment, if he
finds that the payment on the due date of the estate
tax or of any part thereof would impose undue
hardship upon the estate or any of the heirs:
1. Extension not to exceed 5 years, in case the
estate is settled judicially, or
2. 2 years in case the estate is settled
extrajudicially.
Where the taxes are assessed by reason of
negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no
extension will be granted by the CIR.
If extension granted, the CIR may require the
executor, or administrator, or beneficiary, as the case
may be, to furnish a bond in such amount, not
exceeding double the amount of the tax and with such
sureties as the CIR deems necessary, conditioned
upon the payment of the said tax in accordance with
the terms of the extension.
Page 132 of 290
TAXATION LAW
Effects of granting an extension
1. Payment of the amount in respect of which the
extension is granted on or before the date of the
expiration of the period of the extension
2. Suspension of the running of statute of
limitations for deficiency assessment for the
period of any extension
3. Any amount paid after the statutory due date of
the tax, but within the extension period, shall be
subject to interest but not to surcharge.
Can estate tax be paid in installments? Yes!
In case the available cash of the estate is not sufficient
to pay its total estate tax liability, the estate may be
allowed to pay the tax by installment and a clearance
shall be released only with respect to the property the
corresponding/computed tax on which has been
paid. [Sec. 9(F), RR 2-2003]
Who are liable for the payment of estate taxes
Primarily, the estate, through the executor or administrator.
1. Payment shall be made before the delivery of the
distributive share in the inheritance to any heir or
beneficiary.
2. If there are two or more executors or
administrators, all of them are severally liable
for the payment of the tax.
3. The estate tax clearance issued by the CIR or the
RDO having jurisdiction over the estate, will
serve as the authority to distribute the remaining
properties/share in the inheritance to the heir or
beneficiary.
Subsidiarily, heirs or beneficiaries, 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.
Claims for taxes, whether assessed before or after the
death of the deceased, can be collected from the heirs
even after the distribution of the properties of the
decedent, xxx. The heirs shall be liable therefor, in
proportion to their share in the inheritance. [Marcos
v. CA, G.R. No. 120880 (1997)]
Tax deficiency after distribution of properties
1. Sue all the heirs and collect from each of them
the amount of tax proportionate to the
inheritance received
2. By virtue of a lien created under Sec 219, sue only
one heir and subject the property he received
U.P. LAW BOC TAXATION II TAXATION LAW

from the estate to the payment of estate tax. Such
heir may go against the other heirs.
Tax Rate
FLAT RATE OF 6% ON AN AMOUNT IN
EXCESS OF P5,000,000. [Sec. 84, NIRC42]
Exempt: If ne a able e a e P5,000,000.
ADDITIONAL AMENDMENTS BY TRAIN:
Sec. 91(C) Payment by Installment. In case
the available cash of the estate is insufficient to pay
the total estate tax due, payment by installment
shall be allowed within two (2) years from the
statutory date for its payment without civil penalty
and interest.
Sec 97. Payment of Tax Antecedent to the
Transfer of Shares, Bonds or Rights. There
shall not be transferred to any new owner in the
books of any corporation, sociedad anonima,
partnership, business, or industry organized or
established in the Philippines any share, obligation,
bond or right by way of gift inter vivos or mortis
causa, legacy or inheritance, unless a certification
from the Commissioner that the taxes fixed in this
Title and due thereon have been paid is shown.
If a bank has knowledge of the death of a person,
who maintained a bank deposit account alone, or
jointly with another, it shall not allow any
withdrawal from the said deposit account,
subject to a final withholding tax of six percent
(6%) unless the Commissioner has certified that
the taxes imposed thereon by this Title have been
paid: Provided, however, That the administrator of
the estate or any one (1) of the heirs of the
decedent may, upon authorization by the
Commissioner, withdraw an amount not
exceeding Twenty thousand pesos (P20,000)
without the said certification. For this purpose, all
withdrawal slips shall contain a statement to the
effect that all of the joint depositors are still living
at the time of withdrawal by any one of the joint
depositors and such statement shall be under oath
by the said depositors.
2. D Ta
a. Basic Principles, Concept, and
Definition
A donor a i le ied, a e ed, collec ed and paid
upon the transfer by any person, resident or
nonresident, of the property by gift. [Sec. 98(A),
NIRC]. It shall apply whether the transfer is in trust
or otherwise, whether the gift is direct or indirect, and
whether the property is real or personal, tangible or
intangible. [Sec. 98(B), NIRC]
It is the tax on donations. Thus, it is a tax on
1. An act of the donor disposing gratuitously of a
thing/right in favor of a donee; and
2. Sales, exchanges or other transfers of properties,
other than real property (defined in Sec. 24D)
classified as capital asset within the Philippines,
for less than an adequate and full consideration
in mone or mone or h. [Sec. 100, NIRC4344]

42
SECTION 84. Rates of Estate Tax.38 There shall be 10,000,00 And Over 1,215,000 20% 10,000,00
levied, assessed, collected and paid upon the transfer of the 0 0
net estate as determined in accordance with Sections 85 and
86 of every decedent, whether resident or nonresident of the
Philippines, a tax at the rate of six percent (6%) based on 43
SECTION 100. Transfer for Less Than Adequate and Full
the value of such net estate., as computed in accordance with Consideration. Where property, other than real property
the following schedule: referred to in Section 24(D), is transferred for less than an
If the net estate is: adequate and full consideration in money or money's worth,
then the amount by which the fair market value of the property
Over But Not The Tax Plus Of the exceeded the value of the consideration shall, for the purpose
Over Shall Be Over Excess of the tax imposed by this Chapter, be deemed a gift, and shall
be included in computing the amount of gifts made during the
P200,000 Exempt calendar year.: Provided, however, That a sale, exchange,
or other transfer of property made in the ordinary course
P200,000 500,000 0 5% P200,000 of business (a transaction which is a bona fide, at arm s
length, and free from any donative intent), will be
500,000 2,000,000 P15,000 8% 500,000 considered as made for an adequate and full
consideration in mone or mone s orth.
2,000,000 5,000,000 135,000 11% 2,000,000 44
Note: In the RR for Train Law, there is added provision:
Provided, that the sale, exchange or other transfer of
5,000,000 10,000,00 465,000 15% 5,000,000 property is not made in the ordinary course of business
0 (i.e. at arm s length and free of donati e intent). [Sec. 16,
RR 12-2018]

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U.P. LAW BOC TAXATION II
Donor a i no a proper a b a a impo ed
on the transfer of property by way of gift inter vivos.
[Sec 11, RR 2-2003 citing Lladoc v. CIR (1965)]
b. Nature, Purpose, and Object
To prevent avoidance of income tax through the
device of splitting income among numerous donees,
who are usually members of a family or into many
trusts, with the donor thereby escaping the effect of
the progressive rates of income tax.
c. Time and Transfer of Properties
Donor a hall no appl nle and n il here i a
completed gift. The transfer of property by gift is
perfected from the moment the donor knows of the
acceptance by the donee; it is completed by delivery,
either actually or constructively, of the donated
property, to the donee. Thus, the law in force at the
time of the perfection/completion of the donation
hall go ern he impo i ion of he donor a . [Sec.
11, RR 2-2003]
A gift that is incomplete because of reserved powers
becomes complete when either:
the donor renounces the power OR
his right to exercise the reserved power ceases
because of the happening of some event or
contingency or the fulfillment of some condition,
o her han beca e of he donor dea h. [Sec. 11, RR
2-2003]
d. Requisites of Valid Donation
Art. 725, NCC. Donation is an act of liberality
whereby a person disposes gratuitously of a thing
or right in favor of another, who accepts it.
Requisites of a VALID and COMPLETE
donation
1. Donative intent of the donor45
45
Note: The transfers which may be constituted as donation
is exempt from the donative intent requirement.
46
SECTION 100. Transfer for Less Than Adequate and Full
Consideration. Where property, other than real property
referred to in Section 24(D), is transferred for less than an
adequate and full consideration in money or money's worth,
then the amount by which the fair market value of the property
exceeded the value of the consideration shall, for the purpose
of the tax imposed by this Chapter, be deemed a gift, and shall
be included in computing the amount of gifts made during the
calendar year.: Provided, however, That a sale, exchange,
Page 134 of 290
TAXATION LAW
2. Capacity of the donor
3. Delivery of the donated property
4. Acceptance of the donee
5. Donation must be in the proper form
a. Movable: orally or in writing if value is equal
to or less than P5,000. Otherwise, it shall be
in writing.
b. Immovable: must be made in a public
document.
Re: Acceptance [Sec. 11, RR 2-2003]
1. For movables exceeding 5K Acceptance shall
be in writing [Art. 748, Civil Code]
2. For immovable [Art. 749, Civil Code]
a. Must be in the same deed of donation; or
b. In a separate public document the donor
shall be notified thereof in an authentic
form, and this step shall be noted in both
instruments
c. But it shall not take effect unless it is done
during the lifetime of the donor.
e. Transfers which May be
Constituted as Donation
1. Sale, Exchange or Transfer of Property
for Insufficient Consideration
Where property, other than real property referred to
in Section 24(D), is transferred for less than an
adequate and full consideration, then the amount by
which the fair market value of the property exceeded
the value of the consideration shall be deemed a gift,
and shall be included in computing the amount of
gifts made during the calendar year. Provided,
however, that a sale, exchange, or other transfer of
property made in the ordinary course of business (a
transac ion hich i a bona fide, a arm leng h, and
free from any donative intent), will be considered as
made for an adequate and full consideration in money
or mone or h. [Sec. 100, NIRC4647]
or other transfer of property made in the ordinary course
of business (a transaction which is a bona fide, at arm s
length, and free from any donative intent), will be
considered as made for an adequate and full
consideration in mone or mone s orth.
47
N.B. Provided, that the sale, exchange or other transfer of
property is not made in the ordinary course of business (i.e.
a a a a ). O ,
be considered as made for an adequate and full consideration
. [S . 16, RR 12-2018]
U.P. LAW BOC TAXATION II
2. Condonation or Remission of Debt
Where the Debtor Did Not Render
Service in Favor of the Creditor
Condonation or remission of debt is defined as an act
of liberality, by virtue of which, without receiving any
equivalent, the creditor renounces the enforcement of
the obligation, which is extinguished in its entirety or
in that part or aspect of the same to which the
remission refers. It is an essential characteristic of
remission that it be gratuitous, that there is no
equivalent received for the benefit given; once such
equivalent exists, the nature of the act changes. It may
become dation in payment when the creditor receives
a thing different from that stipulated; or novation,
when the object or principal conditions of the
obligation should be changed; or compromise, when
the matter renounced is in litigation or dispute and in
exchange of some concession which the creditor
receives. [Dizon v. CTA, G.R. No. 140944, 2008]
3. Others
a. Renunciation in favor of other heirs [Sec 11, RR
2-2003]
1. 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
2. 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
b. 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 [Sec 11, RR 2-2003]
Sale of shares not listed and traded in a local stock
exchange below FMV.
Sec. 7.c.1.4, RR 6-2008 pro ide : In ca e he fair
market value of the shares of stock sold, bartered, or
exchanged is greater than the amount of money
and/or fair market value of the property received, the
excess of the fair market value of the shares of
stock sold, bartered or exchanged over the
amount of money and the fair market value of the
property, if any, received as consideration shall
b a b a under
Sec. 100 of the Tax Code, a amended.
48
Supra note 24.
Page 135 of 290
TAXATION LAW
f. Transfer for Less Than Adequate
and Full Consideration
A transfer of real or personal property will be
con idered a dona ion and bjec o donor a
when:
1. The transfer was for less than adequate and full
consideration;
2. Such transfer was effective during his lifetime
(inter vivos); and
3. Other than real property classified as capital asset
within the Philippines as defined in Sec. 24(D).
[Sec. 100, NIRC48]
In this case, the amount by which the fair market
value of the property exceeds the value of the
consideration shall be considered a gift.
g. Classification of Donor
Donor Ta applie o indi id al and corpora ion
(in their secondary purpose). They may be classified
into:
1. Residents (RC/RA/DC/RFC)
2. 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.
If donor is:
1. RC/NRC/RA = liable for donor a
REGARDLESS of where the gift was made or
where property is located
2. NRA = liable for donor a onl if he proper
donated is within the Philippines.
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 the residence/domicile of
owner thereof. Situs is the domicile or residence of
the owner. [Collector v. Fisher, supra.]
Exceptions:
When it is inconsistent with express provisions of law
Rule of Reciprocity
Same as in Estate Tax, supra.
U.P. LAW BOC TAXATION II TAXATION LAW

h. Determination of Gross Gift (including Composition of Gross Gift)

RC/NRC/RA NRA
Composition and Determination of Gross Gift
Real property wherever situated Real property located in the Phil.
Tangible personal property wherever situated Tangible personal property located in the Phil.,
Intangible personal property wherever situated 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 gifts
Exemptions from GROSS gift to arrive at NET Gifts
Deductions (These are exempt donations but are
deductible from, and not treated as exclusions from the
gross gift): Dowries or donations made:
On account of marriage
Before its celebration or within one year thereafter
By parents to each of their legitimate, recognized natural,
or adopted children
To the extent of the first P10,000
NOTE: DOWRIES ARE NO LONGER ALLOWED
AS DEDUCTION UNDER THE TRAIN LAW.
Gifts made to or for the use of the National Government or any entity created by any of its agencies which is not
conducted for profit, or to any political subdivision of the said Government. [Sec. 101 (A)(1), NIRC]
Gifts in favor of an educational and/or charitable, religious, cultural or social welfare corporation, institution,
accredited nongovernment organization, trust or philanthropic organization or research institution or organization:
Provided not more than 30% of said gifts will be used by such donee for administration purposes.

For the purpose of this exemption, a 'non-profit educational and/or charitable corporation, institution,
accredited nongovernment organization, trust or philanthropic organization and/or research institution
or organization' is a:
1. school, college or university and/or charitable corporation,
2. accredited nongovernment organization, or;
3. trust or philanthropic organization and/or research institution or organization, that is:
a. incorporated as a non-stock entity,
b. paying no dividends,
c. governed by trustees who receive no compensation, and
d. devoting all its income, whether students' fees or gifts, donation, subsidies or other forms of philanthropy,
to the accomplishment and promotion of the purposes enumerated in its Articles of Incorporation. [Sec.
101 (A)(2), NIRC]
Common Exemptions
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

Page 136 of 290

U.P. LAW BOC
NOT SUBJECT TO DONOR S TAX
1. Contributions to candidate or political party for
campaign purposes duly reported to
COMELEC. [Sec. 99 (B), NIRC49]
2. Gift to Parish Priest or Church (applies only to
real property tax)
3. Onerous Donations or Donations in exchange
for goods/services (since they are subject to
income tax)
SUBJECT TO DONOR S TAX
Gra i o Dona ion o Homeo ner A ocia ion
i. Valuation of Gifts Made in
Property
TAXABLE BASE:
Net gifts i.e., net economic benefit from the transfer
that accrues to the donee AT THE TIME OF
DONATION
1. If gift is personal property = FMV at the time
of donation
2. If gift is real property = whichever is HIGHER
a. FMV as determined by the CIR (Zonal
Value) or
b. FMV in the latest schedule of values fixed by
the provincial and city assessor (MV per Tax
Declaration) [Sec. 102 in relation to Sec.
88(B), NIRC]
Note: Real property considered as capital
assets under the Tax Code are exempted
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
FMV per the latest tax declaration; 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.
49
As renumbered by TRAIN.
Page 137 of 290
TAXATION II TAXATION LAW
3. 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.
4. If unlisted stocks = Adjusted Net Asset
Method shall be used whereby all assets and
liabilities 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
, 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]
N.B. Applies also to sale, barter, or exchange of
shares of stock not listed and traded in a local stock
exchange at prices below the FMV. [Sec. 7, RR 6-
2008]
However, where the consideration is fictitious, the
en ire al e of he proper hall be bjec o donor
tax.
Donation to a Political Candidate
Prior to RA 7166, a donation for a political candidate
a bjec o donor a . [ACCRA CIR, G.R. No.
120721 (2005)]
Under RA 7166, contributions duly reported to the
BIR are no bjec o donor a , a long a i i
utilized in his campaign. Unutilized/excess campaign
funds, that is, campaign contributions net of the
candida e campaign e pendi re , hall be
considered as subject to income tax and as such, must
be incl ded in he candida e a able income a a ed
in his/her ITR filed for the subject taxable year [Sec.
2, RR 7-2011]
j. Ta C D Ta
Paid in a Foreign Country
Who may claim the tax credit:
1. Resident citizen
U.P. LAW BOC TAXATION II TAXATION LAW

2. Non-resident citizen
3. Resident alien DONOR S TAX RETURN
Separate return is filed for each gift made on different
Per Country Limit dates during the year reflecting therein any previous
net gifts made in the same calendar year. If the gift
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥 involves CPG, each spouse shall file separate return
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 with respect to his/her respective share in the CPG.

Worldwide Limit
𝑁𝑒𝑡 𝐺𝑖𝑓𝑡 𝐴𝑙𝑙 𝐶𝑜𝑢𝑛𝑡𝑟𝑖𝑒𝑠
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐺𝑖𝑓𝑡
k. Exemptions of Gifts from
D Ta
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.
a. Aquaculture Department of the Southeast
Asian Fisheries Development Center of the
Philippines
b. Development Academy of the Philippines
c. Integrated Bar of the Philippines
d. International Rice Research Institute
e. National Museum
f. National Library
g. National Social Action Council
h. Ramon Magsaysay Foundation
i. Philippine In en or Commission
j. Philippine American Cultural Foundation
k. Task Force on Human Settlement on the
donation of equipment, materials and
services
l. Person liable
Every person, whether natural or juridical, resident or
non-resident, who transfers or causes to transfer
property by gift, whether in trust or otherwise,
whether the gift is direct or indirect and whether the
property is real or personal, tangible or intangible.
[Sec. 98, NIRC]
Contents
1. Each gift made during the calendar year which is
to be included in computing net gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same
calendar year;
4. The name of the donee;
5. Relationship of the donor to the done;
6. Such further information as the CIR may require.
Period for Filing
General Rule: The return must be filed within 30
days after the date when the gift was made or
completed. The tax due thereon shall be paid at the
same time that the return is filed.
Who will file: Any person who made a gift, such
must be filed under oath.
W F T D Ta R A Pa
The Tax Due
1. Resident
Unless the CIR permits otherwise, the return shall be
filed and tax paid to:
a. To Authorized Agent Bank (AAB) or the
Revenue District Officer having jurisdiction over
the place of the domicile of the donor at the time
of the transfer.
b. If no AAB = to the Revenue Collection Officer
or duly Authorized City or Municipal Treasurer
where the donor was domiciled at the time of the
transfer,
c. if no legal residence in Phil or NRA = with
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.
2. Non-residents
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.50

50
N : OFFICE OF THE COMMISSIONER a of the Commissioner, or presently, to the Revenue District
refer to the Revenue District Office (RDO) having jurisdiction Office No. 39 South Quezon City
over the BIR-National Office Building which houses the Office

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U.P. LAW BOC TAXATION II TAXATION LAW

Payment: Pay as you file. General Formula

Total Gifts
Notice of donation to donee institutions duly Multiply by: Tax rate
accredited by the Philippine Council for NGO -----------------------------------------------------
Certification, Inc. (PCNC) = Estate Tax Due
Requisites to be e emp from donor a and o claim Less: Tax Credit, if any
full deduction: -----------------------------------------------------
1. Donor must give notice if donation is at least = Donor Ta D e, if an
P50K
2. Notice is given to RDO which has jurisdiction If there are several gifts during the year
over place of business Gifts made on a certain date
3. Notice must be given within thirty (30) days after Less: Deductions from gross gifts
receipt of Certificate of Donation -----------------------------------------------------
4. Certificate of Donation must be attached to the Gifts made on a certain date
Notice Add: Prior gifts during the year
5. Notice must state that not more than thirty -----------------------------------------------------
percent (30%) of the donation shall be used by = Aggregate Gifts
done institution (qualified-donee institution) for Multiply by: Tax rate
administration purposes [Sec. 13 (C), RR 2-2003] -----------------------------------------------------
= Donor Ta on Aggrega e Gif
m. Tax Basis Le : Donor Ta Paid on Prior Gif
-----------------------------------------------------
The tax for each calendar year shall be computed on Donor Ta D e on he Gif o Da e
the basis of the total gifts in excess of P250,000 made Less: Tax Credit, if any
during the calendar year. [Sec. 99, NIRC51] -----------------------------------------------------
= Donor Tax Due, if any

51
SECTION 99. Rates of Tax Payable by Donor. 5,000,000 10,000,00 404,000 12% 5,000,000
(A) In General. The tax for each calendar year shall be six 0
percent (6%) computed on the basis of the total net gifts in 10,000,00 1,004,00 15% 10,000,00
excess of Two hundred fifty thousand pesos (P250,000) 0 0 0
exempt gift made during the calendar year. in accordance (B) Tax Payable by Donor if Donee is a Stranger. When the
with the following schedule: donee or beneficiary is a stranger, the tax payable by the
donor shall be thirty percent (30%) of the net gifts. For the
If the net gift is: purpose of this tax, a 'stranger' is a person who is not a:
Over But Not The Tax Plus Of the
Over Shall Be Ove Excess (1) Brother, sister (whether by whole or half-blood), spouse,
r ancestor and lineal descendant; or
P100,000 Exempt
P100,000 200,000 0 2% P100,000 (2) Relative by consanguinity in the collateral line within the
200,000 500,000 2,000 4% 200,000 fourth degree of relationship.
500,000 1,000,000 14,000 6% 500,000 (C)(B) Any contribution in cash or in kind to any candidate,
1,000,000 3,000,000 44,000 8% 1,000,000 political party or coalition of parties for campaign purposes
shall be governed by the Election Code, as amended.
3,000,000 5,000,000 204,000 10% 3,000,000

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U.P. LAW BOC TAXATION II TAXATION LAW

SUMMARY OF TRANSFER TAXES

TRANSFER TAXES
Estate Tax D Ta
Time for filing a return and payment of tax
FILED: within one (1) year from the decedent's NOTE: separate return is filed for each gift made on
death. different dates during the year reflecting therein any
E: not exceeding 30 days (in meritorious cases) previous net gifts made in the same calendar year.

PAID: before the delivery of the distributive share in FILED: within thirty (30) days after the gift (donation)
the inheritance to any heir or beneficiary; upon filing is made
of return.
If the gift involves CPG, each spouse shall file separate
Extension: (when payment on the due date would return with regard to his/her respective share in the
impose undue hardship) not to exceed: CPG.
15 years, in case the estate is settled through the
courts; or
2 years in case the estate is settled extra-judicially.
N.B. when extension is granted, a bond may be
required by CIR 2x amount of tax
Where to file and to whom paid
General Rule: to the Authorized Agent Bank (AAB), Resident
Revenue Collection Officer (RCO) or duly authorized General Rule: to AAB of the RDO having jurisdiction
Treasurer of the city or municipality in the Revenue over the place of the domicile of the donor at the time
District Office having jurisdiction over the place of of the transfer.
domicile of the decedent at the time of his death

Exception: If NRA/NRC, Exception:

If w/ Administrator (Aor), Executor (Eor) in Phil
= to the AAB of the RDO where such Aor, Eor
is registered/domiciled, if not yet registered with
the BIR.
If w/o Aor,Eor in Phil = to AAB under the
jurisdiction of RDO No. 39
If no AAB = to the RCO or duly Authorized City
or Municipal Treasurer where the donor was
domiciled at the time of the transfer,
If no legal residence in Phil or NRA = with
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.

Who should file
The Eor/Aor or any of the legal heirs of the
decedent, whether resident or non-resident of the
Philippines, under any of the following situations:
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
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.
Any person, natural or juridical, resident or non-
resident, who transfers or causes to transfer property
by gift, whether in trust or otherwise, whether the gift
is direct or indirect and whether the property is real or
personal, tangible or intangible.

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U.P. LAW BOC TAXATION II TAXATION LAW

condition precedent for the transfer of ownership

therof in the name of the transferee; or
If there is no executor or administrator
appointed, qualified, and acting within the
Philippines, then any person in actual or
constructive possession of any property of the
decedent.

N.B: 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.

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U.P. LAW BOC TAXATION II TAXATION LAW

ESTATE TAX

EXCLUSIVE COMMUNITY TOTAL

Gross Estate52
Add:
Taxable Transfers & Others
Value Taken of Property
Revocable Transfers/Donation Mortis Causa Less: Mortgage debt paid, if any
Transfers in contemplation of death
Property passing under GPoA Initial Basis
Transfers for insufficient consideration53 Less: Proportionate Deduction**
Deceden In ere Accr ed54
Final Basis
Proceeds of Life Insurance w/
Multiplied by Deduction Rate
revocable beneficiary55
Family Home VANISHING DEDUCTION
Claims against an Insolvent Person56
Amount received by heirs **Proportionate Deduction:
𝑰 𝑩
= 𝑳𝑰𝑻 𝑻𝑷𝑼
𝑮𝑬
Less: (Ordinary Deductions)
LIT
Vanishing Deductions
Transfers for Public Use
Retirement Benefits received by heirs

Net Estate
Less: (Special Deductions57)
Standard Deduction
Family Home
Amounts received by heirs If only 1 country is involved: (whichever is lower)

Estate Tax Credit =

𝑁𝑒𝑡 𝐸𝑆𝑡𝑎𝑡𝑒 𝑖𝑛 𝑡ℎ𝑒 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
Net Taxable Estate (before share of surviving spouse) 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝑊𝑜𝑟𝑙𝑑 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
Less: Share of Surviving Spouse
(Community Property less Ordinary OR actual estate tax paid to foreign country
Deductions =Net Community Property
If two or more countries are involved: (whichever is lower)
Divided by 2)
Net Taxable Estate 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
Multiply by Tax Rate Estate Tax Credit = 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒

OR
Estate Tax Due 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒 𝑜𝑓 𝐴𝐿𝐿 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
Less: Tax Credit58, if any 𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐸𝑠𝑡𝑎𝑡𝑒 𝑇𝑎𝑥
𝐸𝑛𝑡𝑖𝑟𝑒 𝑁𝑒𝑡 𝐸𝑠𝑡𝑎𝑡𝑒
ESTATE TAX DUE
OR actual estate tax paid to foreign country

52
DO NOT INCLUDE: Exemptions
53
Amount included in the GE = FMV at the time of death consideration amount
54
Accrued before his death but only received after his death, e.g., dividends declared on/before, and received after death; par ne hip p ofi
earned on/before and received after, accrued interest and rents on/before and collected after death
55
Beneficiary must be the estate of the decedent, E/Aor or a third person. If premiums are paid using conjugal funds, part of conjugal funds.
56
Full amount of the receivable. However, the uncollectible amount may be deducted from GE under ELIT.
57
These are not allowable deductions when TP is NRA.
58
Applies only to RC/NRC/RA

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U.P. LAW BOC TAXATION II TAXATION LAW

Illustration: [RR 12-2018]

(1) Decedent is unmarried, family home more than P10,000,000:

Real and personal properties P 14,000,000

Family Home 30,000,000
Gross Estate P44,000,000

Less: Deductions
Ordinary Deductions
Unpaid real estate tax (2,000,000)

Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

NET TAXABLE ESTATE P27,000,000

Although the family home is valued at P30 million, the maximum allowable deduction for the family home is
P10million only.

(2) Decedent is married, the family home is conjugal property, more than P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Family Home P30,000,000 P30,000,000
Real and personal properties 14,000,000 14,000,000
Exclusive Properties: 5,000,000 5,000,000
Gross Estate 5,000,000 44,000,000 P49,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 42,000,000
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

Net Estate 32,000,000

Less: ½ Share of Surviving Spouse (21,000,000)
Conjugal Property P44,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P42,000,000
(P42,000,000/2)

NET TAXABLE ESTATE P11,000,000

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U.P. LAW BOC TAXATION II TAXATION LAW

(3) Decedent is married, the family home exclusive property, more than P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Real and personal properties 14,000,000 14,000,000
Exclusive Properties:
Family Home 30,000,000 30,000,000
Gross Estate 30,000,000 14,000,000 P44,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 12,000,000
Special Deductions
Family Home (10,000,000)
Standard Deduction (5,000,000)
Total Deductions (17,000,000)

Net Estate 27,000,000

Less: ½ Share of Surviving Spouse (6,000,000)
Conjugal Property P14,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P12,000,000
(P12,000,000/2)

NET TAXABLE ESTATE P21,000,000

(4) Decedent is unmarried, the family home is below P10,000,000:

Real and personal properties 14,000,000

Family Home 9,000,000
Gross Estate P23,000,000

Less: Deductions
Ordinary Deductions (2,000,000)
Special Deductions (14,000,000)
Family Home (9,000,000)
Standard Deduction (5,000,000)
Total Deductions (16,000,000)

NET TAXABLE ESTATE (7,000,000)

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U.P. LAW BOC TAXATION II TAXATION LAW

(5) Decedent is married, the family home is conjugal property and is below P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Family Home P9,000,000 P9,000,000
Real and personal properties 14,000,000 14,000,000
Exclusive Properties: 5,000,000 5,000,000
Gross Estate 5,000,000 23,000,000 P28,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 21,000,000
Special Deductions
Family Home (4,500,000)
Standard Deduction (5,000,000)
Total Deductions (11,500,000)

Net Estate 16,500,000

Less: ½ Share of Surviving Spouse (10,500,000)
Conjugal Property P23,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P21,000,000
(P21,000,000/2
)

NET TAXABLE ESTATE P6,000,000

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U.P. LAW BOC TAXATION II TAXATION LAW

(6) Decedent is married, the family home exclusive property and below P10,000,000:

Exclusive Conjugal Total

Conjugal Properties:
Real and personal properties 14,000,000 14,000,000
Exclusive Properties:
Family Home 9,000,000 9,000,000
Gross Estate 9,000,000 14,000,000 P23,000,000

Less:
Ordinary Deductions
Conjugal Ordinary Deductions (2,000,000) (2,000,000)
Net Conjugal Estate 12,000,000
Special Deductions
Family Home (9,000,000)
Standard Deduction (5,000,000)
Total Deductions (16,000,000)

Net Estate 7,000,000

Less: ½ Share of Surviving Spouse (6,000,000)
Conjugal Property P14,000,000
Conjugal Deductions (2,000,000)
Net Conjugal Estate P12,000,000
(P12,000,000/2)

NET TAXABLE ESTATE P1,000,000

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U.P. LAW BOC TAXATION II TAXATION LAW

DONOR S TAX

ON FIRST DONATION

Gross Gift xxx

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

Net Gift xxx

Less: Exemptions, if applicable xxx

Net Taxable Gift xxx

Multiply by Tax Rate xxx

Donor Ta D e xxx
Less: Tax Credit59, if any xxx
DONOR S TAX DUE xxx

ON SUBSEQUENT DONATIONS w/in the same calendar year

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

Less: Deductions (those not beneficial
to the done e.g., mortgage) xxx Tax Credit =
𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛𝑠 𝑜𝑢𝑡𝑠𝑖𝑑𝑒 𝑃ℎ𝑖𝑙
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′ 𝑠 𝑇𝑎𝑥
𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
Net Gift xxx
Less: Exemptions, if applicable xxx If two or more countries are involved: (whichever is lower)

Tax Credit =
Net Taxable Gift xxx 𝑁𝑒𝑡 𝐷𝑜𝑛𝑎𝑡𝑖𝑜𝑛 𝑝𝑒𝑟 𝐹𝑜𝑟𝑒𝑖𝑔𝑛 𝐶𝑜𝑢𝑛𝑡𝑟𝑦
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟′𝑠 𝑇𝑎𝑥
Add: All previous net gifts during the year xxx 𝑁𝑒𝑡 𝐷𝑜𝑛𝑡𝑎𝑡𝑖𝑜𝑛𝑠 𝑤/𝑖𝑛 𝑎𝑛𝑑 𝑤/𝑜
Aggregate Net Gifts xxx
OR
Multiply by Tax Rate xxx /
𝑥 𝑃ℎ𝑖𝑙𝑖𝑝𝑝𝑖𝑛𝑒 𝐷𝑜𝑛𝑜𝑟 𝑠 𝑇𝑎𝑥
/ /
Donor Ta on Aggrega e Ne Gif xxx
OR ac al donor s a paid o foreign co n r
Le : Donor a on pre io ne gif d ring he ear xxx

Donor Ta D e xxx
Less: Tax Credit60, if any xxx
DONOR S TAX DUE xxx

59
Applies only to RC/NRC/RA
60
Applies only to RC/NRC/RA

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U.P. LAW BOC TAXATION II TAXATION LAW

Illustration: [RR 12-2018]

Donations were made on January 30, 2018 at P2,000,000; on March 30, 2018 at P1,000,000; and August 15, 2018 at
P500,000.

Solution/computation:

Date of donation Amount D Ta

1. January 30, 2018 P2,000,000
January 30, 2018 donation 2,000,000
Less: Exempt Gift (250,000)
1,750,000 P105,000
2. March 30, 2018 1,000,000
March 30, 2018 donation 1,000,000
Add: January 30, 2018 donation 2,000,000
Less: Exempt Gift (250,000)
Total 2,750,000

Tax Due Thereon 165,000

Less: Tax due/paid on January donation 105,000
Tax due/payable on the March donation 60,000

3. August 15, 2018 500,000

August 15, 2018 donation 500,000
Add: January 2018 donation 2,000,000
March 2018 donation 1,000,000
Less: Exempt Gift (250,000)
Total 3,250,000

Tax Due Thereon 195,000

Less: Tax due/paid on Jan./March donation 165,000
Tax due/payable on the August donation 30,000

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 U.P. LAW BOC TAXATION II TAXATION LAW

ESTATE TAX

DEATH w/in 1 year after death

CANCEL
ESTATE TAX TIN
RETURN +
PAYMENT
Prepare the LIST of assets Transfer
and liabilities and their properties to
supporting documents the heirs
Get TIN for ESTATE

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 No Notice of
RETURN + Donation Necessary
PAYMENT

(NB: Date of payment

Liable may be extended 6
months)

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U.P. LAW BOC TAXATION II
D. Value-Added Tax
(VAT) and Percentage
Taxes
1. VAT
a. Concept, Characteristics/
Elements of VAT-taxable
Transactions
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 sthe 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, G.R.
No. 168056 (2005):
1. The validity of raising the VAT rate from 10% to
12% by the President was upheld by SC.
2. 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.
3. 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.
4. It is equitable: The law is equipped with a
threshold margin (P1.5M; now P3M under the
TRAIN Law). Also, basic marine and agricultural
Page 150 of 290
TAXATION LAW
products in their original state are still not subject
to tax. Congress also 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.
5. VAT, by its very nature, is regressive. BUT the
Constitution does not really prohibit the
imposition of indirect taxes (which is
essentially regressive).
6. What it simply provides is that Congress shall
e ol e a progre i e em of a a ion .
Tolentino v. Secretary of Finance, G.R. No.
115455 (1995):
1. Regressivity is not a negative standard for courts
to enforce. What Congress is required by the
Con i ion o do i o e ol e a progre i e
em of a a ion.
2. This provision is placed in the Constitution as
moral incentives to legislation, not as judicially
enforceable rights.
3. 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.
4. 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:
1. Privilege/Percentage Tax imposed by law
directly not on the thing or service but on the
ACT (sale, barter, exchange, lease, importation,
or performance of service)
2. 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.
3. Indirect Tax The seller is the one statutorily
liable for the payment of the tax but the amount
of the tax may be shifted or passed on to the
buyer, transferee or lessee of the goods,
properties or services.
4. Excise Tax - a tax on the privilege of engaging in
the business of selling goods or services, or in the
importation of goods
Nature VAT is a tax on consumption levied on the
sale, barter, exchange or lease of goods or properties
U.P. LAW BOC TAXATION II TAXATION LAW

and services in the Philippines and on importation of of services is not regular [Section 4.105-3, RR No. 16-
goods into the Philippines. 2005]

This rule shall likewise apply to existing contracts of b. Impact and Incidence of Tax
sale or lease of goods, properties or services at the Impact Incidence
time of the effectivity of RA No. 9337. However, in The statutory taxpayer,
the case of importation, the importer is the one liable the one from whom One who bears the
for the VAT. [Sec. 4.105.2, RR 16-2005] the government burden of taxation
collects.
General Features:
Seller/Importer
1. VAT uses the Tax Credit Method Buyer/Final Consumer
Seller/Importer is the
2. All goods, properties and services (except exempt the buyer is the one
one who collects the
transactions) including goods subject to excise who bears the burden
tax and pays to the
taxes, and use or lease of properties, whether real of the taxation.
government
or personal, are subject to tax at all levels of
distribution.
3. Although tax is levied at all stages, the cumulative c. Tax Credit Method
effect is that the final value of the goods sold to
the ultimate consumers is taxed only once. A a pa er a pa able i he e ce of o p a
4. VAT, as a general rule, follow the destination over input tax:
principle (goods and services are taxed only in the
country where they are consumed). Therefore, no OUTPUT VAT INPUT VAT = VAT
VAT shall be imposed to form part of the cost of PAYABLE
goods destined for consumption outside the
territorial border of the taxing authority. Under the VAT method of taxation, which is invoice-
based, an entity can subtract from the VAT charged
Elements of a VAT-taxable transaction in general on its sales or outputs the VAT it paid on its
1. There must be a sale, barter, exchange, or lease in purchases, inputs and imports. [CIR v. Seagate, G.R.
the Philippines No. 153866 (2005)].
2. The subject matter must be taxable goods or
properties or services
d. Destination Principle/ Cross
General rule: The sale must be made by a taxable Border Doctrine
person in the course of trade or business or in the
furtherance of their profession.
As a general rule, the VAT system uses the destination
principle as a basis for the jurisdictional reach of the
Exception: In the case of importation of goods,
tax. Goods and services are taxed only in the country
the transaction is taxable whether or not done in
where they are consumed. Thus, exports are zero-
the course of business.
rated, while imports are taxed. [CIR v. American
Express International, G.R. No. 152609 (2005)]
Mea g f e c e f ade b e
Means the regular conduct of pursuit of a commercial
N.B. Cross Border Doctrine mandates that no
or an economic activity, including transactions
VAT shall be imposed to form part of the cost of the
incidental thereto, by any person regardless of
goods destined for consumption outside the
whether or not the person engaged therein is a
territorial border of the taxing authority.
nonstock, nonprofit private organization (irrespective
of the disposition of its net income and whether or
Atlas Consolidated Mining & Dev. Corp. v. CIR,
not it sells exclusively to members or their guests), or
G.R. Nos. 141104 and 148763 (2007): Actual export
government entity.
of goods and services from the Philippines to a
foreign country must be free of VAT, while those
N.B. Services rendered by non-resident foreign
destined for use or consumption within the
persons shall be considered as being rendered in the
Philippines shall be imposed with 12% VAT.
course of trade or business, even if the performance

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U.P. LAW BOC TAXATION II
Exception to destination principle Sec. 108(b)(2)61
Sec. 108(b)(2), which subjects certain services
rendered in the Philippines to a zero-rated VAT, is an
exception under the destination principle. The Court
in CIR v. AMEX (2005) enumerated the requisites to
fall under that provision.
1. The service is performed in the Philippines;
2. the service falls under any of the categories
provided in Section 102(b)62 of the Tax Code;
and
3. it is paid for in acceptable foreign currency that is
accounted for in accordance with the regulations
of the BSP.
In that case, the Court held that a ruling providing
ha he er ice m be de ined for con mp ion
o ide of he Philippine in order o q alif for ero
rating contravenes both the law and the regulations
issued pursuant to it. The Court held that such ruling
was ultra vires and therefore void.
The law neither makes a qualification nor adds a
condition in determining the tax situs of a zero-rated
service. Under this criterion, the place where the
service is rendered determines the jurisdiction to
impose the VAT. Performed in the Philippines, such
service is necessarily subject to its jurisdiction, for the
S a e nece aril ha o ha e a b an ial
connec ion o i , in order o enforce a ero ra e. The
place of payment is immaterial; much less is the
place where the output of the service will be
further or ultimately used. [CIR v. American Express
International, G.R. No. 152609 (2005)]
e. Persons Liable
Transactions subject to VAT:
1. Sale, Barter or Exchange of Goods or Properties
2. Sale of Services, including Lease or use of
Properties
3. Importation of Goods.
61
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 were 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.
63
SECTION 119. Tax on Franchises. Any provision of
general or special law to the contrary notwithstanding, there
shall be levied, assessed and collected in respect to all
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TAXATION LAW
Persons Liable:
1. Any person who sells, barters, exchanges, or
leases goods or properties, or who renders
services, in the course of trade or business
Exceptions:
a. A non-VAT-registered person whose annual
gross sales or receipts does not exceed P3M.
b. Franchise grantees under Sec 11963 of this
code and are not VAT-registered.
2. Any person who imports goods, whether or not
in the course of business
3. Any person who voluntarily registers its business
under the VAT system, regardless of level of
sales.
The erm per on refer o an indi id al, r ,
estate, partnership, corporation, joint venture,
cooperative or association [Sec. 4.105-1, RR 16-2005].
General Rule: VAT and Percentage Tax cannot be
charged together. I ei her he ran ac ion i nder
VAT or Other Percentage Tax.
Exception: When one erroneously declares himself to
VAT registered.
f. Imposition of VAT
1. On Sale of Goods or Properties
Sale of goods or properties in general
Rate: 12% VAT beginning 1 February 2006 [RMC
No. 7-06] [Sec. 106, as amended by TRAIN]
Transactions:
Every sale, barter or exchange (actual sale and in
the course of trade or business)
Tran ac ion deemed ale of taxable goods or
properties [RR 16-2005]
franchises on radio and/or television broadcasting companies
whose annual gross receipts of the preceding year do not
exceed Ten million pesos (P10,000,000), subject to Section
236 of this Code, a tax of three percent (3%) and on gas and
water utilities, a tax of two percent (2%) on the gross receipts
derived from the business covered by the law granting the
franchise: Provided, however, That radio and television
broadcasting companies referred to in this Section shall have
an option to be registered as a value-added taxpayer and pay
the tax due thereon: Provided, further, That once the option is
exercised, said option shall be irrevocable.
U.P. LAW BOC TAXATION II TAXATION LAW

Basis: Gross selling price or gross value in money of the If SP P1.5M = VAT-exempt
goods or properties sold, bartered or exchanged. If SP > P2.5M =
Residential House subject to VAT
Who Pays: Paid by SELLER/TRANSFEROR. and Lot If SP P2.5M =
[Sec. 106, NIRC]; N.B. the end-user is the one VAT-exempt
who is actually burdened with the tax since the tax
is passed on to him. Sales of real properties subject to VAT Sale of
real properties held primarily for sale to customers or
Meaning of goods or properties held for lease in the ordinary course of trade or
Goods or properties all tangible and intangible business of the seller shall be subject to VAT. [Sec.
objects which are capable of pecuniary estimation, 4.106-3, RR 16-2005]
including:
a. Real properties held primarily for sale to TYPES OF SALES OF REAL ESTATE;
customers or held for lease in the ordinary course EFFECTS
of trade or business;
b. The right or the privilege to use patent, copyright, a. Cash sale entire selling price taxable in the
design, or model, plan, secret formula or process, month of the sale.
goodwill, trademark, trade brand or other like Note: Ini ial pa men mean pa men or
property or right; payments which the seller receives before or
c. The right or the privilege to use in the Philippines upon execution of the instrument of sale and
of any industrial, commercial or scientific payments which he expects or is scheduled to
equipment; receive in cash or property (other than evidence
d. The right or the privilege to use motion picture of indebtedness of the purchaser) during the
films, films tapes and discs; taxable year when the sale or disposition of the
e. Radio, television, satellite transmission and cable real property was made. It covers any down
television time. payment made and includes all payments actually
or constructively received during the year of sale,
Goods/Personal Properties the aggregate of which determines the limit set by
a. Actual/deemed sale for a valuable consideration law.
b. For use or consumption in the Phil (regardless of
the payment arrangements) b. Installment sales
c. Not exempt from VAT (NIRC, special law, 1. Meaning of installment sale initial
special agreement) payments of which in the year of sale 25%
Gross Selling Price (GSP)
Special rules 2. Effect VAT is recognized based on
Sale of Real Properties (RP) collection, including interest and penalties,
Casual sale actually and/or constructively received by
Subject to CGT (6%)
(Capital Assets) the seller.
Regular sales c. Deferred sales
(Ordinary Assets): 1. Meaning initial payments exceed 25% of
Commercial the GSP
Property Subject to 12% VAT 2. Effect VAT will be recognized outright in
(Sale/Lease) full at the time of sale as though the sale was
If monthly rental P15,000 = a cash sale.
VAT and OPT-exempt
If monthly rental > P15,000
b aggrega e ann al ren al
Residential Units
P3M = subject to OPT
(Lease)
If monthly rental > P15,000
and aggregate annual rentals >
P3M =
subject to VAT
If SP > P1.5M =
Residential Lot
subject to VAT

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U.P. LAW BOC TAXATION II
d. Tax free exchanges under Sec. 40(C)(2)64 are not
subject to VAT. [Sec. 4.106-3, RR 16-2005]
Meaning of Gross Selling Price (GSP) total
amount of money or its equivalent which the
purchaser pays or is obligated to pay to the seller in
consideration of the sale, barter or exchange of the
goods or properties, excluding VAT. The excise tax,
if any, on such goods or properties shall form part of
the gross selling price.
In the case of sale, barter or exchange of real property
subject to VAT, GSP shall mean:
a. The consideration stated in the sales document
or
b. The fair market value (FMV) whichever is higher.
Meaning of FMV Whichever is higher of the
following:
a. The fair market value as determined by the CIR
(zonal value) or
b. The fair market value as shown in schedule of
values of the Provincial and City Assessors (real
property tax declaration).
General Rule: GSP is the total amount of money paid
in consideration of sale, barter, exchange, or lease.
Excludes: VAT, sales discounts and, allowances and
returns (See Section on Allowable Discounts)
64
(a) A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation; or
(b) A shareholder exchanges stock in a corporation, which is
a party to the merger or consolidation, solely for the stock of
another corporation also a party to the merger or
consolidation; or
(c) A security holder of a corporation, which is a party to the
merger or consolidation, exchanges his securities in such
corporation, solely for stock or securities in such corporation,
a party to the merger or consolidation.
No gain or loss shall also be recognized if property is
transferred to a corporation by a person in exchange for stock
or unit of participation in such a corporation of which as a
result of such exchange said person, alone or together with
others, not exceeding four (4) persons, gains control of said
corporation: Provided, That stocks issued for services shall
not be considered as issued in return for property.
65
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 of indebtedness
issued by the purchaser at the time of the sale
66
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.
67
SECTION 109. Exempt Transactions.
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TAXATION LAW
Includes: Excise tax paid, initial payments65, interests
and penalties (if installment), 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
N.B. in retirement/cessation, inventory (raw
materials, finished goods, machinery, equipment,
furniture, fixture), tax base = whichever is lower,
acquisition cost
current market price of goods
N.B.: CIR has the power to determine the appropriate
tax base in 1) SBE in deemed sales and 2) when GSP
is unreasonably lower than AMV66
Not taxable: [Sec. 109 (P)67(Q)68]
a. Not primarily held for sale or lease in the course
of trade or business
b. Low cost or socialized housing
c. Residential lot when value does not exceed
P1.5M
d. House and lot/other residential dwelling <
P2.5M
e. Lease (rental per unit < 15,000/month
(P) Sale of real properties not primarily held for sale to
customers or held for lease in the ordinary course of trade or
business, or real property utilized for low-cost and socialized
housing as defined by Republic Act No. 7279, otherwise
known as the Urban Development and Housing Act of 1992,
and other related laws, residential lot valued at One million
five hundred thousand pesos (P1,500,000)77 and below,
house and lot, and other residential dwellings valued at Two
million five hundred thousand pesos (P2,500,000)78 and
below: Provided, That, beginning January 1, 2021, the VAT
exemption shall only apply to sale of real properties not
primarily held for sale to customers or held for lease in
the ordinary course of trade or business, sale of real
property utilized for socialized housing as defined by
Republic Act No. 7279, sale of house and lot, and other
residential dwellings with selling price of not more than
Two million pesos (P2,000,000): Provided, further, That
not later than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be adjusted to their
its present values using the Consumer Price Index, as
published by the National Statistics Office (NSO) Philippine
Statistics Authority (PSA);
68
(Q) Lease of a residential unit with a monthly rental not
exceeding Ten Fifteen thousand pesos (P10,000) (P15,000);
Provided, That not later than January 31, 2009 and every
three (3) years thereafter, the amount herein stated shall be
adjusted to its present value using the Consumer Price Index,
as published by the National Statistics Office (NSO);
U.P. LAW BOC TAXATION II
f. Transmission to a trustee (Except: transmission
is deemed sale transaction)
Note: That, beginning January 1, 2021, the VAT
exemption shall only apply to sale of real
properties not primarily held for sale to
customers or held for lease in the ordinary course
of trade or business, sale of real property utilized
for socialized housing as defined by Republic Act
No. 7279, sale of house and lot, and other
residential dwellings with selling price of not
more than Two million pesos (P2,000,000).
General Rule: 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 control over the
property, i.e., irrevocable transfer of corpus
and/or irrevocable designation of beneficiary.
g. Transfer to corporation in exchange of shares of
stocks [see Sec. 40, NIRC for Tax-free exchange]
h. Security deposits for lease agreements provided it
does not form part of Gross Receipt or Official
Receipt.69 [See RMC 16-2013]
Allowable Deductions from GSP
The following are deductible from the gross selling
price:
a. Sales returns and allowances the selling price of
the goods or properties returned and not sold
necessarily reduces the gross sales on which the
rate is applied.
1. Sales returns and allowances for which a
proper credit/refund was made during the
month or quarter to the buyer for sales
previously recorded as table sales are allowed
as a deduction in the period when they are
made. Excess may be carried over to the
succeeding period.
69
SUBJECT TO VAT NOT SUBJECT TO
VAT
Loan to the lessor from
the lessee
Pre-Paid Rental
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TAXATION LAW
2. The value of goods or properties sold and
subsequently returned or for which
allowances were granted by a VAT-
registered person may be deducted from the
gross sales or receipts for the quarter in
which a refund is made or a credit
memorandum is issued.
b. Sales Discounts bona fide or regular discounts
given to purchasers, which are ascertainable and
definitely agreed upon between the vendor and
the vendee at the time of sale are deductible from
the GSP.
1. If given after the sale or are in the nature of
a rebate or partial remission of indebtedness,
they will not be allowed as a deduction from
the GSP.
2. Furthermore, the discount must be expressly
indicated in the sales invoice and the amount
forming part of the gross sales duly recorded
in the books of accounts.
3. Credits for allowances to cover roll back in
prices and other adjustments are not
deductible.
2. 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, VAT
shall be based on the landed cost plus excise taxes,
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)
Security deposit Security deposit to
when applied to the insure the faithful
rental performance of certain
obligations of the
lessee to the lessor, if
not part of Gross
Receipt.
U.P. LAW BOC TAXATION II
Importation of Goods
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 payment of 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.
a. Other taxes (special import tax)
b. Bank charges
c. Arrastre charges
d. Wharfage dues
e. Brokerage fees
f. All other charges or expenses
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:
a. 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.
b. 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.
3. On Services
[Sec 108]
Rate: 12%
Basis: Gross receipts derived from the sale or
exchange of services, including the use or lease of
properties.
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TAXATION LAW
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]
Con r c i e receip occ r hen he mone
consideration or its equivalent is placed at the control
of the person who rendered the service without
restrictions by the payor.
a. Deposit in banks which are made available to the
seller of services without restrictions
b. Issuance by the debtor of a notice to offset any
debt or obligation and acceptance thereof by the
seller as payment for services rendered
c. Transfer of the amounts retained by the
contractee to the account of the contractor. [RR
16-2005]
Requisites for taxability
a. 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;
b. For a valuable consideration actually or
constructively received; and
c. The service is not exempt under the Tax Code,
special law or international agreement
d. Person selling or rendering service is liable to
VAT
Sale/Exchange of Services : mean he
performance of all kinds of services in the Philippines
for o her for a fee, rem nera ion or con idera ion.
[Sec 108 (A); Diaz v Secretary of Finance, G.R. No.
193007 (2011)] It includes:
a. Construction and service contractors
b. Stock, real estate, commercial, customs and
immigration brokers
c. Lessors of property, whether personal or real
d. Persons engaged in warehousing service.
e. Lessors or distributors of cinematographic films
f. 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)
g. Proprietors, operators, or keepers of hotels,
motels, rest houses, pension houses, inns, resorts,
theaters, and movie houses
U.P. LAW BOC TAXATION II
h. Proprietors or operators of restaurants,
refreshment parlors, cafes and other eating
places, including clubs and caterers
i. Dealers in securities including pre-need
companies
Gro receip mean gro elling price le
cost of the securities sold.
j. 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.
k. 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
l. 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
m. Sales of electricity by generation, transmission by
any entity, and/or distribution companies,
including electric cooperatives (as amended by
Train Law)
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).
n. 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
Page 157 of 290
TAXATION LAW
percentage tax under Sec. 120 and hence exempt
from VAT
o. Non-life insurance companies including surety,
fidelity, indemnity and bonding companies;
EXCEPT crop insurance, life and disability
insurance, and health and accident insurance
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.
p. 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.
a. The lease or the use of or the right or privilege to
use any copyright, patent, design or model, plan
secret
b. formula or process, goodwill, trademark, trade
brand or other like property or right
c. The lease of the use of, or the right to use of any
industrial, commercial or scientific equipment
d. The supply of scientific, technical, industrial or
commercial knowledge or information
e. 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
f. 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
g. 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
h. The lease of motion picture films, films, tapes
and discs
i. The lease or the use of or the right to use radio,
television, satellite transmission and cable
television time
U.P. LAW BOC TAXATION II
Additional services subject to VAT:
a. 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);
b. Services performed by actors/actresses, talents,
singers, emcees, radio/television broadcasters,
choreographers,
musical/radio/movie/television/stage directors,
and professional athletes;
c. Services rendered by customs, real estate, stock,
immigration and commercial brokers;
d. Services rendered by doctors, and lawyers.
e. 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.
g. 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 CIR 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]
1. Transfer, Use or Consumption Not in
the Course of Business of Goods or
Properties Originally Intended for Sale
or for Use in the Course of Business
Example: when a VAT-registered person withdraws
goods from his business for his personal use. [RR 16-
2005]
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TAXATION LAW
2. 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]
3. Consignment of Goods
Consigned goods returned by the consignee within
the 60-day period are not deemed sold. [RR 16-2005]
4. Retirement from or Cessation of
Business with Respect to Inventories
on Hand
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]
5. Transmission of Property to a Trustee
IF:
Property is for sale, lease or use in the ordinary course
of business
The transfer is a completed gift (transferor divested
from himself absolute control of property)
h. 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.
U.P. LAW BOC TAXATION II
VAT shall apply to goods disposed of or existing as
of a certain date if under the circumstances to be
prescribed in rules and regulations to be promulgated
by the Secretary of Finance, upon recommendation of
the CIR, the status of a person as a VAT-registered
person changes or is terminated.
1. Subject to 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:
a. Change of business activity from VAT
taxable status to VAT-exempt status
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.
b. Approval of request for cancellation of a
registration due to reversion to exempt status
c. 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)
2. Not Subject to VAT
Goods or properties existing as of the occurrence of
the following:
a. Change of control of a corporation by
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 transferor, for shares
of stocks, whether resulting in corporate control
or not, is SUBJECT TO VAT [RR 10-2011]
b. Change in the trade or corporate name of the
business
c. Merger or consolidation of corporations: The
unused input tax of the dissolved corporation, as
Page 159 of 290
TAXATION LAW
of the date of merger or consolidation, shall be
absorbed by the surviving or new corporation.
Note: The INPUT VAT of the dissolved
corporation will be absorbed by the surviving
corporation
i. Zero-Rated Sales of Goods or
Properties, Effectively Zero-
Rated Sales of Goods or
Properties, and Zero-Rated Sale
of Services
Rate: 0% Output VAT; 12% Input VAT
Transactions: Every sale, barter or exchange, or
ran ac ion deemed ale of taxable goods or
properties as well as services [RR 16-2005; RR 13-
2018]
Concept A zero-rated sale of goods, properties, or
services 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.
Transaction is subject to VAT but at 0% instead of
12%.
1. Export Sales
2. Sales of Goods or Property to persons or entities
who are tax-exempt/Effectively Zero-Rated
Sales
3. Zero rated sale of services
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. 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.
U.P. LAW BOC TAXATION II
3. Sale of raw materials or packaging materials to
export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual
production.
Any enterprise whose export sales exceed 70% of
the total annual production of the preceding
taxable year shall be considered an export-
oriented enterprise [RR 13-2018]
4. Those considered export sales under the
Omnibus Investment Code of 1987, and other
special laws (e.g. Bases Conversion &
Development Act of 1992)
Under Omnibus Investment Code (EO 226):
Considered Export Sales
a. Philippine port F.O.B. value determined
from invoices, bills of lading, inward letters
of credit, landing certificates, and other
commercial documents, of export products
exported directly by a registered export
producer; OR
b. 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):
a. Sales to bonded manufacturing warehouses
of export-oriented manufacturers;
b. Sales to export processing zones [RA 7916];
c. Sales to registered export traders operating
bonded trading warehouses supplying raw
materials in the manufacture of export
products [RA 7227]
d. 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.
e. 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.
Export sales of registered export traders shall
include commission income, and that
exportation of goods on consignment shall not
Page 160 of 290
TAXATION LAW
be deemed export sales until the export products
consigned are in fact sold by the consignee. [RR
16-2005; RR 13-2018]
5. The sale of goods, supplies, equipment and fuel
to persons engaged in international shipping or
international air transport operations: Provided,
That the goods, supplies, equipment and fuel
shall be used for international shipping or air
transport operations. (as amended by Train
Law)
a. 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.
b. 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; RR 13-2018]
Note: items (c), (d), and (e) above shall be subject to
the twelve percent (12%) value-added tax and no
longer be considered export sales subject to zero
percent (0%) VAT rate upon satisfaction of the
following conditions:
1. The successful establishment and
implementation of an enhanced VAT refund
system that grants refunds of creditable input tax
within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided,
That, to determine the effectivity of item no. 1,
all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90)
days from the filing of the VAT refund
application; and
2. All pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by December
31, 2019.
Provided, That the Department of Finance shall
establish a VAT refund center in the Bureau of
Internal Revenue (BIR) and in the Bureau of Customs
(BOC) that will handle the processing and granting of
cash refunds of creditable input tax.
An amount equivalent to five percent (5%) of the
total VAT collection of the BIR and the BOC from
the immediately preceding year shall be automatically
appropriated annually and shall be treated as a special
account in the General Fund or as trust receipts for
the purpose of funding claims for VAT refund:
U.P. LAW BOC TAXATION II
Provided, That any unused fund, at the end of the year
shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be
required to submit to the Congressional Oversight
Committee on the Comprehensive Tax Reform
Program (COCCTRP) a quarterly report of all
pending claims for refund and any unused fund. [last
paragraphs of Sec. 106 (A)(2)(a), NIRC (such
provisions were added by TRAIN Law)]
Effectively Zero-Rated Sales [Sec. 106 (A)(2)(b),
NIRC]
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. 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
The ECOZONES shall be managed and operated by
the PEZA as separate customs territory. [Sec. 8, RA
7916 Special Economic Zone Ac of 1995 ].
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.
Tax treatment of sales to & by PEZA-registered
enterprise within & without the ecozone [RMC
74-99]:
1. Any sale of goods, property or services made by
a VAT registered supplier from the Customs
Territory to any registered enterprise operating in
the ecozone, REGARDLESS of the class or type
of he la er PEZA regi ra ion, i ac all
qualified and thus LEGALLY ENTITLED TO
THE 0% VAT.
Customs Territory hall mean he na ional
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]
Page 161 of 290
TAXATION LAW
2. By a VAT-Exempt Supplier from the Customs
Territory to a PEZA registered enterprise
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.
3. By a PEZA Registered Enterprise
a. Sale of Goods by a PEZA registered
enterprise to a buyer from the Customs
Territory (i.e., 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.
b. 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.
c. Sale of Goods by a PEZA registered
enterprise to Another PEZA registered
enterprise (i.e. Intra-ECOZONE Sales of
Goods) this shall be EXEMPT from VAT.
4. Sale of Services by ECOZONE enterprise, to
Another ECOZONE enterprise (Intra-
ECOZONE enterprise Sale of Service)
a. if PEZA registered seller is subject to 5%
special tax regime - EXEMPT from VAT
b. if PEZA registered seller is subject to taxes
under NIRC (i.e. not subject to 5% special
tax regime) subject to 0% VAT pursuant
o cro border doc rine
Zero Rated Sale of Services [Sec. 108 (B), NIRC]
1. Processing, manufacturing or repacking goods
for other persons doing business outside the
Philippines which goods are subsequently
exported, where the services are paid for in
acceptable foreign currency and accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP);
2. Services other than those mentioned in the
preceding paragraph, rendered to a person
engaged in business conducted outside the
Philippines or to a nonresident person not
engaged in business who is outside the
Philippines when the services are performed, the
U.P. LAW BOC TAXATION II
consideration for which is paid for in acceptable
foreign currency and accounted for in accordance
with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
3. Services rendered to persons or entities whose
exemption under special laws or international
agreements to which the Philippines is a signatory
effectively subjects the supply of such services to
zero percent (0%) rate;
4. Services rendered to persons engaged in
international shipping or international air
transport operations, including leases of property
for use thereof: Provided, That these services
shall be exclusively for international shipping
or air transport operations (as amended by
TRAIN Law);
5. Services performed by subcontractors and/or
contractors in processing, converting, or
manufacturing goods for an enterprise whose
export sales exceed seventy percent (70%) of
total annual production;
6. Transport of passengers and cargo by domestic
air or sea vessels from the Philippines to a foreign
country (as amended by TRAIN Law); and
7. Sale of power or fuel generated through
renewable sources of energy such as, but not
limited to, biomass, solar, wind, hydropower,
geothermal, ocean energy, and other emerging
energy sources using technologies such as fuel
cells and hydrogen fuels.
Note: items (a) and (e) above shall be subject to the
twelve percent (12%) value-added tax and no longer
be considered export sales subject to zero percent
(0%) VAT rate upon satisfaction of the following
conditions:
1. The successful establishment and
implementation of an enhanced VAT refund
system that grants refunds of creditable input tax
within ninety (90) days from the filing of the VAT
refund application with the Bureau: Provided,
That, to determine the effectivity of item no. 1,
all applications filed from January 1, 2018 shall be
processed and must be decided within ninety (90)
days from the filing of the VAT refund
application; and
2. All pending VAT refund claims as of December
31, 2017 shall be fully paid in cash by December
31, 2019.
Provided, That the Department of Finance shall
establish a VAT refund center in the Bureau of
Internal Revenue (BIR) and in the Bureau of Customs
Page 162 of 290
TAXATION LAW
(BOC) that will handle the processing and granting of
cash refunds of creditable input tax.
An amount equivalent to five percent (5%) of the
total VAT collection of the BIR and the BOC from
the immediately preceding year shall be automatically
appropriated annually and shall be treated as a special
account in the General Fund or as trust receipts for
the purpose of funding claims for VAT refund:
Provided, That any unused fund, at the end of the year
shall revert to the General Fund.
Provided, further, That the BIR and the BOC shall be
required to submit to the Congressional Oversight
Committee on the Comprehensive Tax Reform
Program (COCCTRP) a quarterly report of all
pending claims for refund and any unused fund. [last
paragraphs of Sec. 108 (B), NIRC (such provisions
were added by TRAIN Law)]
Difference between Zero-rated and VAT-exempt
Zero-rated VAT-exempt
It is a taxable transaction Not subject to output tax
but does not result in an
output tax
The input VAT on the The seller in an exempt
purchases of a VAT- transaction is not entitled
registered person with to any input tax on his
zero-rated sales may be purchases despite the
allowed as tax credits or issuance of a VAT
refunded invoice or receipt;
Persons engaged in Registration is optional
transactions which are for VAT-exempt
zero-rated, being subject persons.
to VAT, are required to
register
j. VAT-Exempt Transactions
1. Vat-Exempt Transactions, in General
a. 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.
b. The person making the exempt sale of goods,
properties or services shall not bill any output tax
to his customers. [RR 16-2005]
c. But, the VAT-registered person may elect that
the exemption not apply to its sale of goods or
properties or services; provided that the election
made shall be irrevocable for a period of three
U.P. LAW BOC TAXATION II
(3) years from the quarter the election was made
[Sec. 109(2), NIRC].
2. Exempt Transactions, Enumerated
[4.109-1 of RR 16-2005 as amended by RR 13-2018]
a. Sale/import of agricultural and marine food
products in their original state, livestock and
poultry of a kind generally used as or yielding or
producing foods for human consumption and
breeding stock and genetic materials therefor;
Original state even if they have undergone
the simple processes of preparation or
preservation for the market, such as
freezing, drying, salting, broiling, roasting,
smoking or stripping. Also includes
preservation using advanced technological
means of packaging, such as shrink
wrapping in plastics, vacuum packing, tetra-
pack, and other similar packaging methods
[RR 16-2005]
Polished and/or husked rice, corn grits, raw
cane sugar and molasses, ordinary salt,
AND COPRA shall be considered in their
original state
Livestock or poultry do not include fighting
cocks, race horses, zoo animals and other
animals generally considered as pets.
b. Sale/ importation of fertilizers, seeds, seedlings
and fingerlings, fish, prawn, livestock and poultry
feeds including ingredients, whether locally
produced or imported, used in the manufacture
of finished feeds (EXCEPT specialty feeds for
race horses, fighting cocks, aquarium fish, zoo
animals, and other animals generally considered
pets);
c. Importation of personal and household effects
belonging to Philippine residents returning from
abroad and non-resident citizens coming to
resettle in the Philippines; provided, that such
goods are also exempt from customs duties
under the TCC (now CMTA);
d. Importation of professional instruments and
implements, tools of trade, occupation or
employment, wearing apparel, domestic
animals, and personal household effects
belonging to persons coming to settle in the
Philippines, or Filipinos 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 said items for their own
Page 163 of 290
TAXATION LAW
use and not for sale, barter or exchange,
accompanying such persons, or arriving within
90 days before or after their arrival a reasonable
time: Provided, That the Bureau of Customs
may, upon production of satisfactory evidence
that such persons are actually coming to settle in
the Philippines and that the change of residence
is bona fide the goods are brought from their
former place of abode, exempt such goods
from payment of duties and taxes (as amended
by Train Law);
EXCEPT vehicles, vessels, aircrafts,
machineries, and other goods for use in
manufacturing and merchandise of any kind
in commercial quantity)
e. Services subject to percentage tax under the
NIRC;
Sale of services of non-VAT-registered
persons (other than the other VAT-Exempt
transactions) where the gross annual sales
and/or receipts of which does not exceed
P3M.
f. Services by agricultural contract growers and
milling for others of palay into rice, corn into
grits, and sugar cane into raw sugar;
Note: RMC 10-2010: Toll processing that are
VAT exempt pertain only to services to
clients from which growing of animals were
contracted.
g. Medical, dental, hospital and veterinary services,
except those rendered by professionals:
Laboratory services are exempted. If the
hospital or clinic operates a pharmacy or
drug store, the sale of drugs and medicine is
subject to VAT. [RR 16-2005]
Note: RR-2004 granting VAT-exemption to
doctors registered with the PRC and lawyers
registered with the IBP was superseded by
RA 9337 and RR 16-2005.
h. Educational services rendered by private
educational institutions, duly accredited by
DepED, CHED, TESDA, and those rendered by
government educational institutions;
Ed ca ional er ice doe no incl de
seminars, in-service training, review classes
and other similar services rendered by
persons who are not accredited by the
DepED, CHED, and/or TESDA. [RR 16-
2005]
i. Services rendered by individuals pursuant to an
employer-employee relationship;
j. Services rendered by regional or area
headquarters established in the Philippines by
U.P. LAW BOC TAXATION II
multinational corporations which act as
supervisory, communications and coordinating
centers for their affiliates, subsidiaries or
branches in the Asia-Pacific Region and do not
earn or derive income from the Philippines;
k. Transactions which are exempt under
international agreements to which the Philippines
is a signatory or under special laws, except those
under PD No. 529 (Petroleum Exploration
Concessionaires under the Petroleum Act of
1949);
l. Sales by agricultural cooperatives duly registered
with the Cooperative Development Authority
(CDA) to their members, as well as sale of their
produce, whether it is original state or processed
form, to non-members; their importation of
direct farm inputs, machineries and equipment,
including spare parts thereof, to be used directly
and exclusively in the production and/or
processing of their produce;
Sale by agricultural cooperatives to non-
members can only be exempted from VAT
if the producer of the agricultural products
sold is the cooperative itself. If the
cooperative is not the producer (e.g., trader),
then only those sales to its members shall be
exempted from VAT. [RR 16-2005]
m. Gross receipts from lending activities by credit or
multi-purpose cooperatives duly registered with
the CDA;
n. Sales by non-agricultural, non- electric and non-
credit cooperatives duly registered and in good
standing with the CDA; Provided, that the share
capital contribution of each member does not
exceed P15,000 and regardless of the aggregate
capital and net surplus ratably distributed among
the members. BUT their importation of
machineries and equipment, including spare parts
thereof, to be used by them are SUBJECT to
VAT;
o. Export sales by persons who are not VAT-
registered;
p. Sale of real properties as follows:
1. 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
inciden al o he a pa er main b ine .
[RR 4-2007; RR 13-2018]
Page 164 of 290
TAXATION LAW
2. Sale of real properties utilized for low-cost
housing as defined by RA 7279, ("Urban
Development and Housing Act of 1992")
and other related laws, such as RA 7835 and
RA 8763;
Lo -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
220, PD 957 or any other similar law,
wherein the unit selling price is within
the selling price ceiling per unit of as set
by the Housing and Urban
Development Coordinating Council
(HUDCC) pursuant to RA 7279, and
other laws, such as RA 7835 and RA
8763.
3. Sale of real properties utilized for socialized
housing as defined under RA 7279, and
other related laws, such as RA 7835 and RA
8763, wherein the price ceiling per unit is
P225,000 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
7279 and RA 7835 and RA 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.
4. Sale of residential lot valued at P1.5M and
below, or house & lot and other residential
dwellings valued at P2.5M and below, as
U.P. LAW BOC TAXATION II
adjusted in 2011 using the 2010 Consumer
Price Index values.
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 P1.5M. [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 13-
2018]
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 P1.5M for
residential lots and P2.5M 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]
5. Note: That beginning January 1, 2021, the
VAT exemption shall only apply to sale of
real properties not primarily held for sale to r.
customers or held for lease in the ordinary
course of trade or business, sale of real
property utilized for socialized housing as
defined by Republic Act No. 7279, sale of
house and lot, and other residential dwellings
with selling price of not more than Two s.
Million Pesos (P2,000,000.00) [provision t.
added by TRAIN Law amending Sec. 109
(1)(P), NIRC]
q. Lease of residential units with a monthly rental
per unit not exceeding P15,000, regardless of
the amount of aggregate rentals received by the
lessor during the year.
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TAXATION LAW
Lease of residential units where the monthly
rental per unit exceeds P15,000 but the
aggregate of such rentals of the lessor during
the year do not exceed P3M shall likewise be
exempt from VAT, however, the same shall
be subjected to 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
P15,000 while others are leased out for more
than P15,000 per unit, his tax liability will be
as follows:
o The gross receipts from rentals not
exceeding P15,000 per month per unit
shall be exempt from VAT regardless of
the aggregate annual gross receipts.
o The gross receipts from rentals exceeding
P15,000 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 P15,000)
exceeds P3M. Otherwise, the gross
receipts will be subject to the 3% tax
imposed under Sec. 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, lodging houses, inns and pension
houses.
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 13-2018]
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;
Transport of passengers by international carriers
Sale, importation or lease of passenger or cargo
vessels and aircraft, including engine, equipment
and spare parts thereof for domestic or
international transport operations;
The exemption from VAT on the
importation and local purchase of passenger
and/or cargo vessels shall be subject to the
U.P. LAW BOC TAXATION II
requirements on restriction on vessel
importation and mandatory vessel
retirement program of Maritime Industry
Authority (MARINA) [RR 13-2018]
u. Importation of fuel, goods, and supplies by
persons engaged in international shipping or air
transport operations: Provided, That the fuel,
goods, and supplies shall be used for
international shipping or air transport
operations (as amended by TRAIN Law);
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%. [RR 13-2018]
v. Services of banks, non-bank financial
intermediaries performing quasi-banking
functions and other non-bank financial
intermediaries (such
as money changers and pawnshops [RR 13-
2018]) subject to Percentage Tax;
w. Sale or lease of goods and services to senior
citizens and persons with disability, as provided
under Republic Act Nos. 9994 (Expanded Senior
Citizens Act of 2010) and 10754 (An Act
Expanding the Benefits and Privileges of Persons
with Disability), respectively [Added by TRAIN
Law];
x. Transfer of property pursuant to Section 40(C)(2)
of the NIRC, as amended [Added by TRAIN
Law];
y. Association dues, membership fees, and other
assessment and charges collected by
homeowners association and condominium
corporations [Added by TRAIN Law];
z. Sale of gold to the Bangko Sentral ng Pilipinas
(BSP) [Added by TRAIN Law];
aa. Sale of drugs and medicines prescribed for
diabetes, high cholesterol, and hypertension
beginning January 1, 2019 [Added by TRAIN
Law];
bb. Sale or lease of goods or properties or the
performance of services other than the
transactions mentioned in the preceding
paragraphs, the gross annual sales and/or
receipts do not exceed the amount of P3M;
For purposes of the threshold of P3M, the
husband and the wife shall be considered
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TAXATION LAW
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]
cc. Self-employed individuals and professionals
availing of the 8% tax on gross sales and/or
receipts and other non-operating income, under
Sections 24(A)(2)(b) and 24(A)(2)(c)(2)(a) of the
NIRC [added exemption by TRAIN Law as
stated in RR 18-2018].
Other Services Exempt from VAT such services
are those subject to percentage tax (see Percentage
Tax, infra)
a. Services rendered by domestic common carriers
by land for the transport of passengers and
keepers of garages [Sec. 117, NIRC];
b. Services rendered by international air/shipping
carriers [Sec. 118, NIRC];
c. Services rendered by franchise grantees of radio
and/or television broadcasting whose annual
gross receipts of the preceding year do not exceed
P10,000,000 and by franchise grantees of gas and
water utilities [Sec. 119, NIRC];
N.B. Compare with other franchise grantees
which are subject to VAT
d. Services rendered for overseas dispatch, message,
by franchise grantees or conversation originating
from the Philippines [Sec. 120, NIRC];
e. Services by any person, company or corporation
(except purely cooperative companies or
associations) doing life insurance business of any
sort in the Philippines [Sec. 123, NIRC];
f. Services rendered by fire, marine or
miscellaneous insurance agents of foreign
insurance companies [Sec. 124, NIRC];
g. Services rendered by proprietors, lessees or
operators of cockpits, cabarets, night or day
clubs, boxing exhibitions, professional basketball
games, jai-alai and race tracks [Sec. 125, NIRC];
and
h. Receipts on sale, barter for exchange of shares of
stock listed and traded through the local stock
exchange or through initial public offering [Sec.
127, NIRC].
U.P. LAW BOC TAXATION II TAXATION LAW

SUMMARY TABLE OF VAT-EXEMPTIONS [SEC. 109, NIRC]

A Of agricultural and marine products in their original state

Sale or Of fertilizers; seeds, seedlings and fingerlings; prawn, livestock and poultry feeds.
B importation Exception: specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals,
and other animals generally considered pets.
Of personal and household effects belonging to the residents of the Philippines
C
returning from abroad
Of professional instruments and implements, tools of trade, occupation or
Importation
employment, wearing apparel, domestic animals and personal household effects,
D
belong to persons coming to settle in the Philippines for their own use and not for
sale, barter or exchange.
E Subject to percentage tax
By agricultural contract growers and milling for others of palay into rice, corn into
F
grits and sugarcane into raw sugar
Medical, dental, hospital and veterinary services
G
Services Exception: those rendered by professionals
Educational services rendered by private educational institutions duly accredited by
H
DepEd, CHED, and TESDA, and those by governmental educational institutions
I Rendered pursuant to an employer-employee relationship
J Rendered by a RAHQ established in the Philippines
Transactions which are exempt under international agreements to which the
K Philippines is a signatory or under special laws, except those under PD 529 (Petroleum
concessionaires)
L Sales By agricultural cooperatives duly registered with the CDA
Gross receipts from lending activities by credit or multi-purpose cooperatives duly
M Services
registered with the CDA whose lending is limited to members
By non-agricultural, non-electric, and non-credit cooperatives duly registered and in
N Sales good standing with the CDA. Provided, the share capital contribution of each member
does not exceed 15K
By persons who are not VAT-registered
O Export sales
Of real property not primarily held for sale to customers or held for lease in the
P Sales ordinary course of business or sales within the low-cost cap of below P1.5M for a
residential lot and P2.5M for a house and lot and other residential building
Q Lease Of a residential unit with a monthly rental not exceeding P15,000
Sale, importation, Books and any newspaper, magazine, review or bulletin which appears at regular
R printing, or intervals with fixed prices for subscription and sale and is not devoted principally to
publication publication of paid advertisements.
S Transport of passengers by international carriers
Sale, importation, Of passenger or cargo vessels and aircraft, including engine, equipment and spare
T
or lease parts thereof for domestic or international transport operations
Fuel, goods, and supplies by persons engaged in international shipping or air transport
U Importation
operations
Of banks, non-bank financial intermediaries performing quasi-banking functions and
V Services
other non-bank financial intermediaries
W Collection Of Association dues, membership fees, and other assessment and charges by
homeowners association and condominium corporations;
X Transfer Of property pursuant to Section 40(C)(2) of the NIRC, as amended
Association dues, membership fees, and other assessments and charges collected by
Y
homeowners associations and condominium corporations

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U.P. LAW BOC TAXATION II TAXATION LAW

Z Sale Of gold to the Bangko Sentral ng Pilipinas (BSP);

Sale Of drugs and medicines prescribed for diabetes, high cholesterol, and hypertension
AA
beginning January 1, 2019
other than the transactions mentioned in
Sale or lease Of goods or properties the preceding paragraphs, the gross
BB
annual sales and/or receipts do not
Services Performance of services exceed the amount of P3M

k. Input and Output Tax 4. For use as materials supplied in the sale of
service; or
1. Definition 5. For use in trade or business for which
deduction for depreciation or amortization is
allowed under the Code.
Input tax the VAT due on or paid by a VAT-
b. Purchase of real properties for which VAT
registered person on importation of goods or local
has actually been paid
purchases of goods, properties, or services, including
c. Purchase of services in which VAT has
lease or use of properties, in the course of his trade or
actually been paid
business.
d. Transactions deemed sale
a. It includes the transitional input tax and the
e. Presumptive Input Tax [Sec. 111(B), NIRC]
presumptive input tax as determined in
accordance with Section 111 of the Code.
Persons or firms engaged in the processing of
b. It includes input taxes which can be directly
(1) sardines, (2) mackerel and (3) milk, and in
attributed to transactions subject to the VAT plus
manufacturing (1) refined sugar, (2) cooking oil
a ratable portion of any input tax which cannot
and (3) packed noodle based instant meals, shall
be directly attributed to either the taxable or
be allowed a presumptive input tax, creditable
exempt activity.
against the output tax, equivalent to FOUR
c. Input tax must be evidenced by a VAT invoice or
PERCENT (4%) of the gross value in money
official receipt issued by a VAT-registered person
of their purchases of primary agricultural
in accordance with Secs. 113 and 237 of the
products which are used as inputs to their
Code. [RR 16-2005]
production.
Output tax the VAT due on the sale or lease of
Proce ing mean pa e ri a ion, canning and
taxable goods or properties or services by any person
activities which through physical or chemical
registered or required to register under Section 236 of
process alter the exterior texture or form or inner
the Code.
substance of a product in such manner as to
prepare it for special use to which it could not
If at the end of any taxable month or quarter:
have been put in its original form or condition.
a. The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
f. Transitional Input Tax [Sec 111(A), NIRC]
b. The input tax exceeds the output tax, the excess
shall be carried over to the succeeding quarter or
quarters [Sec. 110(B), NIRC] 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
2. Sources of Input Tax
Rate: 2% Input VAT of the value of the beginning
a. Purchase or importation of goods (evidenced inventory on hand or actual VAT paid on such,
by VAT invoice/receipt) goods, materials and supplies, whichever is
1. For sale; or HIGHER, which amount shall be creditable
2. For conversion into or intended to form part against the output tax of VAT-registered person.
of a finished product for sale including
packaging materials; or Tax base: The value allowed for income tax
3. For use as supplies in the course of business; purposes on inventories shall be the basis for the
or computation of the 2% transitional input tax,

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U.P. LAW BOC
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, G.R. Nos. 158885 and
170680 (2009)]
3. Persons Who Can Avail of Input Tax
Credit
Input tax on domestic purchase or importation of
goods or properties shall be creditable:
a. To the importer upon payment of the VAT prior
to the release of the goods from the custody of
the Bureau of Customs.
b. To the purchaser upon consummation of sale and
on importation of goods or properties;
Claims for Input Tax on Depreciable Goods
1. The input tax on capital 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 (60 month
period) if the aggregate acquisition cost for
such goods, excluding the VAT component
thereof, exceeds One million pesos
(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.
2. 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. The amortization of the input VAT shall
only be allowed until December 31, 2021
after which taxpayers with unutilized input
VAT on capital goods purchased or
imported shall be allowed to apply the same
as scheduled until fully utilized: Provided,
That in the case of purchase of services, lease
or use of properties, the input tax shall be
70
P a Ca I Ta D a
G I a .
Page 169 of 290
TAXATION II TAXATION LAW
creditable to the purchaser, lessee or licensee
upon payment of the compensation, rental,
royalty or fee. 70 [RR 13-2018]
c. 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:
a. To the purchaser upon payment of the
compensation, royalty or fee
b. To lessee or licensee upon payment of the
compensation, royalty or fee
c.
Claiming of input Tax on motor vehicles subject
to the following conditions:
a. Purchase of vehicle must be substantiated with
official receipts and other records;
b. Taxpayer has to prove the direct connection of
the motor vehicle to the business;
c. Only one vehicle for land transport is allowed for
the use of an official/employee with value not
exceeding P2.4 million;
d. No depreciation shall be allowed for yachts,
helicopters, airplanes
4. Determination of Output/Input Tax;
VAT Payable; Excess Input Tax
Credits
Output VAT Input VAT = VAT Payable
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%
U.P. LAW BOC TAXATION II TAXATION LAW

Output VAT in a sale of services shall be computed by

multiplying the total amount indicated in the invoice Determination of the output tax and VAT
or receipt by 12%. payable and computation of VAT payable or
excess tax credits
𝑂𝑈𝑇𝑃𝑈𝑇 𝑉𝐴𝑇 If at the end of any taxable month or quarter:
𝐺𝑟𝑜𝑠𝑠 𝑅𝑒𝑐𝑒𝑖𝑝𝑡𝑠 𝑥 𝑅𝑎𝑡𝑒 𝑜𝑓 𝑉𝐴𝑇 𝑜𝑟 12% a. The output tax exceeds the input tax, the excess
shall be paid by the VAT-registered person
b. The input tax exceeds the output tax, the excess
Determination of input tax creditable shall be carried over to the succeeding quarter or
a. The sum of the excess input tax carried over from quarters [Sec. 110(B), NIRC]
the preceding month or quarter and the input tax
creditable to a VAT-registered person during the Illustration:
taxable month or quarter shall be reduced by the For a given taxable quarter ABC Corp. has output
amount of claim for refund or tax credit for VAT of 100 and input VAT of 80. Since output tax
value-added tax and other adjustments, such as exceeds the input tax for such taxable quarter, all of
purchase returns or allowances and input tax the input tax may be utilized to offset against the
attributable to exempt sale. output tax. Thus, the net VAT payable is 100 minus
80 = 20.
b. The claim for tax credit referred to includes not
only those filed with the BIR but also those filed l. Substantiation of Input Tax
with other government agencies, such as the
Board of Investments the Bureau of Customs.
Credits
1. INPUT TAXES must be substantiated and
Allocation of input tax on mixed transactions71
supported by the following documents, and must
There are four possible transactions a VAT-registered
be reported in the information returns required
person may enter into:
to be submitted to the Bureau:
a. VAT taxable,
a. For the importation of goods = Import entry
b. VAT-exempt,
or other equivalent document showing
c. zero-rated VAT and
actual payment of VAT on the imported
d. sale to governments.
goods.
b. For the domestic purchase of goods and
A VAT-registered person who is also engaged in
properties = Invoice showing the
transactions not subject to VAT shall be allowed to
information required under Secs. 113
recognize input tax credit on transactions subject to
(Invoicing and Accounting Requirements
VAT as follows:
for VAT-Registered Persons) and 237
a. All the input taxes that can be directly attributed
(Issuance of Receipts or Sales or
to transactions subject to VAT may be
Commercial Invoices) of the Tax Code.
recognized for input tax credit. Input taxes that
c. For the purchase of real property = public
can be directly attributable to VAT taxable sales
instrument i.e., deed of absolute sale, deed of
of goods and services to the Government or any
conditional sale, contract/agreement to sell,
of its political subdivisions, instrumentalities or
etc., together with VAT invoice issued by the
agencies, including GOCCs shall not be credited
seller.
against output taxes arising from sales to non-
d. For the purchase of services = official
Government entities
receipt showing the information required
b. If any input tax cannot be directly attributed to
under Secs. 113 and 237 of the Tax Code.
either a VAT taxable or VAT-exempt
A cash register machine tape issued to a
transaction, the input tax shall be pro-rated to the
registered buyer shall constitute valid proof of
VAT taxable and VAT-exempt transactions and
substantiation of tax credit only if it shows the
ONLY the ratable portion pertaining to
information required under Secs. 113 and 237 of
transactions subject to VAT may be recognized
the Tax Code.
for input tax credit.

71
P a A a a
transactions Illus a .

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U.P. LAW BOC TAXATION II TAXATION LAW

2. TRANSITIONAL INPUT TAX shall be Remittance Return of Value Added Tax

supported by an inventory of goods as shown in
a detailed list to be submitted to the BIR.
3. Input tax on "deemed sale" transactions shall be
substantiated with the invoice required.
4. Input tax from payments made to non-residents
(such as for services, rentals and royalties) shall
be supported by a copy of the Monthly
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.
5. Advance VAT on sugar shall be supported by the
Payment Order showing payment of the advance
VAT.

Claims for Input Tax on Depreciable Goods Illustration: [RR 13-2018]

(1) ABC Corporation sold capital goods on installment on October 1, 2018. It is agreed that the selling price,
including the VAT, shall be payable in five (5) equal monthly installments with the first installment to be paid on
October 1, 2018. The data pertinent to the sold assets are as follows:

Selling Price 5,000,000.00 (exclusive of VAT)

Passed on VAT 600,000.00
Original Cost of Asset 3,000,000.00
Accumulated Depreciation 1,000,000.00
Unutilized Input Tax (Sold Asset) 100,000.00

Accounting:
SELLER BUYER
October 1, 2017 October 1, 2017
Cash P1,120,000 Asset P5,000,000
Installment Receivable 4,480,000 Input Tax 500,000
Accumulated Depreciation 1,000,000
Output Tax 600,000 Cash 1,120,000
Asset 3,000,000 Installment Payable 4,480,000
Gain on sale of set 3,000,000

To record VAT liability:

Output Tax 600,000
Input Tax 100,000
VAT Payable 500,000

Periodic receipt of installment Periodic receipt of installment

Cash 1,120,000 Installment payable 1,120,000
1,120,000 Cash 1,120,000

* The input tax of P600,000.00 shall be spread evenly over a period of 60 months starting on October 2018 of
purchase.

If the depreciable capital good is sold/transferred within a period of five (5) years or prior to the exhaustion of the
amortizable input tax thereon, the entire unamortized input tax on the capital goods sold/transferred can be claimed
as input tax credit during the month/quarter when the sale or transfer was made.

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U.P. LAW BOC TAXATION II TAXATION LAW

(2) A manufacturer purchased capital goods on different occasions as follows:

Month of Amount 12% Input Useful Life No. of Last Month of

Purchase Tax Monthly Amortization
Amortization
January 2018 P8,500,000 P1,020,000 6 Years 60 December 2022
February 2018 P8,500,000 P1,020,000 4 Years 48 January 2022
December 2018 P10,000,000 P1,020,000 5 Years 60 November 2022
January 2018 P10,000,000 P1,020,000 5 Years - *Outright claim on
January 2022

a. For purchase made on January 2018, the amortization shall be for the shorter period of 5 years only or up to
December 2022 although the useful life is 6 years.
b. For purchase made on February 2018, the amortization shall be for period of 4 years only or up to January 2022
since the useful life of the asset is shorter than 5 years.
c. For purchase made on December 2021, the amortization shall be for the period of 5 years or up to November
2026.
d. For purchase made on January 2022, no amortization shall be made and the input VAT shall be claimed on the
month of purchase or January 2022.

Allocation of input tax on mixed transactions Illustration:

ERA Corporation has the following sales during the month:

Sale to private entities subject to 12% 100,000.00

Sale to private entities subject to 0% 100,000.00
Sale of exempt goods 100,000.00
Sale to government subjected to 5% final VAT (withholding) 100,000.00
Total sales for the month 400,000.00

The following input taxes were passed on by its VAT supplies:

Input tax on taxable goods (12%) 5,000.00
Input tax on zero-rated sales 3,000.00
Input tax on sale of exempt goods 2,000.00
Input tax on sale to government 4,000.00
Not attributable to any specific activity (monthly amortization for 60 months) 20,000.00

The creditable input tax for the month shall be computed as follows:
Input tax on sale subject to 12% - 5,000.00
Input tax on zero-rated sale 3,000.00
Ratable portion of the input tax not directly attributable to any activity:

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠 0% 𝑎𝑛𝑑 12%

𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
100,000.00
𝑋 20,000.00 5,000.00
400,000.00

Total input tax attributable to salesto government: 9,000.00

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U.P. LAW BOC TAXATION II TAXATION LAW

The input tax attributable to sales to government for the month shall be computed as follows:
Inp a on ale o go . - P 4,000.00
Ratable portion of the input tax not directly attributable to any activity:

𝑇𝑎𝑥𝑎𝑏𝑙𝑒 𝑠𝑎𝑙𝑒𝑠 𝑡𝑜 𝑡ℎ𝑒 𝑔𝑜𝑣𝑒𝑟𝑛𝑚𝑒𝑛𝑡

𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
100,000.00
𝑋 20,000.00 5,000.00
400,000.00

Total input tax attributable to salesto government: 9,000.00

The input tax attributable to VAT-exempt sales for the month shall be computed as follows:
Input tax on VAT-exempt sales - 2,000.00
Ratable portion of the input tax not directly attributable to any activity:

𝑉𝐴𝑇 𝑒𝑥𝑒𝑚𝑝𝑡 𝑠𝑎𝑙𝑒𝑠

𝑋 𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑡𝑎𝑥 𝑛𝑜𝑡 𝑑𝑖𝑟𝑒𝑐𝑡𝑙𝑦 𝑎𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑎𝑏𝑙𝑒
𝑇𝑜𝑡𝑎𝑙 𝑆𝑎𝑙𝑒𝑠
100,000.00
𝑋 20,000.00 5,000.00
400,000.00

Total input tax attributable to VAT-exempt sales: 7,000.00

c. Where the taxpayer is engaged in zero-rated or

m. Refund or Tax Credit of Excess
Input Tax
1. Who May Claim for Refund/Apply for
Issuance of Tax Credit Certificate
Zero-Rated Sales [Sec. 112(A), NIRC]
a. Any VAT-registered person, whose sales are
zero-rated or effectively zero-rated may apply for
the issuance of a tax credit certificate/refund of
creditable input tax due or paid attributable to
such sales, EXCEPT transitional input tax, to the
extent that such input tax has not been applied
against output tax, within two (2) years after the
close of the taxable quarter when the sales were
made.
b. The acceptable foreign currency exchange
proceeds must have been duly accounted for in
accordance with the rules and regulations of the
Bangko Sentral ng Pilipinas (BSP) in the case of
zero-rated transactions paid for in acceptable
foreign currency and requiring that such be
accounted for in accordance with BSP rules &
regulations [Sec. 106(A)(2)(a)(1)&(2);
106(A)(2)(b) and 108(B)(1)&(2), NIRC].
effectively zero-rated sale and also in taxable or
exempt sale of goods of properties or services,
and the amount of creditable input tax due or
paid cannot be directly and entirely attributed to
any one of the transactions, it shall be allocated
proportionately on the basis of the volume of
sales.
d. In the case of a person engaged in the transport
of passenger and cargo by air or sea vessels from
the Philippines to a foreign country, the input
taxes shall be allocated ratably between his zero-
rated sales and non-zero-rated sales (sales subject
to regular rate, subject to final VAT withholding
and VAT-exempt sales).
Requirements
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 declared
from the VAT quarterly return.

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U.P. LAW BOC
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.
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.
c. That the date of cancellation being referred
hereto is the date of issuance of tax clearance by
the BIR, after full settlement of all tax liabilities
relative to cessation of business or change of
status of the concerned taxpayer.
d. The filing of the claim shall be made only after
completion of the mandatory audit of all internal
revenue tax liabilities covering the immediately
preceding year and the short period return and
the issuance of the applicable tax clearance/s by
the appropriate BIR Office which has jurisdiction
over the taxpayer. [RR 13-2018]
2. Period to File Claim/Apply for
Issuance of Tax Credit Certificate
This period 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.
72
SECTION 112. Refunds or Tax Credits of Input Tax.
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. In proper cases, the Commissioner shall
grant a refund or issue the tax credit certificate for creditable
input taxes within one hundred twenty (120) ninety (90) days
from the date of submission of complete documents the
official receipts or invoices and other documents in
support of the application filed in accordance with
Subsections (A) and (B) hereof: Provided, That should the
Commissioner find that the grant of refund is not proper,
the Commissioner must state in writing the legal and
factual basis for the denial. x x x
73
SECTION 112. Refunds or Tax Credits of Input Tax.
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TAXATION II TAXATION LAW
a. Application for issuance of tax credit certificate
or refund of creditable input tax (except
transitional input tax)
b. WITHIN 2 YEARS after the close of the taxable
quarter when the sales were made, to apply for
the issuance of a Tax Credit Certificate or refund
of creditable input tax due or paid attributable to
such sales. [Sec. 112 (A), NIRC]
c. If the VAT registration has been cancelled due to
retirement or cessation of business, or change of
status, the 2 year period shall be after the date of
cancellation [Sec. 112 (B), NIRC]
d. Administrative Claim [Sec 112 (C), ¶1, NIRC72]
e. The CIR shall grant the refund within 90 days
from the date of submission of the official
receipts or invoices and other documents in
support of the application filed in accordance
with Sec. 112 (A) and (B).
f. Should the CIR find that the grant of refund is
not proper, the CIR must state in writing the
legal and factual basis for the denial
g. The 90-day period to process and decide,
pending the establishment of the enhanced VAT
Refund System shall only be up to the date of
approval of the Recommendation Report on
such application for VAT refund by the
Commissioner or his duly authorized
representative
h. Judicial Claim [Sec 112 (C), ¶2, NIRC73]
i. In case of full or partial denial of the claim for tax
refund or the expiry of the 90 days, the taxpayer
affected may appeal to the CTA within 30 days
from the receipt of decision.
j. failure on the part of any official, agent, or
employee of the BIR to act on the application
within the ninety (90)-day period shall be
punishable under Section 269 of this Code
(Violations Committed by Government
Enforcement Officers).
3. Manner of Refund
(C) Period within which Refund or Tax Credit of Input Taxes
shall be Made. xxx
case of full or partial denial of the claim for tax refund or tax
credit, or the failure on the part of the Commissioner to act on
the application within the period prescribed above, the
taxpayer affected may, within thirty (30) days from the receipt
of the decision denying the claim or after the expiration of the
one hundred twenty day-period, appeal the decision or the
unacted claim with the Court of Tax Appeals.: Provided,
however, That failure on the part of any official, agent, or
employee of the BIR to act on the application within the
ninety (90)-day period shall be punishable under Section
269 of this Code.
U.P. LAW BOC TAXATION II
Revenue Memorandum Circular no. 57-2013 (August
23, 2013): Unutilized creditable input taxes attributed
to zero-rated sales can only be recovered through the
application for refund or tax credit. There is no other
mode of recovering unapplied input taxes aside from
an application for refund or tax credit. The
Memorandum Circular also instructed the
disallowance of unutilized creditable input taxes
attributable to VAT zero-rated sales that is claimed as
a deduction for income tax purposes.
Refunds shall be made upon warrants drawn by the
CIR or by his duly authorized representative without
the necessity of being countersigned by the Chairman,
Commission on Audit, the provisions of the
Administrative Code of 1987 notwithstanding:
provided that refunds shall be subject to post audit by
the Commission on Audit. [Sec. 112(D), NIRC]
n. Invoicing Requirements
[Sec. 113, NIRC]
1. In General
A VAT-registered person shall issue:
a. A VAT invoice for every sale, barter or exchange
of goods or properties; and
b. A VAT official receipt for every lease of goods or
properties, and for every sale, barter or exchange
of services
Only VAT-registered persons are required to print
heir TIN follo ed b he ord VAT in heir
invoice or ORs. Said documents shall be considered
a a VAT In oice or VAT official receip . All
purchases covered by invoices/receipts other than
VAT Invoice/VAT OR shall not give rise to any input
tax. [RR 16-05]
Note: VAT component of all transactions shall be
separately indicated in the VAT invoice or receipt.
[RR 18-2011]
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TAXATION LAW
Information Contained in the VAT Invoice or
VAT Official Receipt:
1. A statement that the seller is a VAT-registered
person, followed by his taxpayer's identification
number (TIN);
2. The total amount which the purchaser pays or is
obligated to pay to the seller with the indication
that such amount includes the VAT:
a. The amount of the tax shall be shown as a
separate item in the invoice/receipt;
b. If the sale is exempt from VAT, the term
"VAT-exempt sale" shall be written or
printed prominently on the invoice or
receipt;
c. If the sale is subject to zero percent (0%)
value-added tax, the term "zero-rated sale"
shall be written or printed prominently on
the invoice or receipt;
d. If the sale involves goods, properties or
services some of which are subject to and
some of which are VAT zero-rated or VAT-
exempt, the invoice or receipt shall clearly
indicate the breakdown of the sale price
between its taxable, exempt and zero-rated
components, and the calculation of the
value-added tax on each portion of the sale
shall be shown on the invoice or receipt. The
seller has the option to issue separate
invoices or receipts for the taxable, exempt,
and zero-rated components of the sale.
3. The date of transaction, quantity, unit cost and
description of the goods or properties or nature
of the service; and
4. In the case of sales in the amount of one
thousand pesos (P1,000) or more where the sale
or transfer is made to a VAT-registered person,
the name, business style, if any, address and
taxpayer identification number (TIN) of the
purchaser, customer or client.
5. Name of buyer and seller
U.P. LAW BOC
2. In Deemed Sale Transactions
Transaction
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
Distribution or transfer to
shareholders/investors or creditors
Consignment of goods if actual sale is not made
within 60 days
Retirement from or cessation of business with
respect to all goods on hand
3. Consequences of Issuing Erroneous
VAT Invoice or VAT Official Receipt
Issuance of a VAT Invoice or VAT Receipt by a
non-VAT person
If a person who is not a VAT-registered person issues
an invoice or receipt showing his Taxpayer
Identification Number (TIN), followed by the word
"VAT", the erroneous issuance shall result to the ff:
a. The non-VAT person shall be liable to:
1. Percentage taxes applicable to his
transactions;
2. VAT due on transactions under Section 106
or 108 of the Code, without the benefit of
any input tax credit; and
3. A 50% surcharge under Section 248 (B) of
the code;
b. The VAT shall, if the other requisite information
required is shown on the invoice/receipt, be
recognized as an input tax credit to the purchaser.
Issuance of a VAT Invoice or VAT Receipt on an
Exempt Transaction by a VAT-registered Person
If a VAT-registered person issues a VAT invoice or
VAT official receipt for a VAT-exempt transaction,
Page 176 of 290
TAXATION II TAXATION LAW
Invoicing Requirement
Memorandum entry in the subsidiary sales journal to record
withdrawal of goods for personal use
Invoice, at the time of the transaction, which should include
all the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
Invoice, at the time of the transaction, which should include
all the info prescribed above; data in the invoice shall be duly
recorded in the subsidiary sales journal
An inventory shall be prepared and submitted to the RDO
ho ha j ri dic ion o er he a pa er principal place of
business not later than 30 days after retirement or cessation
from business. An invoice shall be prepared for the entire
inventory, which shall be the basis of the entry into the
subsidiary sales journal. The invoice need not
enumerate the specific items appearing in the inventory
regarding the description of the goods. If the business is to
be continued by the new owners or successors, the entire
amount of output tax on the amount deemed sold shall be
allowed as input taxes.
but fails to display prominently on the invoice or
receipt the term "VAT-exempt Sale:
a. the transaction shall become taxable and the
b. issuer shall be liable to pay VAT thereon.
c. The purchaser shall be entitled to claim an input
tax credit on his purchase. [RR 16-05]
o. Filing of Return and Payment
[Sec 114, NIRC]
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.
4. That beginning January 1, 2023, the filing and
payment required under this Subsection shall be
U.P. LAW BOC TAXATION II
done within twenty-five (25) days following the
close of each taxable quarter. [Added by TRAIN
Law]
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,
NIRC]
1. Suspension of business operations. In addition to
other administrative and penal sanctions
provided for in the Tax Code and implementing
regulations, the CIR 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:
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).
p. Withholding of Final VAT on
Sales to Government
[RR 16-2005; RR 13-2018; Sec. 114(C), NIRC74]
General Rule: Withholding tax does not apply on
transactions subject to VAT.
74
SECTION 114. Return and Payment of Value-added Tax.
(C) Withholding of Value-added Tax. The Government or
any of its political subdivisions, instrumentalities or agencies,
including government-owned or -controlled corporations
(GOCCs) shall, before making payment on account of each
purchase of goods and services which are subject to the
value-added tax imposed in Sections 106 and 108 of this
Code, deduct and withhold the value-added tax imposed
in Sections 106 and 108 of this Code, deduct and withhold
a final value-added tax at the rate of five percent (5%) of the
gross payment thereof: Provided, That beginning January 1,
2021, the VAT withholding system under this Subsection
shall shift from final to a creditable system: Provided,
further, That the payment for lease or use of properties or
property rights to nonresident owners shall be subject to ten
Page 177 of 290
TAXATION LAW
Exceptions:
1. Gross payments by the government shall be
subject to the 5% final withholding tax;
2. Gross payments by resident VAT-taxpayers to
non-resident foreign persons of rentals, royalties,
reinsurance premiums, and services done in the
Philippines 12%
Sales to Government
The Government or any of its political subdivisions,
instrumentalities or agencies, including GOCCs shall,
before making payment on account of each purchase
of goods and services which are subject to the VAT
(Secs. 106 and 108, NIRC), deduct and withhold the
value-added tax imposed in Sections 106 and 108 of
this Code, deduct and withhold a final VAT due at the
rate of five percent (5%) of the gross payment
thereof.
Beginning January 1, 2021, the VAT withholding
system under this Subsection shall shift from final to
a creditable system.
The payment for lease or use of properties or
property rights to nonresident owners shall be subject
to 12% withholding tax at the time of payment.
Payments for purchases of goods and services arising
from projects funded by Official Development
Assistance (ODA) as defined under Republic Act No.
8182, o her i e kno n a he Official De elopmen
A i ance Ac of 1996 , a amended, hall no be
subject to the final withholding tax system as imposed
in this Subsection.
The payor or person in control of the payment is
considered as the withholding agent.
The 5% final VAT shall represent the net VAT
payable of the seller. The remaining 7% effectively
twelve percent (10%) (12%) withholding tax at the time of
payment.: Provided, finally, That payments for purchases
of goods and services arising from projects funded by
Official Development Assistance (ODA) as defined under
Republic Act No. 8182, other ise kno n as the Official
De elopment Assistance Act of 1996 , as amended, shall
not be subject to the final withholding tax system as
imposed in this Subsection. For purposes of this Section,
the payor or person in control of the payment shall be
considered as the withholding agent.
The value-added tax withheld under this Section shall be
remitted within ten (10) days following the end of the month
the withholding was made.
U.P. LAW BOC TAXATION II TAXATION LAW

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
expense or cost. On the other hand, if actual input
VAT is less than 7% of gross payment, the difference
must be closed to income.

However, 12% final VAT shall be withheld with

respect to the following:
1. Lease or use of properties or property rights
owned by non-residents;
2. Services rendered to local insurance companies,
with respect to reinsurance premiums payable to
non-residents; and;
3. Other services rendered in the Philippines by
non-residents

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U.P. LAW BOC TAXATION II TAXATION LAW

VAT FORMULA (IN GENERAL)

Actual Sales/Receipts xxx
Add: Excise Tax xxx
Remaining Merchandise (Cessation of VAT-registered Status) xxx
Transactions Deemed Sale xxx xxx

Less: Sales Returns and Allowances xxx

Sales Discounts xxx xxx

Total Sales (Taxable Base) xxx

Multiplied by 12% 12%
Output VAT on sales or gross recipts xxx
Less: Input VAT on purchases and services xxx
Transitional Input VAT, if applicable xxx
Presumptive Input VAT, if applicable xxx
Input VAT Carry-over from previous period xxx
Creditable VAT withheld xxx xxx
Net VAT payable (refundable) xxx

MONTHLY RETURN
Gross Sales/Receipts for the Month xxx
Multiplied by VAT rate 12%
Output VAT xxx
Less Input Taxes:
Transitional/Presumptive Input Tax xxx
On taxable goods/services xxx xxx
Net VAT Payable xxx
Add Penalties:
Surcharge xxx
Interest xxx
Compromise xxx xxx
Total Amount Payable xxx

INVOLVING GOVERNMENT
When Actual Input VAT > Standard Input VAT: e ce form par of eller e pen e/co
When Actual Input VAT < Standard Input VAT: difference is treated as taxable other income

Sales xxx
Output VAT (Sales x 12%) xxx
Purchases xxx
Input VAT (Purchases x 12%) xxx

OUTPUT VAT Payable:

Output VAT xxx
Less: Actual Input VAT xxx
Standard Input VAT (Sales x 7%) xxx xxx
Net VAT Payable xxx
Less: Creditable Withholding Tax (Sales x 5%) xxx
Output VAT Payable xxx

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U.P. LAW BOC TAXATION II TAXATION LAW

QUICK NOTES ON VAT b. performed ICTB in the Phil.

Transactions subject to VAT
General Requirements
1. Done in the course of trade or business (w/n
profit-oriented): rule of regularity + incidental
thereto (including isolated)
EXCEPTION:
a. NRC/NRA who perform services in Phil,
even if no regularity
b. Importation of Goods may be for business
or non-business use
2. Gross sales or receipts for the past 12 months or
the next 12 months > 3,000,000php
Taxable Transactions and Specific Requirements
1. Sale, Barter, Exchange or Importation (SBEL) of
Goods or Properties75
Goods/Personal Properties
a. Actual/deemed sale for a valuable
consideration
b. for use or consumption in the Phil
(regardless of the payment arrangements)
c. not exempt from VAT (NIRC, special law,
special agreement)
Real Properties76:
d. Seller (w/n natural) executes contract to sale,
barter, or exchange of RP
e. RP is in the Phil
f. Seller is engaged in sale or exchange of RP
or real estate (dealer, developer, lessor)
RP is held primarily for sale/lease ICT/B or an
ordinary asset used in T/B as an incident to his
vatable activity (NOT a capital asset) not exempt
from VAT (NIRC, special law, special agreement
2. Sale of Services77
a. for a valuable consideration
(actually/constructively received)
c. not exempt from VAT (NIRC, special law,
special agreement)
d. person rendering service is VAT-liable
e. no ER-EE relationship
3. Importation of Goods
Persons Liable to pay VAT
1. Any person who Sells, Barters, Exchanges or
Leases (SBEL) goods or properties
if real property: persons engaged in real estate
business:
a. Any person who SBE real properties in the
course of trade or business (ICT/B)
b. Real estate lessors/ sub-lessors
c. NRA/NRC lessors when Real Property is in
the Phil
d. Non-stock, non-profit corporations engaged
in SBE of real properties ICT/B, regardless
of disposition of income
e. Go inc GOCC in SBEL of RP ICT/B
2. Renders services
3. Imports goods
a. if importer is tax-exempt/VAT-exempt
AND goods are subsequently SBE to non-
exempt persons, purchasers/recipients =
importer
b. if the Philippine branch of an NRFC
impor ed , fir local b er = impor er
Tax Bases of VAT
1. Gross (Sales) Selling Price: total amount of
money paid in consideration of SBEL
excludes: VAT, sales discounts78 and,
allowances and returns
includes: Excise tax paid, initial payments79,
interests and penalties (if instalment),
commission income (if exported), purchase

75
Sec 106 If SP > P1.5M = subject to
76
VAT
Residential Lot
Casual sale (Capital I SP P1.5M = VAT-
Subject to CGT (6%)
Assets) exempt
Regular sales If SP > P2.5, = subject to
(Ordinary Assets): Residential VAT
Commercial House and Lot I SP P2.5M= VAT-
Property Subject to 12% VAT exempt
(Sale/Lease)
I a 15,000 77
Sec 108
= VAT and OPT-exempt 78
It should be determined at the time of the sale, indicated in
If monthly rental > 15,000 the invoice and granting does not depend on the happening
but aggregate annual of a future event
Residential Units a P3M = 79
Initial payments does not include the amount of mortgage
(Lease) subject to OPT on RP sold (except excess when mortgage exceeds the cost
If monthly rental > 15,000 of the property), notes and other evidence on=f indebtedness
and aggregate annual issued by the purchaser at the time of the sale
rentals > P3M subject to
VAT

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U.P. LAW BOC TAXATION II TAXATION LAW

price, charges for packing, delivery and

insurance Rates of VAT
If goods/personal properties, 1. Output Tax (Sale/Barter/Exchange/Lease)
o GSP = amount paid in consideration a. 12% standard rate: applied directly to TB
o IF DEEMED SALE: FMV at the time b. 0%: applied directly to TB
of the transaction 2. Input Tax (Purchase from VAT-registered
N.B. in retirement/cessation, inventory businesses/Importation of goods)
(raw materials, finished goods, a. 12% standard rate: applied directly to TB
machinery, equipment, furniture, b. 0%: applied directly to TB
fixture), tax base = whichever is lower, c. 2% transitional VAT (: applied to the
(i) acquisition cost OR (ii) current (inventory on hand) value of goods (exc.
market price of goods VAT-exempt good) existing at the date a
If real property, GSP = amount higher: person commences business and/or
o consideration stated in the sales becomes liable to VAT) or 12% actual input
document tax rate, higher
o FMV, whichever is higher of d. 4% presumptive input tax rate: applies to
o Zonal value: FMV as determined by purchases of VAT-exempt goods used as
CIR inputs by a VAT-registered person in
o Real Property Tax Value: FMV as manufacturing or processing certain food
determined by provincial & city products
assessors e. 7% FWT (standard input VAT, when
2. Gross Value in money of goods government sale), 5% withholding
3. Gross Receipts derived from transaction: total
amount of money/equivalent = contract price + Creditable Input VAT Requirements
compensation + service fee + rental fee + 1. Proper documentation
royalties + amount charged for materials 2. No double input tax credit is allowed.
supplied with the services + deposits and 3. Input VAT on a particular purchase transaction
advanced payments actually or constructively can be claimed once only upon consummation of
received + costs items of construction projects the sale of goods and based on the entire GSP
(VAT + amounts earmarked for payments to unrelated (whether paid on cash, credit or instalment)
3rd party + amounts received as reimbursement + 4. Ignore erroneous VAT rate. The correct rate of
monies/receipts held in trust w/c do not redound to the input VAT can still be claimed.
benefit of taxpayer + universal charge passed on and 5. Transactions should have been made with VAT-
collected by distribution companies and electric coop (if sale registered persons.
of electricity) + receivables + local taxes) 6. IF MIXED TRANSACTIONS and input VAT
cannot be directly attributable:
IF DEALER IN SECURITIES: gross selling Input Tax
Formula
price cost of securities sold Treatment
4. Total Value/Landed Cost (determined on Untraceable Input Creditable Input
the basis of quantity/volume of goods) VAT x VAT
Input VAT Credit,
Total Value used by Customs: tariff and customs Untraceable Input
eligible for tax
duties + custom duties +excise tax + charges VAT x
refund or TCC
Landed Cost: invoice amount inc. cost of loading, Untraceable Input Cost of Sales or
shipping, unloading, + custom duties + freight + VAT x Operating Expense
insurance + other charges +excise tax expenses Compare to
incurred after release of goods (e.g., cost of delivery) Standard Input VAT
Customs duty: amount of customs duty legally Untraceable Input
(Creditable against
due and paid by the importer VAT x
Standard input
Charges: special import tax,foreign marginal fees, VAT)
bank and arrastre charges, wharfage dues, broker
fees, other charges paid to complete importation

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U.P. LAW BOC TAXATION II TAXATION LAW

N.B. Creditable Input VAT is b. input tax attributable to exempt sales and
1. increased by any input VAT carried over from unauthorized input tax attributable of
the preceding month or quarter depreciable capital goods
2. decreased by c. amount of input VAT with regard to
a. amount of the claim for refund or tax credit uncollected portion of instalment receivable
for VAT filed during the same period in instalment sales

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
Optional VAT Registration credit or refund
Partial relief Total relief
Only removes VAT at the exempt stage All VAT is removed at whatever stage
On Sales: On Sales:
No VAT No VAT
Not within the VAT system Still within the VAT system
Not subject to VAT Subject to 0% VAT
On Purchases: On Purchases:
VAT passed is on cost VAT passed on is input tax
Input tax is a cost component thus item of Input tax is creditable against output tax thus
deduction reducing only taxable income reducing VAT liability

SALE OF SERVICES

VAT-Exempt 0% VAT
1. For lease of property =exempt
if advance payment = loan, security deposit
NB: if security deposit is applied to rental =
VAT
2. For persons engaged in milling, processing,
manufacturing or repacking goods = exempt 1. Processing, manufacturing, repacking goods to
if palay rice; corn corn grits; sugar cane non-resident
2. Processing, manufacturing, repacking goods to
raw sugar
export-oriented
3. For franchise grantees of electric utilities,
3. Services other than processing, manufacturing,
telephone and telegraph, radio and/or television
repacking
broadcasting = exempt
4. Services to exempted persons: effectively 0-rate
if annual gross receipts <= 10M; 5. Sale of power/fuel-generated through renewable
franchise grantees of gas and water utilities; of resources
telephone & telegraph services, amounts 6. Ser ice rendered o in l hipping/air ran por
received for overseas dispatch from Phil. 7. Transport of passengers and cargo by air from Phil
4. For PREMIUMS of insurance companies = to Foreign
exempt IF 8. Transactions of VAT-reg person to foreign
life and disability insurance; embassies
crop insurance; health and accident insurance

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U.P. LAW BOC TAXATION II
(included are only those with exceptions)
1. Sale/import of agricultural & marine food
products in their original state; livestock and
poultry (used/yield for human consumption);
breeding stock and genetic materials
2. Import of professional instruments, implements,
wearing apparel, domestic animals, and personal
household effects
3. Transactions exempt pursuant to special laws
4. Cooperatives
5. Residential lots P1.5M & lot & dwellings
P2.5M
6. lease of residential units,
if 15,000/unit/month (regardless of
aggregate amount);
if 15,000/unit/month (AND aggregate
amount is P3M)
7. importation of fuels, goods, supplies by
international shipping or air transport
SALE OF GOODS
VAT-Exempt
Real Property
1. Not primarily held in connection with Trade
or Business (ICT/B)
2. Low-cost or socialized housing
3. Residential lot <= P1.5M
4. House and/or other residential dwellings <=
P2.5M
5. Lease (15,000/unit/year or total P3M/year)
6. Transmission to a trustee
7. Except: if transmission is deemed sale
8. Transfer to corporation in exchange of SoS
9. Advance payments/Security Deposits in lease
10. Except: if applied to the rent
As regards ecozones and PEZA-registered
entities
1. Made by VAT-exempt supplier from customs
territory to any registered enterprise inside
ecozone
2. Intra-ecozone enterprise sale of service, if
PEZA registered seller is subject to 5% special
tax regime
3. Intra-ecozone sales of goods
80
Under Omnibus Investment Code (EO226)
81
Ibid
82
RA7227
83
RA 7916
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TAXATION LAW
Exceptions to the Exemptions (Subject to VAT)
1. Livestock and poultry DOES NOT INCLUDE
fighting cocks, race horses, zoo animals and pets
2. DOES NOT INCLUDE vehicles, vessels,
aircrafts, machineries, and other goods for use in
manufacturing in commercial quantities
3. DOES NOT INCLUDE those under Petroleum
Exploration Concessionaires under Petroleum Act
of 1949
4. For sales by agricultural coops to non-members, if
seller is the member = VAT
5. For sales by non-agri, non-electric and non-credit,
importation of machineries and equipment = VAT
6. DOES NOT INCLUDE parking lot
If any portion of such goods are used for purposes
other than those stated = VAT
0% VAT
Actual Export Sales
Deemed Export Sales
1. Internal or constructive export sales
Raw/Packaging materials to non-resident buyer
Raw/Packaging materials to export-oriented
Phil. Port FOB value of export products80
Net selling price of export products81
sales to bonded manufacturing warehouses82
sales to export processing zones83
sales to enterprises duly accredited by Subic Bay
Metropolitan Authority
sales to registered export traders
sales to diplomatic missions etc.
sale by VAT-supplier to manufacturer/producer
whose products are 100% exported
Sale of gold to BSP
Sale of goods/supplies/equipment/fuel to persons
engaged in in l hipping/air ran por
2. Docking/Undocking services to foreign vessels
Effectively-zero rated sales
1. Made by VAT registered supplier from customs
territory to any registered enterprise inside ecozone
2. Intra-ecozone enterprise sale of service, if PEZA
registered seller is subject to NIRC taxes
U.P. LAW BOC TAXATION II TAXATION LAW

Taxable
TR Tax Base Tax Payable
Activity/Property
Actual SBE of Goods
Gross Selling Price
or Properties
Goods/ Personal
= amt. paid to the seller
Properties
Real Properties = consideration/FMV, higher
12%
IF sale is on
instalment plan =
AND ZV/FMV >
𝑥 𝑧𝑜𝑛𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑟 𝐹𝑀𝑉 𝑒𝑥𝑒𝑐𝑢𝑡𝑖𝑜𝑛
SP (excluding
VAT)
VAT Payable
Deemed Sale
paid by
Transactions
seller/transferor
Not ICB/T, but
originally intended for
sale/use ICB/T
FMV (at the time of transaction)
Transfer to SH in
E: if FMV is unreasonably lower (by more than 30% of AMV) = AMV
share of profit or Cr
12% or determined by CIR
in payment of debt
Consignment after
60d
Retirement/Cessation
Acquisition Cost or current market price, lower
of business
VAT Payable
Sale of Services 12% Gross receipts derived paid by
performer
Importation of Goods Total Value used by BOC VAT paid by
In general =tariff & custom duties + custom duties + excise tax + charges importer
PRIOR to the
When custom duties 12%
release of goods
are based on quantity = landed cost + excise tax in Customs
or volume custody

1. Once registered as a VAT person, the taxpayer shall be liable to output tax and be entitled to input tax credit
beginning on the first day of the month following registration.
2. The cancellation for registration will be effective from the first day of the following month the cancellation was
approved.
3. What is the treatment for Withholding of VAT on Government Money Payments?
a. The government or any of its political subdivisions, instrumentalities or agencies, including government-
owned or controlled corporations (GOCCs) shall, before making payment on account of each purchase of
goods and/or services taxed at twelve percent (12%) VAT pursuant to Sections 106 and 108 of the Tax
Code, deduct and withhold a Final VAT due at the rate of five percent (5%) of the gross payment.
b. The five percent (5%) final VAT withholding rate shall represent the net VAT payable of the seller.
The remaining seven percent (7%) effectively accounts for the standard input VAT for sales of goods or
services to government or any of its political subdivisions, instrumentalities or agencies including GOCCs
in lieu of the actual input VAT directly attributable or ratably apportioned to such sales. Should actual input
VAT attributable to sales to government exceeds seven percent (7%) of gross payments, the excess may
form part of the sellers' expense or cost. On the other hand, if actual input VAT attributable to sale to
government is less than seven percent (7%) of gross payment, the difference must be closed to expense or
cost.

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c. 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.

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U.P. LAW BOC TAXATION II TAXATION LAW

Before start of business or VAT-registered

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

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

UPDATE his registration:

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

VAT REFUND OR VAT CREDIT CERTIFICATE

VAT- registered
cancelling their
registration (regardless of
w/in 2 years after close the source of input tax)
of the taxable quarter
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 taxable
Direct Tax CIR + quarter when sales
Credit supporting docs are made
VAT-registered
Taxpayer Presumptive Input Tax
w/in 90 days
Transitional Input Tax w/in 90 days
Carry-over from
If VAT-exempt Actual Input Tax not related from submission
to zero-rated sales Tax Credit submission
changes his
status to VAT-
registered = GRANTED
transitional
input tax VAT-exempt Transactions DENIED INACTION

w/in 30 days w/in 30 days

Non-VAT Apply against from receipt from expiration
Taxpayer OUTPUT VAT of denial of 90-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

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U.P. LAW BOC TAXATION II TAXATION LAW

Illustration of the VAT System

VAT System (All VAT)

Raw Material (VAT) Manufacturer (VAT) Trader (VAT) End-User
SP (100+12) 100 112 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 112 Purchases 336 Purchases 504
Input VAT 12 12% VAT 36 12% VAT 54
OT 12% 12 OT 12% 36 OT 12% 54
IT 0 IT 12 IT 36
VAT Payable 12 Vat Payable 24 VAT Payable 18
VAT to BIR 12 VAT to BIR 24 VAT to BIR 18 Total VAT 54

VAT System (VAT Exempt 1st chain)

Raw Material
Manufacturer Trader End-User
(VAT Exempt)
SP (100+ 0) 100 SP (300 + 36) 300 336 SP (450 +54) 450 504
Cost 50 Cost (100) 100 Cost (300+36) 300 336
Profit 50 Profit 200 Profit 150
Purchase 100 Purchases 336 Purchases 504
Input VAT 0 12% VAT 36 12% VAT 54
OT 12% 0 OT 12% 36 OT 12% 54
IT 0 IT 0 IT 36
VAT Payable 0 Vat Payable 36 VAT Payable 18
VAT to BIR 0 VAT to BIR 36 VAT to BIR 18 Total VAT 54

VAT System (VAT Exempt mid-chain)

Manufacturer (VAT
Raw Material Trader End-User
Exempt)
SP (100+12) 100 112 SP (300) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 0 No VAT 0 12% VAT 54
OT 12% 12 OT 12% 0 OT 12% 54
IT 0 IT 0 IT 0
VAT Payable 12 Vat Payable 0 VAT Payable 54
VAT to BIR 12 VAT to BIR 0 VAT to BIR 54 Total VAT 66

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U.P. LAW BOC TAXATION II TAXATION LAW

VAT System (VAT zero-rate mid-chain)

Manufacturer
Raw Material Trader End-User
(VAT Zero-rate)
SP (100+12) 100 112 SP (300+ 0) 300 SP (450 +54) 450 504
Cost 50 Cost (100 + 12) 100 112 Cost (300) 300
Profit 50 Profit 188 Profit 150
Purchase 112 Purchases 300 Purchases 504
No Input VAT 12 No VAT 0 12% VAT 54
OT 12% 12 OT 12% 0 OT 12% 54
IT 0 IT 12 IT 0
VAT Payable 12 Vat Payable (12) VAT Payable 54
VAT to BIR 12 VAT to BIR (12) VAT to BIR 54 Total VAT 54

CARRIERS BY LAND / AIR / SEA

Area Object Kind Business Tax Income Tax
Person Domestic 3% Percentage Tax Regular Tax
By Land
Cargo/Goods Domestic 12% VAT Regular Tax
Domestic flight -
Domestic Regular Tax
12% VAT
Person / Cargo / International flight
By Air Regular tax
Goods 0% VAT
Gross Philippine
International 3% Percentage Tax
Billing
Domestic flight -
Domestic Regular Tax
12% VAT
Person / Cargo International flight
By Sea Regular tax
/Goods 0% VAT
Gross Philippine
International 3% Percentage Tax
Billing

2. Percentage Taxes84 Sec. 118 International Carriers

Sec. 119 Franchises
CONCEPT Overseas Dispatch, Message or
A percentage tax is a national tax measured by a Sec. 120 Conversation Originating in the
certain percentage of the gross selling price or gross Philippines
value in money of goods sold, bartered or imported; Banks and Non-bank Financial
Sec. 121
or of the gross receipts or earnings derived by any Intermediaries
person engaged in the sale of services. It is not subject Sec. 122 Finance Companies
to withholding. [CIR v. Solidbank Corp., G.R. No. Sec. 123 Life Insurance Premiums
148191 (2003)] Sec. 124 Agents of Foreign Insurance Companies
Sec. 125 Proprietors of amusement places
Percentage tax is a business tax imposed on persons, Sec. 126 Winnings from horse races and jai alai
entities, or transactions specified under Sections 116 Sale of Shares of Stock Listed and Traded
to 127 of the NIRC. Sec. 127 through the Local Stock Exchange or
through Initial Public Offering.
NIRC Persons/Entities/Transactions
Sec. 116 Persons exempt from VAT NATURE
Domestic Carriers; By its nature, a gross receipts tax applies to the entire
Sec. 117 receipts without any deduction, exemption or
Keepers of Garages

84
Not Included in the Bar Examination Coverage for 2019.

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U.P. LAW BOC TAXATION II TAXATION LAW

exclusion, unless the law clearly provides otherwise. Sec. 150-

Non-essential Services*
[China Banking Corp. v. CA, G.R. No. 146749 (2003)] A
Sec. 150-B Sweetened Beverages*
PURPOSE Sec. 151 Mineral Products
It was devised to maintain simplicity in tax collection *Added by TRAIN Law
and to assure a steady source of state revenue even
during periods of economic slowdown. Such a policy NATURE
frowns upon erosion of the tax base. Deductions, Excise taxes are imposed directly on certain specified
exemptions, or exclusions complicate the tax system goods, manufactured or produced locally or
and lessen the tax collection. [De Leon] imported. They are, therefore, taxes on property.

3. Excise Tax and Excise taxes, whether under the specific or the ad
valorem tax system, is basically an indirect tax
Documentary Stamp Tax85 imposed on consumption of certain types or classes
of goods, whether locally manufactured or imported.
a. Excise Taxes While the tax is directly levied upon the
manufacturer/importer upon removal of the taxable
CONCEPT goods from its place of production or from the
Excise taxes are taxes imposed on certain specified customs custody, the tax, in reality, is actually passed
goods manufactured or produced in the Philippines on to the end consumer as part of the transfer value
for domestic sale or consumption or for any other or selling price of the goods, sold, bartered or
disposition and to things imported as well as exchanged. [Silkair (Singapore) Pte. Ltd. v. CIR, G.R.
services performed in the Philippines. [Sec. 129, No. 173594 (2012)]
par. 1, NIRC86]
In the refund of indirect taxes, the proper party to
Kinds of excise taxes [Sec. 129, par. 2, NIRC87] question or seek a refund of the tax is the statutory
1. Specific tax tax due is computed based on the: taxpayer, the person on whom the tax is imposed by
Weight law and who paid the same even when he shifts the
burden thereof to another. The tax liability remains
volume capacity
with the manufacturer/ producer/importer that is
any other physical unit of measurement. primarily, directly, and legally liable for the payment
2. Ad valorem tax tax due is computed based on of excise taxes. [Id.]
the:
selling price PURPOSE
other specified value of goods. The selective application and imposition of excise
taxes may be justified on any of the following
The NIRC enumerates the specific goods and services grounds:
that are subject to Excise Tax: 1. To curtail consumption of certain
NIRC Goods/Services commodities, excessive or indiscriminate use of
Sec. 141 Distilled Spirits which is considered harmful to the individual or
Sec. 142 Wines community. Taxes of this kind are sumptuary in
Sec. 143 Fermented Liquor nature and are exemplified by the taxes on
Sec. 144 Tobacco Products alcoholic beverages and tobacco products.
Sec. 145 Cigars and Cigarettes 2. To protect a domestic industry the products of
Sec. 148 Manufactured Oils and Other Fuels which face competition from similar imported
Sec. 149 Automobiles articles;
Sec. 150 Non-essential Goods 3. To distribute the tax burden in proportion to
benefit derived from a particular government

85 87
Not Included in the Bar Examination Coverage for 2019. SECTION 129. Goods and Services Subject to Excise
86
SECTION 129. Goods and Services Subject to Excise Taxes. x x x For purposes of this Title, excise taxes herein
Taxes. Excise taxes apply to goods manufactured or imposed and based on weight or volume capacity or any other
produced in the Philippines for domestic sales or consumption a a a a specific
or for any other disposition and to things imported as well as tax a a a a a selling
services performed in the Philippines. The excise tax price or other specified value of the good or service
imposed herein shall be in addition to the value-added tax performed a a ad valorem tax .
imposed under Title IV.

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U.P. LAW BOC TAXATION II TAXATION LAW

service. Examples are the excise taxes on

gasoline, lubricating oils and denatured alcohol NIRC Documents
for motive power; and Debentures and Certificates of
4. To raise revenue. The excise taxes have on Sec. 174
Indebtedness
many occasions been justified on the pretext of Sec. 175 Original Issue of Shares of Stocks
any of the three mentioned above to minimize Sales of Due-bills, Certificates of
the opposition to the tax. In reality, however, the Sec. 176
Obligation, or Shares of Stock
main purpose is to raise revenue. Bonds, Debentures, Certificates of
5. [De Leon] Sec. 177 Stock or Indebtedness Issued in
Foreign Countries
b. Documentary Stamp Taxes Sec. 178
Certificates of Profits or Interest in
Property or Accumulations
CONCEPT Bank Checks, Drafts, Certificates of
Documentary stamp tax is a tax on documents, Sec. 179 Deposit not Bearing Interest, and
instruments, loan agreements and papers evidencing Other Instruments
the acceptance, assignment, sale or transfer of an Bonds, Loan Agreements, Promissory
obligation, right, or property thereto. [Sec. 173, Notes, Bills of Exchange, Drafts,
Sec. 180
NIRC] Instruments and Securities Issued by
the Government
The NIRC enumerates the specific documents that Acceptance of Bills of Exchange and
Sec. 181
are subject to DST: Others
Foreign Bills of Exchange and Letters
Sec. 182
of Credit
Sec. 183 Life Insurance Policies
Sec. 184 Policies of Insurance Upon Property
Fidelity Bonds and Other Insurance
Sec. 185
Policies
Policies of Annuities and Pre-Need
Sec. 186
Plans
Sec. 187 Indemnity Bonds
Sec. 188 Certificates
Sec. 189 Warehouse Receipts
Jai-alai, Horse Race Tickets, Lotto or
Sec. 190
Other Authorized Numbers Games
Sec. 191 Bills of Lading or Receipts
Sec. 192 Proxies
Sec. 193 Powers of Attorney
Sec. 194 Leases and Other Hiring Agreements.
Mortgages, Pledges, and Deeds of
Sec. 195
Trusts
Deeds of Sale and Conveyances of
Sec. 196
Property
Charter Parties and Similar
Sec. 197
Instruments
Assignment and Renewals of Certain
Sec. 198
Instruments

NATURE
DST is levied on the exercise by persons of certain
privileges conferred by law for the creation, revision,
or termination of specific legal relationships through
the execution of specific instruments. Hence, in
imposing the DST, not only the document but also

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U.P. LAW BOC TAXATION II TAXATION LAW

the nature and character of the transaction is

considered. [Phil. Banking Corp. v. CIR, G.R. No.
170574 (2009)]
E. TAX REMEDIES
Being an excise tax, it is paid only once. Since DST is
UNDER THE NIRC
not a tax on income, an exemption from income tax
does not include DST. [BIR Ruling No. DA-106-08, 1. General Concepts
August 4, 2008]
ADMINISTRATIVE (BIR)
The tax base is the document itself, not the Before payment
transaction or the property described in the o Filing a petition or reconsideration or
document. Thus, the validity or invalidity of the reinvestigation; and
transaction, or the extent of the right to the property o Entering into a compromise
is not affected by payment or non-payment of the After payment
DST. [Vitug & Acosta] o Filing a claim for refund; and
o Filing a claim for tax credit
PURPOSE
The purpose of the law imposing stamp taxes on JUDICIAL (CTA/RTC)
documents, instruments, and papers is to raise Civil action
revenue and not to invalidate contracts or inflict o Appeal to the CTA
penalties, and courts should give it a liberal o Action to contest forfeiture of chattel; and
construction. [33 C.J.S. 315-316] o Action for damages
Criminal action
Filing a criminal complaint against erring
BIR officials and employees

Periods:
Assessment (3 or 10 years)
Return was filed
o Not false or fraudulent 3 years after the
last day of the prescribed period OR 3 years
from the date of actual filing of the return if
paid beyond the prescribed period. [Sec. 203,
NIRC]
o False or Fraudulent or Failure to file a return
(FFF) 10 years from date the fraud or
falsity or omission was discovered [Sec.
222(a), NIRC]
Collection (3 or 5 years)
o Collections with assessments 5 years from
issuance of FAN (Final Assessment Notice)
or FLD (Final letter of Demand) [Sec.
222(c), NIRC]
o Collections without assessments must be
made within the period of making an
assessment.
If the return filed was false or fraudulent or
if no return was filed a proceeding in court
may be filed within 10 years from date of
discovery of fraud or falsity [Sec. 222(a),
NIRC]
Criminal offense [Sec. 281, NIRC]
o 5 years from date of commission, and if same
is unknown then, from discovery and the

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U.P. LAW BOC TAXATION II
institution of judicial proceedings for its
investigation and punishment.
The prescription period shall not run when the
offender is absent from the Philippines
a. Assessment
1. Definition and Requisites of a Valid
Assessment
To 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 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. [CIR v. CTA, 27 SCRA 1159]
Forms of assessment
a. Self-assessment Assessments made by
taxpayers who then file returns.
b. Deficiency assessment Assessments made by
the BIR after the conduct of an investigation or
audit when it finds that the tax return filed by the
taxpayer contains an under-declaration of income
or when the taxpayer does not at all file a tax
return.
c. Jeopardy assessment [Section C, infra]
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,
G.R. No. 128315 (1999)]
c. An assessment must be served on and received
by the taxpayer [CIR v. PASCOR, supra.]
Note: The presumption of the correctness 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
a. Rely upon circumstantial evidence of
determining the correct income or transaction of
a taxpayer (Indirect Method)
b. Expenditure Method: It proceeds on the theory
that where the amount of money which a
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TAXATION LAW
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.
c. 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.
d. Unit and Value Method: The determination of
gross receipts may be computed by applying price
and profit figures to the known ascertainable
quality of business done by taxpayer
Inventory method for income determination (Net
Worth Method)
Holland v. US: In a typical net worth prosecution, the
Government, having concluded that the taxpayer's
records are inadequate as a basis for determining
income tax liability, attempts to establish an "opening
net worth" or total net value of the taxpayer's assets
at the beginning of a given year. It then proves
increases in the taxpayer's net worth for each
succeeding year during the period under examination,
and calculates the difference between the adjusted net
values of the taxpayer's assets at the beginning and
end of each of the years involved. The taxpayer's non-
deductible expenditures, including living expenses,
are added to these increases, and if the resulting figure
for any year is substantially greater than the taxable
income reported by the taxpayer for that year, the
Government claims the excess represents unreported
taxable income.
Formula
Increase in Net worth
Add: Non-deductible Item
Less: Non-taxable income or receipts subjected to
final tax transfer taxes
Taxable Net Income
Less: Personal and additional exemptions
NET INCOME SUBJECT TO TAX
Notices (Preliminary Assessment Notice, Final
Letter of Demand, Final Assessment Notice,
Final Decision on a Disputed Assessment) may
be served in the following modes:
Personal Service (by personal delivery to known
address of taxpayer) preferred mode
Substituted Service (by leaving the notice with
omeone a a pa er kno n addre ); or
U.P. LAW BOC TAXATION II TAXATION LAW

Service by mail Service to the tax agent shall be administratively by previously assessed as a
deemed service to the taxpayer (RR 18-2013) distraint or levy or by deficiency
(p.391 Ingles) judicial action [p. 405,
Ingles] Deficiency tax must be
2. Tax Delinquency as Distinguished assessed prior to
from Tax Deficiency collection, as the
deficiency has to be
Deficiency is defined as the amount still due and determined first [p.405,
collectible from a taxpayer upon audit or Ingles]
investigation; whereas delinquency is defined as the SUBJECT to
SUBJECT to
failure of the taxpayer to pay the tax due on the date administrative penalties
administrative penalties
fixed by law or indicated in the assessment notice or of:
of:
letter of demand. Deficiency interest is imposed for 25% surcharge
interest
the shortage of taxes paid, while delinquency interest interest
compromise penalty
is imposed for the delay in payment of taxes. compromise penalty
[Takenaka Corporation Philippine Branch v. CIR, G.R. [Mamalateo]
No. 193321 (2016); First Lepanto Taisho Insurance
Corporation v. CIR, G.R. No. 197117 (2013)] 3. Jeopardy Assessment

Deficiency Delinquency Under BIR Regulations, a jeopardy assessment is a tax

Basic tax + assessment which was assessed without the benefit of
deficiency complete or partial audit by an authorized revenue
Base Basic tax officer, who has reason to believe that the assessment
interest and
surcharge and collection of a deficiency tax will be jeopardized
From the due b dela beca e of he a pa er fail re o compl
From the date date appearing in with the audit and investigation requirements to
prescribed for its the notice and present his books of accounts and/or pertinent
Reckoning records, or to substantiate all or any of the deductions,
payment until demand of the
date exemptions, or credits claimed in his return. (As
the full payment CIR until the
thereof amount is fully defined in Sec. 3(1)(a), RR 30-2002 for the purposes
paid of entering into a compromise)
12% p.a. (double the legal interest
rate for loans or forbearance of 4. Prescriptive Period for Assessment
any money in the absence of an (Sec. 203, NIRC)
express stipulation as set by the
Rate Bangko Sentral ng Pilipinas) General Rule: 3 years
If the taxpayer filed a return: internal revenue
NOTE: deficiency and the taxes shall be assessed within 3 years after the last
delinquency interest SHALL day prescribed by law for the filing of the return.
NOT be imposed simultaneously If a return is filed beyond the period prescribed
by law: the 3-year period shall be counted from
Tax Delinquency v. Tax Deficiency the day the return was filed.
Tax Delinquency Tax Deficiency
It is when: It is when: Exceptions (FFF)
Self-assessed taxpayer The amount of tax False return deviation ;
filed his tax return but imposed by law is Fraudulent return/intentional or deceitful entry
did not pay or only greater than the amount with intent to evade tax; and
partially paid the tax shown in the tax return
Failure to file a return. [Sec. 222, NIRC]
Deficiency Tax assessed If no amount is shown
Note: Prescriptive period in these exceptions is within
by the BIR became final in the return, or if there
10 years from discovery of falsity, fraud, or failure or
and executory is no return, amount by
omission to file the return.
which the tax as
Delinquency Tax can be determined by the CIR
Waiver
collected exceeds the amount

Page 194 of 290

U.P. LAW BOC
The taxpayer and the CIR may agree in writing, before
the expiration of the time prescribed in Sec. 203, to
extend the period of assessment [Sec. 222(b), NIRC]
a. 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, G.R. No. 162852
(2004)]
b. Requirements for a valid waiver under RMO 20-
90 and RMO 14-2016:
1. In writing (may be but need not be
notarized);
2. Indicate the date of execution by the
taxpayer, which must be before the
expiration of the period to assess or collect
taxes, or before the lapse if the period
previously agreed upon in a prior agreement;
3. Indicate the date agreed upon within which
an assessment may still be issured;
4. Indicate the date of acceptance, which must
be before the expiration of the period to
assess or to collect taxes, or before the lapse
of the period agreed upon in a prior
agreement; and
5. Taxpayer must be furnished with a copy of
the waiver.
Suspension of running of statute of limitations
a. Period during which the CIR 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 CIR;
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 CIR 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.
88
SECTION 249. Interest.
(A) In General. There shall be assessed and collected on
any unpaid amount of tax, interest at the rate of twenty percent
(20%) per annum, or such higher rate as may be prescribed
by rules and regulations, double the legal interest rate for
loans or forbearance of any money in the absence of an
express stipulation as set by the Bangko Sentral ng
Pilipinas from the date prescribed for payment until the
amount is fully paid.: Provided, That in no case shall the
deficiency and the delinquency interest prescribed under
Page 195 of 290
TAXATION II TAXATION LAW
Determining if prescriptive period has set in
In determining if prescription to assess has indeed set
in, the important date to remember is the date when
the demand letter or notice is released, mailed or sent
by the CIR to the taxpayer (Basilan Estates, Inc. v. CIR,
G.R. No. L-22492, September 5, 1967)
Provided the release was effected BEFORE
prescription sets in, the assessment is deemed
made on time even if the taxpayer actually
receives it AFTER the prescriptive period
Mailing of the assessment before the prescriptive
period sets in must be proved with substantial
evidence by the CIR.
If taxpayer makes a direct denial of receipt of a
mailed demand letter, such denial shifts the
burden to the Government to prove that such
letter was indeed received by the taxpayer
(Republic v. CA, G.R. No. L-38549, April 30,
1987). (pp. 394-395 Ingles)
5. Civil Penalties, Additions to the Tax
[Sec. 248, NIRC] [RR 21-2018]
DELINQUENCY INTEREST AND
DEFICIENCY INTEREST
In General
12% per annum (double the interest rate for loans or
forbearance of any money as set by BSP) on the
unpaid amount of tax, interest at the rate of twenty
percent (12%) per annum from the date prescribed
for payment until the amount is fully paid. [Sec.
249(A), NIRC88]
Deficiency Interest
12% per annum on any deficiency tax due, which
interest shall be assessed and collected from the date
prescribed for its payment until: (a) full payment
thereof; (b) or upon issuance of a notice and demand
by the Commissioner or his authorized
representative, whichever comes first. [Sec 249(B),
NIRC;89 Sec. 3, RR 21-2018]
Delinquency interest
12% per annum on the unpaid amount in case of
failure to pay:
Subsections (B) and (C) hereof, be imposed
simultaneously.
89
SECTION 249. Interest.
(B) Deficiency Interest. Any deficiency in the tax due, as
the term is defined in this Code, shall be subject to the interest
prescribed in Subsection (A) hereof, which interest shall be
assessed and collected from the date prescribed for its
payment until the full payment thereof, or upon issuance of
a notice and demand by the Commissioner of Internal
Revenue, whichever comes earlier.
U.P. LAW BOC TAXATION II
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
c. A deficiency tax, or any surcharge or interest
thereon on the due date appearing in the notice
and demand of the CIR or his authorized
representative until the amount is fully paid,
which interest shall form part of the tax [Sec.
249(C), NIRC]
Interest on extended payment
12% 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 CIR has authorized an extension of
time within which to pay a tax or a deficiency tax
or any part thereof [249(D), NIRC]
In no case shall deficiency and delinquency
interest be imposed simultaneously. [Sec. 249(A),
NIRC] However, the double imposition of both
deficiency and delinquency tax shall continue
TRANSITORY PROVISION [Sec. 6, RR 2018]
In cases where the tax liability or deficiency tax
became due before the effectivity of the TRAIN Law
on January 1, 2018, and the full payment thereof will
only be effected after such date, the rates shall be
applied as follows:
Applicable Interest
Period
Type and Rate
Deficiency and/or
For the period up to
delinquency interest at
Dec. 31, 2017
20%
For the period Deficiency and/or
beginning January 21, delinquency interest at
2018 until full payment 12%
SURCHARGE
ILLUSTRATION
Mr. A has been assessed deficiency income tax of P1,000,000, exclusive of interest and surcharge, for taxable year 2015.
The tax liability remained unpaid despite the lapse of June 30, 2017, the deadline for payment stated in the notice and
demand issued by the Commissioner. Payment was made by Mr. A on February 10, 2018. The civil penalties are computed
as follows:
Page 196 of 290
TAXATION LAW
Surcharge penalty imposed in addition to the tax
required to be paid [Sec. 24, NIRC]
Rates of Surcharge (25% or 50%)
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 CIR 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 amount of
tax due on or before the date prescribed for its
payment [Sec. 248 (A), NIRC]
50% of the tax or of the deficiency tax in case any
payment has been made, 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]
COMPROMISE PENALTY
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.
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]
U.P. LAW BOC
Basic Tax Due
Add: 25% surcharge for late
20% Deficiency Interest from April 16,2016
to June 30, 2017 (441 days)
Total Amount Due, June 30,2017
Add: 20% Deficiency Interest from July 1,
2017 to December 31, 2018 (184 days based
on P1M)
Add: 20% Delinquency Interest on tax from
July 1,2017 to December 31,2017 (225days)
based on total amount as of June 30, 2017
12% Delinquency Interest from January
1,2018 to February 10,2018 (41 days, based
on total amount due as of June 30,2017
Total Amount Due, February 10, 2021
6. Assessment Process and Reglementary
Periods
Assessment process [Sec. 228, NIRC; RR 12-99; RR
18-13; RR 7-18]
1. LETTER OF AUTHORITY AND TAX
AUDIT
Letter of Authority: An official document that
empowers a Revenue Officer to examine and
cr ini e a a pa er book of acco n and o her
accounting records, in order to determine the
a pa er correc in ernal re en e a liabili ie .
Cases which need not be covered by a valid LA:
a. Cases involving civil/criminal tax fraud which fall
under the jurisdiction of the tax fraud division of
the Enforcement Services, and
b. Policy cases under audit by the special teams in
national offices.
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.
Absence of an LOA violates right to due process.
[Medicard Philippines, Inc. vs CIR, G.R. No. 222743,
(2017)]
There must be a grant of authority before any revenue
officer can conduct an examination or assessment.
Equally important is that the revenue officer so
authorized must not go beyond the authority given.
In the absence of such an authority, the assessment or
examination is a nullity. [CIR vs. Sony Philippines, Inc.,
G.R. No. 178697 (2010)]
Page 197 of 290
TAXATION II TAXATION LAW
P 1,000,000.00
P 250,000.00
241,643.84 491,643.84
P 1, 491,643.84
100,821.92
150,390.39
20,106.54 271,318.85
P 1,762,962.90
2. NOTICE OF INFORMAL
CONFERENCE
N.B. RR 7-2018 reinstated the notice of informal conference.
The Revenue Officer who audited the taxpayer's
records shall state in his report whether or not the
taxpayer agrees with his findings that the taxpayer is
liable for deficiency taxes. If the taxpayer is not
amenable, based on the said Officer's submitted
report of investigation, the taxpayer shall be
informed, in writing, of the discrepancies in the
taxpayer's payment of his internal revenue taxes for
the purpose of "lnformal Conference," in order to
afford the taxpayer with an opportunity to present his
side of the case.
The Informal Conference shall in no case extend
beyond thirty (30) days from receipt of the notice for
informal conference. lf it is found that the taxpayer is
still liable for deficiency tax or taxes after presenting
his side, and the taxpayer is not amenable, the, case
shall be endorsed within seven (7) days from the
conclusion of the Informal Conference for the
issuance of a deficiency tax assessment.
3. ISSUANCE OF PRELIMINARY
ASSESSMENT NOTICE (PAN)
General rule The Assessment Division issues a PAN
if it determines that there exists sufficient basis to
assess the taxpayer for any deficiency tax. It shall
show in detail the facts and the law on which the
proposed assessment is based.
U.P. LAW BOC TAXATION II
Exceptions to issuance of preliminary
assessment notice (PAN)
The notice for informal conference and the PAN shall
not be required in any of the following 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
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.
Reply to preliminary assessment notice (PAN)
Taxpayer is given 15 days from date of receipt of PAN
to respond
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
N.B. In Oakwood Management Services, Inc. v. CIR
(2013), the CTA held that the issuance of the
FAN before the lapse of the 15-day period to
reply to PAN does not violate due process. A
protest against the PAN, unlike the protest
against the FAN, is not indispensable. A PAN
may or may not be protested by the taxpayer, and
the non-filing of such protest does not render the
PAN final and unappealable. Therefore, the
issuance of the FAN before the lapse of the 15-
day period for the taxpayer to file its protest to
the PAN does not inflict prejudice on the
taxpayer, for as long as the BIR properly served a
FAN and the taxpayer was able to intelligently
contest the FAN by filing a protest letter within
the period provided by law.
If he/she responds: a FAN/FLD shall be issued
within 15 days from filing/submission of the
a pa er re pon e, calling for pa men of he
a pa er deficienc a liabili , incl i e of he
applicable penalties.
Page 198 of 290
TAXATION LAW
4. ISSUANCE OF FORMAL LETTER OF
DEMAND AND FINAL ASSESSMENT
NOTICE (FAN/FLD)
A Final Assessment Notice (FAN) is a declaration of
deficiency taxes issued to a taxpayer who:
fails to respond to a pre-assessment notice within
the prescribed period of time, or
whose reply to the PAN was found to be without
merit.
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 [Sec. 228,
NIRC]
An assessment contains not only a computation of tax
liabilities, but also a demand for payment within a
prescribed period.
5. 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 date of receipt. The taxpayer protesting an
assessment may file a written request for
reconsideration or 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.
Failure to file a protest against FLD/FAN within 30
days, the assessment shall become final, executory and
demandable.
If there are several issues in the FLD/FAN and the
taxpayer disputes or protests only some of them, the
assessment relating to the undisputed issue(s) shall
become final, executory and demandable.
Moreover, if the taxpayer disputes or protests issues
in the FLD/FAN but he fails to state the facts, the
applicable law, rules and regulations, or jurisprudence
in support of his protest, the issues shall be
considered undisputed and the related assessment
U.P. LAW BOC TAXATION II TAXATION LAW

shall likewise become final, executory and

demandable.
A final decision on disputed assessment (FDDA)
that is declared void does not necessarily result in
a void assessment
A deci ion differ from an a e men and fail re
of the FDDA to state the facts and law on which it is
based renders the decision void but not necessarily
the assessment. [CIR vs. Liquigaz Philippines Corp., GR
No. 215534, April 18, 2016]
2. Collection
a. Requisites and Types
Generally, the government can initiate to collect
administratively or judicially once the FAN and FLD
are issued. [Sec. 203, NIRC]
The Government has two ways to collect:
Summary or administrative remedies
o Distraint on personal property
o Levy on real property
Judicial remedies (civil or criminal)
Suspension of running of statute of limitations
Period during which the CIR is prohibited from
making the assessment or beginning distraint or
levy or a proceeding in court, and for sixty (60)
days thereafter;
When the taxpayer requests for a reinvestigation
which is granted by the CIR;
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 CIR of any change in
address, the running of the statute of limitations
shall not be suspended;
When the warrant of distraint or levy is duly
served upon the taxpayer, his authorized
representative, or a member of his household
with sufficient discretion, and no property is
located;
When the taxpayer is out of the Philippines.
[Sec. 223, NIRC]

b. Prescriptive Periods; Suspension

of Running of Statute of
Limitations
Collections with assessments
FIVE YEARS after the issuance of FAN and FLD.

Collections without assessments

In case of false or fraudulent return with intent
to evade tax or of failure to file a return,
collection without assessment (or assessment)
may be made within 10 years from discovery of
falsity, fraud or omission. [Sec. 222(a), NIRC]
o An assessment may also be made which
carries its own 5-year prescriptive period to
collect.
Collections without assessment may be made
within the period for making an assessment (3
years from the required date of filing or actual
filing, whichever is later) [See Sec. 203, NIRC]

Waiver of prescriptive period

If tax was assessed within the different period agreed
upon by the CIR and the taxpayer, it may be collected
by distraint or levy or by a proceeding in court within
the period agreed upon in writing before the
expiration of the 5-yr period. [Sec. 222(d), NIRC]

Page 199 of 290

U.P. LAW BOC TAXATION II
F. Ta a R
1. Protesting the Assessment
a. Protested Assessment
After issuance of FAN, taxpayer may protest the
assessment either by a request for reconsideration or
reinvestigation.
b. Period to File Protest
30 days after receipt of FAN/FLD.
Request for RECONSIDERATION
Effect on prescriptive period to COLLECT A request for
reconsideration does not toll the running of the
prescriptive period for the collection of an assessed
tax. [CIR vs. Philippine Global Communication Inc., G.R.
No. 167146 (2006)]
Request for REINVESTIGATION
Effect on prescriptive period to COLLECT A Request
for Reinvestigation will only toll the prescriptive
period to COLLECT if the request for reinvestigation
is granted by the BIR.
c. Form, Content, and Validity of
Protest
The protest shall state: (Failure to state shall render
protest null and void)
Nature of protest, whether reconsideration or
reinvestigation, specifying new or additional
evidence if request for reinvestigation
Date of the assessment notice
Applicable law, rules and regulations, or
jurisprudence on which his protest is based.
d. Submission of Supporting
Documents
If request for REINVESTIGATION is
GRANTED Submission of documents within 60
days from filing of protest
Within sixty (60) days from filing of the protest,
all relevant supporting documents must be
submitted, otherwise the assessment shall
become final.
Page 200 of 290
TAXATION LAW
Rele an ppor ing doc men documents
necessary to support the legal and factual bases in
disputing a tax assessment as determined by the
taxpayer
A e men hall become final taxpayer is
barred from disputing the correctness of the issue
assessment by introduction of newly discovered
or additional evidence, and the FDDA shall
consequently be denied.
Only applies to request for reinvestigation
e. Effect of Failure to Protest
FAN/FLD becomes final and demandable.
f. Rendition of Decision by CIR
Period to act upon or decide protest filed
180 DAYS from
1. Submission of documents if request for
REINVESTIGATION; or
2. Filing of protests if request for
RECONSIDERATION
N.B. An administrative appeal to the CIR may only
be availed of upon the denial of the protest to the
FAN by the CIR representative. Under RR 18-2013,
there is no administrative appeal to the CIR for
inaction by the CIR representative. The remedy is to
await the decision or file a petition for review to the
CTA 30 days after the lapse of 180-day waiting period.
Denial of protest Issuance of a Final Decision on
a disputed assessment (FDDA): The decision of the
CIR or his duly authorized representatives shall state
the facts, the applicable law, rules and regulations or
jurisprudence on which such decision is based, and
that the same is his final decision.
CIR ac ion eq i alen o denial of protest:
Filing of collection suit against taxpayer [CIR v.
Union Shipping, G.R. No. L-66160 (1990)]
Issuing a warrant of distraint and levy [CIR v.
Algue, G.R. No. L-28896 (1998)]
Where there is a request for reconsideration, final
demand letter from BIR [CIR v. Isabela Cultural
Corp., G.R. No. 172231 (2007)]
Notice of delinquency [CIR v. Ayala Securities,
G.R. No.L-29485 (1976)]
Inaction by CIR - If the protest is not acted upon
within one hundred eighty (180) days from
submission of documents, the inaction by the
CIR is considered as a denial of protest.
Filing of criminal action against taxpayer
U.P. LAW BOC
Issuing a warrant of distraint and levy
REMEDIES OF TAXPAYER TO IN CASE
THE COMMISSIONER DENIED THE
PROTEST OR FAILS TO ACT ON THE
PROTEST
1. In case of denial of protest
If the protest is denied, in whole or in part, by the
CIR d l a hori ed repre en a i e, he
taxpayer may either:
a. Appeal to the CTA within 30 days from the
date of receipt of the decision
b. Elevate his protest through request for
reconsideration to the CIR (the only case
where an administrative appeal is possible)
If the CIR denies the protest filed by the
taxpayer, the latter may appeal to the CTA within
30 days from receipt of the decision denying the
protest. A motion for reconsideration of the
CIR denial of he pro e hall no oll he 30
day period to appeal to the CTA.
2. In case of inaction by CIR within 180 days
from submission of documents
If he pro e i no ac ed pon b he CIR d l
authorized representative within 180 days from
filing of the protest or from submission of
required documents, the taxpayer may either:
a. Appeal to the CTA within 30 days after the
expiration of the 180 days,
b. A ai he final deci ion of he CIR d l
authorized representative.
If the CIR did not act upon the petition within
180 days from the time the documents were
submitted, the taxpayer may either:
a. Appeal to the CTA within thirty days from
the lapse of the 180-day period OR
b. Wait until the CIR decides before he elevates
the case to the CTA.
These options are mutually exclusive, and resort
to one bars the application of the other. [Rizal
Commercial Banking Corporation vs. CIR, G.R. No.
168498 (2007)]
N.B. if the protest is a request for
RECONSIDERATION, count the 180 days
from the filing of the protest. The submission of
documents is only for a request for
reinvestigation.
Effect of failure to appeal
Page 201 of 290
TAXATION II TAXATION LAW
Assessment becomes final and demandable.
2. Compromise and Abatement
of Taxes
Compromise to reduce the amount of tax payable
Cases which may be compromised:
[Sec. 2, R.R. 30-2002]
a. Delinquent accounts
b. 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
c. Civil tax cases being disputed before the courts
d. Collection cases filed in courts
e. 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]
a. Withholding tax cases, unless the applicant-
taxpayer invokes provisions of law that cast
doubt on the taxpayer's obligation to withhold
b. Criminal tax fraud cases confirmed as such by the
CIR or his duly authorized representative
c. Criminal violations already filed in court
d. Delinquent accounts with duly approved
schedule of installment payments
e. 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 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
f. 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
g. Estate tax cases where compromise is requested
on the ground of financial incapacity of the
taxpayer
Authority of the CIR to compromise and abate
taxes
Grounds for a compromise
The CIR may compromise the payment of any
internal revenue tax in the following cases:
U.P. LAW BOC TAXATION II
a. A reasonable doubt as to the validity of the
claim against the taxpayer exists; or
b. The financial position of the taxpayer
demonstrates a clear inability to pay the assessed
tax. (financial incapacity)
L CIR : a. Tax Refund as Distinguished
a. For cases of financial incapacity: a minimum
compromise rate equivalent to ten percent (10%)
of the basic assessed tax
b. 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 National
Evaluation Board (composed of the CIR and 4
Deputy Commissioners)
The compromise offer shall be paid by the taxpayer
upon filing of the application for compromise
settlement. No application for compromise
settlement shall be processed without the full
settlement of the offered amount. In case of
disapproval of the application for compromise
settlement, the amount paid upon filing of the
aforesaid application shall be deducted from the total
outstanding tax liabilities, [RR 9-2013]
Abatement to cancel the entire amount of tax
payable.
When the CIR may abate or cancel a tax liability:
a. The tax or any portion thereof appears to be
unjustly or excessively assessed; or
b. The administration and collection costs do
not justify the collection of the amount due. (e.g.,
when the costs of collection are greater than the
amount of tax due)
3. Recovery of Tax Erroneously
or Illegally Collected
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, G.R. No.
L-68252 (1995)]
Nature of erroneously-paid tax/illegally assessed
collected
Page 202 of 290
TAXATION LAW
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.
from 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.
b. Grounds, Requisites, and Period
for Filing a Claim for Refund or
Issuance of a Tax Credit
Certificate
1. There is a tax collected erroneously or illegally, or
a penalty collected without authority, or a sum
excessively or wrongfully collected [see Section
229, NIRC]
2. There must be a written claim for refund filed by
the taxpayer to the CIR [see Vda. De Aguinaldo v.
CIR, G.R. No. L-19927 (1965)]
Exceptions
a. When on the face of the return upon which
payment was made, such payment appears
clearly to have been erroneously paid, the
CIR may refund or credit the tax even
without a written claim [Sec. 229, NIRC]
b. A return filed showing an overpayment shall
be considered as a written claim for credit or
refund. [Sec. 204(C), NIRC]
3. The
claim must be a categorical claim for
reimbursement [see Bermejo v. CIR, G.R. No. L-
3029 (1950)]
4. The claim for refund must be filed within 2 years
from the date of the payment of the tax regardless
of any supervening cause [Sec. 229, NIRC]
5. Taxpayer must show proof of the payment of tax
[Sec. 229, 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 years
from date of payment regardless of any
supervening cause
U.P. LAW BOC TAXATION II
The claim for refund must be filed within 2 years
from the date of payment of the tax regardless of
any supervening cause [Sec. 229, NIRC]
Judicial remedy for refund File with suit with the
CTA
Within 30 days from receipt of denial by the CIR; and
Before the expiration of the 2-year period
Simultaneous filing allowed
If the 2 year period is about to lapse, the taxpayer may
already appeal to the CTA even if the CIR has not yet
made any decision on the claim for refund. In Gibbs v.
CIR [G.R. No. L-17406 (1965)], the Supreme Court
noted that if the CIR takes time in deciding the claim
and the period of two years is about to end, the suit
or proceeding must be started in the CTA before the
end of the 2 year period without awaiting the decision
of the CIR.
N.B. Compare with the rule on refunds of input
VAT. The awaiting of the decision of CIR or the lapse
of the 90-day period is mandatory. [Mandatory 90+30
Day Period: The taxpayer affected may file an appeal
in one of two ways: (1) file the judicial claim within 30
days after the Commissioner denies the claim within
the 90-day period, or (2) file the judicial claim within
30 days from the expiration of the 90-day period if the
Commissioner does not act within such period.
Legal basis of tax refunds solutio indebitii and the
rules on quasi-contracts (prevention of unjust
enrichment)
Prescriptive period for recovery of tax
erroneously or illegally collected
Note: Under Sec. 229, there is no exception to the 2-
year prescriptive period.
Two-year period when counted:
From the date that the tax was paid.
How date of payment determined:
If the income tax is withheld at source payment
is at the end of the taxable year.
If the income is paid on a quarterly basis
payment is from the time of filing the final
adjustment return.
CIR vs. TMX Sales [G.R. No. 83736 (1992)]: 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
Page 203 of 290
TAXATION LAW
liability is completely paid. Installments should be
treated as advances or portions of the annual tax due.
c. Statutory Basis and Proof for Tax
Refund or Tax Credit [Sec.
204(C) and Sec. 229, NIRC]
Scope of claims for refund
The CIR may:
Credit or refund taxes erroneously or illegally received
or penalties imposed without authority;
Refund the value of internal revenue stamps when
they are returned in good condition by the purchaser;
and
In he CIR di cre ion, redeem or change n ed
stamps that have been rendered unfit for use and
refund their value upon proof of destruction
Necessity of proof for claim or refund
No credit or refund of taxes or penalties shall be
allowed unless the taxpayer files in writing with the
CIR a claim for credit or refund within two (2) years
after the payment of the tax or penalty. [Sec. 204,
NIRC]
A return filed showing an overpayment shall be
considered as a written claim for credit or refund.[Sec.
204, NIRC]
d. Proper Party to File Claim for
Refund or Tax Credit
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.
General Rule: The taxpayer must file a written claim for
refund stating a categorical demand for
reimbursement before the CIR within two years from
the date of payment. [Sec. 229, NIRC]
When it comes to recovery of unutilized input VAT,
Section 112 [two (2) years after the close of the
taxable quarter when the sales were made], 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
U.P. LAW BOC TAXATION II TAXATION LAW

Mirant. [CIR v. San Roque Power Corp, G.R. No 187485 Tax credit certificates (TCCs) can be applied against
(2013)] 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]

All tax credit certificates issued by the BIR shall not

Exceptions to requirement of a written claim: be allowed to be transferred or assigned to any [other]
When on the face of the return upon which payment person. [RR 14-11]
was made, such payment appears clearly to have been
erroneously paid (e.g., mathematical errors), the CIR
may refund or credit the tax even without a written
claim therefore. [Sec. 229, NIRC]

A return filed showing an overpayment shall be

considered as a written claim for credit or refund.
[Sec. 204(C), NIRC]

Note: Once the option to carry over and apply the

excess income tax payments to succeeding
quarters/year is taken, that option is irrevocable,
pursuant to the irrevocability rule found in Section 76
of the Tax Code.

Consequently, a taxpayer is barred from securing a

refund of, or tax credit certificate for, the excess
amount that it has initially opted to carry-over.

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
hir (30) da from he receip of he CIR
decision and within two years from the date of
payment.
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 CIR 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):

Page 204 of 290

U.P. LAW BOC TAXATION II
G.G R Grounds for Constructive Distraint:
1. Administrative Remedies
a. Tax Lien
1. When a taxpayer neglects or refuses to pay his
internal revenue tax liability after demand, the
amount so demanded shall be 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
CIR 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,
G.R. No. L-16014 (1921)]
b. Distraint and Levy
DISTRAINT OF PERSONAL PROPERTY
Distraint remedy enforced on the 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 [Sec. 205(a), NIRC]
Kinds of Distraint:
1. Constructive Distraint
2. Actual Distraint
RMC 5 wot
-
Constructive Distraint may be placed by the CIR
or any taxpayer to safeguard the interest of the
Government [Sec. 206, NIRC]. Delinquency of the
taxpayer is not necessary.
Page 205 of 290
TAXATION LAW
When in the opinion of the CIR,
1. the taxpayer is retiring from any business subject
to tax; or
2. the taxpayer is intending to leave the Philippines;
or
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 CIR.
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
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
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
U.P. LAW BOC TAXATION II
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 CIR 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 CIR 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)
Summary remedy of distraint of personal
property
1. Purchase by the government at sale upon
distraint
2. Report of sale to the Bureau of Internal Revenue
(BIR)
3. Constructive distraint to protect the interest of
the government
PROCEDURE FOR ACTUAL DISTRAINT
1. Commencement of Distraint Proceedings
Who issues the warrant of distraint:
a. CIR or his duly authorized representative
where the amount involved is more than
P1M
b. Revenue District Officer where the
amount involved is P1M or less [Sec. 207(A),
NIRC]
2. 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, expenses of
distraint and the cost of the subsequent sale. [Sec.
207(A), NIRC]
3. Report on the Distraint
A report shall be submitted by the distraining
officer to the Revenue District Officer, and to the
Revenue Regional Director.
Page 206 of 290
TAXATION LAW
4. Power of the CIR or proper officer to lift the
order of distraint
The taxpayer may request that the warrant be
lifted. The CIR 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]
5. Notice of Sale of Distrained Properties
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.
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]
6. Sale at Public Auction
a. 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 CASH or with the approval of
the CIR, through a DULY LICENSED
COMMODITY or STOCK
EXCHANGES.
b. 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
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]
c. If the proceeds from the sale of the
distrained properties are not sufficient to
satisfy the tax delinquency, the CIR or his
duly authorized representative shall within
thirty (30) days after execution of the
distraint, proceed with the levy on the
a pa er real proper . [Sec. 207(B), NIRC]
7. 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
U.P. LAW BOC TAXATION II
conducting the sale, the goods or effects
distrained shall be restored to the owner. [Sec.
210, NIRC]
8. 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 CIR 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 CIR or his deputy. [Sec. 212, NIRC]
9. 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 CIR and shall
himself preserve a copy of such report as an
official record. [Sec. 211, NIRC]
/SUMMARYREMEDY OF LEVY ON REAL
PROPERTY
1. 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]
2. 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 CIR 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 CIR or his deputy. [Sec. 212, NIRC]
3. 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 CIR and shall
himself preserve a copy of such report as an
official record. [Sec. 211, NIRC]
4. 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 to
Page 207 of 290
TAXATION LAW
the GOVERNMENT in satisfaction of the
claim. [Sec. 215, NIRC]
5. Redemption of Property Sold
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]
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
Go ernmen did no p rcha e he proper
anyway, it was forfeited)
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]
6. Final Deed of Purchaser
After the period of redemption, a final deed of
sale is issued in favor of the purchaser.
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]
c. Forfeiture of Real Property
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]
Instances when forfeiture is appropriate
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
U.P. LAW BOC TAXATION II
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]
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 CIR provides otherwise, the
Minimum Bid Price/Floor Price shall be the
latest fair market value as determined by the CIR
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 check in an amo n repre en ing
10% of the minimum bid price at least one day
before the scheduled public auction.
7. Unless the CIR allows extension of time to pay,
in meritorious cases, the winning bidder shall pay
the full amount of his bid ca h or manager
check within two days after receipt of notice of
award.
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
Page 208 of 290
TAXATION LAW
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 CIR
or his authorized representative.
13. The Government reserves the right to reject or
cancel any or all bids.
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 CIR when the sale or use would be
injurious to public health or 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 CIR
4. Forfeited property shall not be destroyed until at
least 20 days after seizure. [Sec. 225, NIRC]
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 CIR 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]
d. Suspension of Business
Operation
In addition to other administrative and penal
sanctions provided for in the Tax Code and
implementing regulations, the CIR 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:
1. Failure to issue receipts and invoices.
U.P. LAW BOC TAXATION II
2. Failure to file VAT return as required under the
provisions of Sec. 114 of the Tax Code.
3. Understatement of taxable sales or receipts by
30% or more of his correct taxable sales or
receipt for the taxable quarter.
4. Failure of any person to register as required under
the provisions of Sec. 236 of the Tax Code.
e. 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 this
Code. [Sec. 218, NIRC]
2. Judicial Remedies Civil or
Criminal Action
CIVIL ACTION
Two ways by which civil liability is enforced:
a. By filing a civil case for the collection of sum of
money with the proper regular court; and
b. By filing an answer to the petition for review filed
by the taxpayer with the Court of Tax Appeals.
[Mamalateo]
Criminal Action
Any person convicted of a crime under the Code
shall:
a. Be liable for the payment of the tax, and
b. Be subject to the penalties imposed under the
Code. [Sec. 253(A), NIRC]
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:
a. Shall be BROUGHT IN THE NAME OF THE
GOVERNMENT of the Philippines; and
b. Shall be CONDUCTED BY LEGAL
OFFICERS OF THE BIR
c. Shall be filed in court with the approval of the
CIR. [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 CIR. [Sec. 205,
NIRC]
Assessment not necessary before filing a criminal
charge for tax evasion
Page 209 of 290
TAXATION LAW
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,G.R. No. 128315 (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
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, G.R. No. L-20569 (1974)]
Payment of tax not defense
Payment of the tax due after a case has been filed shall
not constitute a valid defense in any prosecution for
violation of the provisions under the Code. [Sec.
253(A), NIRC]
Liability of person who aids or abets:
Any person who willfully aids or abets in the
commission of a crime penalized under the Code or
who causes the commission of any such offense by
another shall be liable in the same manner as the
principal. [Sec. 253(B), NIRC]
Offender Penalty
he shall be deported
Not a citizen of the
immediately after serving
Philippines
the sentence
the maximum penalty
prescribed for the offense
shall be imposed on him
shall be dismissed from
A public officer or
public office, and
employee
perpetually disqualified
from holding any public
office, to vote, and to
participate in any election
CPA his license shall be
automatically revoked or
U.P. LAW BOC TAXATION II TAXATION LAW

cancelled once he is
convicted
imposed on the partner,
president, general
Corporations, manager, branch manager,
associations, treasurer, officer-in-charge
partnerships etc. and employees
responsible for the
violation [Sec. 253, NIRC]

Minimum amount of fine:

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 and surcharges due
from the taxpayer, whichever is higher. [Sec. 253,
NIRC]

Prescriptive period for criminal action:

All violations of any provision of the Code shall
prescribe after five (5) years. [Sec. 281, NIRC]

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U.P. LAW BOC TAXATION II TAXATION LAW

III. LOCAL autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments. [Sec. 5, Art. X,
GOVERNMENT 1987 Constitution]

CODE OF 1991, AS Each local government unit shall exercise its power to
create its own sources of revenue and to levy taxes,
AMENDED fees, and charges subject to the provisions herein,
consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue exclusively
A. Local Government to the local government units. (Sec. 129, LGC)

Taxation b.rAuthority to Prescribe Penalties

for Tax Violations
/Fundamental Principles
1.
(UEPIP) Vested in the sanggunian
The sanggunian of a local government unit is
a. O
Taxation shall be Uniform in each local
government unit;
authorized to prescribe fines or other penalties for
violation of tax ordinances but in no case shall such
b. Taxes, fees, charges and other impositions shall: fines be less than One thousand pesos (P1,000.00) nor
(EPUC) more than Five thousand pesos (P5,000.00), nor shall
O
be Equitable and based as far as practicable
on the taxpayer's ability to pay;
imprisonment be less than one (1) month nor more
than six (6) months. Such fine or other penalty, or
both, shall be imposed at the discretion of the court.
purposes;
O
be levied and collected only for Public The sangguniang barangay may prescribe a fine of not

8
less than One hundred pesos (P100.00) nor more than
not be Unjust, excessive, oppressive, or One thousand pesos (P1,000.00). [Sec. 516, LGC]
confiscatory;
not be Contrary to law, public policy, c.-Authority to Grant Local Tax
national economic policy, or in the restraint
of trade; Exemptions
c. The collection of local taxes, fees, charges and
O
other impositions shall not be let to any Private
person;
LGUs may, through ordinances duly approved, grant
tax exemptions, incentives or reliefs under such terms
O
d. The revenue collected shall inure solely to the and conditions as they may deem necessary. [Sec. 192,
LGC]
benefit of, and be subject to the disposition by,
the local government unit levying the tax, fee,
charge or other Imposition, unless otherwise d.
- Withdrawal of exemptions
specifically provided herein; and,
e. Each local government unit shall, as far as Local tax exemptions, in general
O
Practicable, evolve a progressive system of General rule: Unless otherwise provided, tax
taxation. (SEC. 130, LGC) exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or judicial,
2. Nature and Source of Taxing including government-owned or controlled
corporations are withdrawn upon the effectivity of
Power the LGC. [Sec. 193, LGC]

a./Grant of Local Taxing Power * Exceptions: Tax exemptions not withdrawn

under the Local Government
Code
Each local government unit shall have the power to
create its own sources of revenues and subject to such
guidelines and limitations as the Congress may
provide, consistent with the basic policy of local
1. Local water districts
2. Cooperatives duly registered under R.A. No.
6938,
3. Non-stock and non-profit hospitals and
education institutions
Note: The LGC took effect on January 1, 1992.

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U.P. LAW BOC TAXATION II
[Sec. 193 is] an express and general repeal of all
statutes granting exemptions from local taxes,
withdrew the sweeping tax privileges previously
enjoyed by the National Power Corporation under its
Charter. [NPC v. Cabanatuan, G.R. No. 149110 (2003)]
Real property tax exemptions
General Rule: Any exemption from payment of real
property tax previously granted to, or presently
enjoyed by, all persons, whether natural or juridical,
including all government-owned or controlled
corporations are hereby withdrawn upon the
effectivity of the LGC.
Exceptions:
1. Real property owned by the Republic of the
Philippines or any of its political subdivisions
except when the beneficial use thereof has been
granted, for consideration or otherwise, to a
taxable person;
2. Charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, non-
profit or religious cemeteries and all lands,
buildings, and improvements actually, directly,
and exclusively used for religious, charitable or
educational purposes;
3. All machineries and equipment that are actually,
directly and exclusively used by local water
districts and government-owned or controlled
corporations engaged in the supply and
distribution of water and/or generation and
transmission of electric water;
4. All real property owned by duly registered
cooperatives as provided for under R.A. No.
6938; and
5. Machinery and equipment used for pollution
control and environmental protection. [Sec. 234,
LGC]
Note: Section 234 applies specifically to real property
tax exemptions, while Section 193 applies to
exemptions from all other local taxes.
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]
Page 212 of 290
TAXATION LAW
f. Residual Taxing Power of Local
Governments
LGUs may exercise the power to levy taxes, fees, or
charges on ANY base or subject not otherwise
specifically enumerated in the LGC or taxed under
NIRC or other applicable laws:
Requisites:
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); and
3. Subject to the limitations provided under Section
133 of the 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]
3. Local Taxing Authority
a. Power to Create Revenues
Exercised thru Local
Government Units [LGUs]
Each LGU shall exercise its power to create its power
to create its own sources of revenue and to levy taxes,
fees and charges subject to the provisions herein,
consistent with the basic policy of local autonomy.
[Sec. 129, LGC]
The power to impose a tax, fee, or charge or to
generate revenue under this Code shall be exercised
by the Sanggunian concerned through an appropriate
ordinance. [Sec. 132, LGC]
Ordinances issued in the exercise of such power, or
any particular item/s therein, 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]
 U.P. LAW BOC TAXATION II TAXATION LAW

b. Procedure for Approval and

Effectivity of Tax Ordinances 4. Scope of Taxing Power
A public hearing must be conducted prior to the LGU Scope of Taxing Power
enactment of a tax ordinance. [Sec. 187, LGC] May levy only:
Transfer of Real Property
Within ten (10) days after the approval of the Ownership [Sec. 135, LGC]
ordinance, certified true copies of all tax ordinances Business of Printing and
or revenue measures shall be published in full for Publication [Sec. 136, LGC]
three (3) consecutive days in a newspaper of local Franchise Tax [Sec. 137, LGC]
Provinces [Sec.
circulation. Tax on Sand, Gravel and Other
134, LGC]
Quarry Resources [Sec. 138, LGC]
In provinces, cities and municipalities where there are Professional Tax [Sec. 139, LGC]
no newspapers of local circulation, it must be posted Amusement Tax [Sec. 140, LGC]
in at least two (2) conspicuous and publicly accessible Annual Fixed Tax for every
places. [Sec. 188, LGC] delivery truck or van [Sec. 141,
LGC]
Copies shall be furnished the respective local May levy taxes, fees and charges
treasurers for public dissemination [Sec. 189, LGC] Municipalities not otherwise levied by provinces
[Sec. 142, LGC]
N.B. Requisites for substantive validity of an May levy taxes, fees and charges
ordinance: which the province or
Cities
1. It must not contravene the Constitution or any municipality may impose [Sec.
statute; 151, LGC]
2. It must not be unfair or oppressive; May levy only:
3. It must not be partial or discriminatory; Taxes on stores or retailers
4. It must not prohibit but may regulate trade; Service fees or charges
5. It must be general and consistent with public Barangays
Barangay clearance
policy; and Other fees and charges [Sec. 152,
6. It must not be unreasonable [Magtajas v. Pryce LGC]
Properties, G.R. No. 111097 (1994)]
But all LGUs may also impose reasonable service fees,
rates for operation of public utilities, and toll fees and
charges. (See letter e below) [Sec. 153-155, LGC]

5. Specific Taxing Power of LGUs

Tax on Transfer of Real Property (135)

(151)
Tax on Business of Printing and Publication (136)
Franchise tax (137)
Tax on sand, gravel and other quarry resources (138)
Professional tax (139)
Amusement tax (140)
Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or
(141)
Producers, Wholesalers of, Dealers, or Retailers in, Certain Products
Tax on Business (143)
Fees and charges on regulation/licensing of business and occupation (147)
Fees for Sealing and Licensing of Weights and Measures (148)
Fishery Rentals, Fees and Charges (149)
Community Tax (156)
Tax on Gross Sales or Receipts of Small-Scale Stores/Retailers (152a)

Page 213 of 290

 U.P. LAW BOC TAXATION II TAXATION LAW

Service Fees on the use of Barangay-owned properties (152b)

Barangay Clearance (152c)
Other Fees and Charges (on commercial breeding of fighting cocks,
cockfights, cockpits; places of recreation which charge admission fees; (152d)
outside ads)
Service Fees and Charges (153)
Public Utility Charges (154)
Toll Fees or Charges (155)
(w/in
Real Property Tax Metro
Manila)
May exceed the maximum rates allowed for the province or municipality 50%, except rates of professional and
amusement taxes [Sec. 151, LGC]

a. Taxing Powers of Provinces

Tax Imposed Rate/Amount Base Exemptions Others
Evidence of payment
of tax is to be
required by Register
of Deeds as a
requisite to
registration; and by
the provincial assessor
Total as a condition for
Sale, transfer, or
TAX ON TRANSFER OF acquisition price cancellation of old tax
other disposition of
REAL PROPERTY or fair market declaration.
real property
Imposed on the sale, donation, value if
Not more than pursuant to R.A.
barter, or any other mode of monetary value Notaries public shall
50% of 1% 6657
transfer of ownership or title is not furnish the provincial
(Comprehensive
to real property (Sec 135 substantial, treasurer with a copy
Agrarian Reform
LGC) whichever is of the subject deed
Law)
higher within 30 days from
notarization.

Tax must be paid 60

days from the date of
execution of deed or
from the date of
decedent's death.
TAX ON BUSINESS OF
PRINTING AND
PUBLICATION [Sec 136,
Printing by DECS
LGC]
Receipts from
Imposed on the business of
printing and/or
persons engaged in printing,
Gross annual publishing of books
and/or publication of books,
Not exceeding receipts for the and other reading
cards, posters, leaflets,
50% of 1% preceding materials prescribed
handbills, certificates, receipts,
calendar year by the DECS as
pamphlets, and others of
school texts or
similar nature
references
In the succeeding
Not exceeding Capital
Newly started business calendar year,
1/20 of 1% investment
regardless of when

Page 214 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

business started
operating, tax shall be
based on gross
receipts for preceding
calendar year, or any
fraction thereof.
FRANCHISE TAX [Sec 137,
LGC]
Notwithstanding any
exemption granted by any law
or any other special law, tax
may be imposed on business
enjoying a franchise
Gross annual
Note: The case of San Pablo v. receipts for the
Reyes [G.R. No. 127708 (1999)] preceding
states that the explicit language calendar year
Not exceeding
of Section 137 of LGC, which based on the
50% of 1
authorizes the province to incoming
impose franchise tax receipt, or
"notwithstanding any realized, within
exemption granted by any law its territorial
or other special law", is all- jurisdiction
encompassing and clear, even
ho gh he phra e in lie of
all a e i con ained in he
MERALCO franchise upon
the withdrawal of tax
exemptions in the LGC.
In the succeeding
calendar year,
regardless of when
business started
Not more than Capital
Newly-started business operating, tax shall be
1/20 of 1% investment
based on gross
receipts for preceding
calendar year, or any
fraction thereof.
Permit to extract
sand, gravel and other
TAX ON SAND, GRAVEL
quarry resources to be
AND OTHER QUARRY
issued exclusively by
RESOURCES.
Fair market the provincial
Levied on ordinary stones,
value in the governor pursuant to
gravel, earth and other quarry
locality per an Ordinance by the
resources as defined in the Not more than
cubic meter of Sangguniang
NIRC, extracted from public 10%
resources Panlalawigan
lands or from the beds of seas,
referred to in
lakes, rivers, streams, creeks,
Column 1 Distribution of
and other public waters within
proceeds:
its territorial jurisdiction (Sec
Province - 30%
138, LGC)
Component
City/Municipality

Page 215 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

where resources were
extracted - 30%
Barangay where
resources were
extracted - 40%
To be paid to the
province where the
profession is
practiced, or where a
principal office is
maintained.

A person who pays

for professional tax
may practice his
profession anywhere
in the country without
PROFESSIONAL TAX. being subjected to
Such amount as
Provinces may levy annual Such reasonable similar taxes.
the Sangguniang Professionals
professional tax on each classification by
Panlalawigan exclusively
person engaged in the exercise the Employers shall
may determine, employed by the
of a profession requiring Sangguniang require payment of
in no case to government
government examination (Sec Panlalawigan professional tax as a
exceed P300.00
139, LGC) condition for
employment and
annually thereafter.

Payable annually, on
or before Jan 31.

Any person first

beginning to practice
a profession after
January must pay the
full tax before
engaging therein.
AMUSEMENT TAX.
Holding of operas,
Collected from proprietors,
concerts, dramas, In case of theaters or
lessees, or operators of
recitals, painting, cinemas, tax shall first
theaters, cinemas, concert
and art exhibitions, be deducted and
halls, circuses, boxing stadia,
flower shows, withheld by their
and other places of
musical programs, proprietors, lessees
amusement (Sec 140, LGC) Not more than
Gross receipts literary and and operators
10% (amended
from admission oratorical
Note: The case of Alta Vista by RA 9640,
fees presentations Proceeds to be shared
Golf and Country Club v. City of 2009)
equally by the
Cebu [G.R. No. 180235 (2016)]
Exception to province and
states that golf courses are not
exemption: Pop, municipality where
subject to amusement tax
rock, or similar amusement places are
beca e people do no en er a
concerts located.
golf course to see or view a
show or performance.
TAX ON DELIVERY Amount not Every truck, Manufacturers,
TRUCK/VAN.. Imposed on exceeding P500 van, vehicle producers,

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U.P. LAW BOC TAXATION II TAXATION LAW

Tax Imposed Rate/Amount Base Exemptions Others

vehicles used for the delivery wholesalers, dealers
of distilled spirits, fermented and retailers referred
liquors, soft drinks, cigars and to in column 1 shall
cigarettes, and other products be exempt from tax
as may be determined by the on peddlers
sanggunian, to sales outlets, or
consumers in the province,
whether directly or indirectly
[Sec 141, LGC]

b. Taxing Powers of Cities

The City may levy taxes, fees, charges which the province or municipality may impose.
Those levied and collected by highly urbanized and independent component cities shall accrue to them and
distributed in accordance with the provisions of LGC.
Rates on levy made by the city may exceed the maximum rates allowed for the province or municipality by not
more than 50%; Exception: Rates of professional and amusement taxes. [Sec. 151, LGC]

c. Taxing Powers of Municipalities

TAX ON VARIOUS TYPES OF BUSINESSES [SEC. 143, LGC]
Manufacturers, assemblers,
repackers, processors, brewers, Section 143 [a], LGC, at a rate not
distillers, rectifiers, and
compounders of liquors, distilled or receipts for the preceding calendar
spirits, and wines or
manufacturers of any article of
commerce of whatever kind or
nature
Wholesalers, distributors, or
dealers in any article of
Rate/Amount and Base
In accordance with the schedule in
exceeding 37 ½% of 1% of gross sales
year
Schedule in Article 143 [b], LGC, at a
rate not exceeding 50% of 1% of gross
Other Information
Man fac rer incl de e er
person who:
by physical or chemical process,
alters the exterior texture or form or
inner substance of any raw material
or product in such manner as to
have been put in its original
condition, or
by any such process alters the
quality of such raw material or
product to reduce it to marketable
shape or prepare it for any of the use
of industry, or
by any such process combines such
material or product with others of
the same or of different kinds that
the finished products can be put to a
special use or uses to which such
material or products in their original
condition could not have been put,
and
alters such raw material or
manufactured or partially
manufactured products, or combines
the same to produce such finished
products for the purpose of their
sale or distribution to others and not
for his own use or consumption
[Sec. 131, LGC]

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U.P. LAW BOC TAXATION II TAXATION LAW

Rate/Amount and Base Other Information

commerce of whatever kind or sales or receipts for the preceding
nature calendar year
Exporters and on manufacturers, Not exceeding 1/2 of rates prescribed
millers, producers, wholesalers, in the schedule in Sec 143 [a, b, d],
distributor, dealers or retailers of LGC (Manufacturers. Wholesalers,
essential commodities Retailers)
enumerated below: [RWC-
CLAPS]
Rice and corn
Wheat and or cassava flour,
meat, dairy products, locally
manufactured, processed or
preserved food, sugar, salt, and
other agricultural, marine, and
fresh water products, whether in
original state or not
Cooking oil and cooking gas
Cement
Laundry soap, detergents, and
medicine
Agricultural implements.
equipment and post-harvest
facilities, fertilizers, pesticides,
insecticides, herbicides and other
farm inputs;
Poultry feeds and other animal
feeds;
School supplies
Retailers Gross sales or receipts for the Barangays have the exclusive power
preceding calendar year of: to tax gross receipts amounting to:
400k or less: 2% per annum 50k or less: in cities
more than 400k: 1% per annum 30k or less: in municipalities [Sec.
143 [d], Sec. 152, LGC]
Contractors and other In accordance with the schedule in Sec.
independent contractors 143 [e], LGC, at a rate not exceeding
50% of 1% of gross receipts for the
preceding calendar year
Banks and other financial Not exceeding fifty percent 50% of 1%
institutions on the gross receipts of the preceding
= calendar year from interest,
commissions and discounts from
lending activities, income from financial
leasing, dividends, rentals on property
and profit from exchange or sale of
property, insurance premium.
Peddlers engaged in the sale of Not exceeding P50.00 per peddler
any merchandise or article of annually.
commerce
Any business which the Catch-all provision.
sanggunian concerned may deem
proper to tax If on any business subject to excise,
value-added or percentage tax, rate
of tax shall not exceed 2% of gross

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 U.P. LAW BOC TAXATION II
Rate/Amount and Base
The Sanggunian concerned may prescribe a schedule of graduated rates but in no case to exceed the rates
prescribed herein
Ceiling on Business Tax Imposable on
Municipalities within Metro Manila
Such municipalities may levy taxes at rates which shall
not exceed by fifty percent (50%) the maximum rates
prescribed in sec 143. [Sec. 144, LGC]
TAX ON RETIREMENT ON BUSINESS
Upon termination of a business subject to tax under
Sec.143 and 144, a sworn statement of its gross sales
or receipts for the current year shall be submitted. If
the tax paid is less than the tax due, the difference
shall be paid before the business is considered
officially retired. [Sec. 145, LGC]
*
Sec 143 f
Banks & financial
RULES ON PAYMENT OF BUSINESS TAX
institutions 1. Taxes in Sec. 143 shall be paid for every separate
or distinct establishment or place where business
subject to tax is conducted.
2. One line of business is not exempted by being
conducted with some other businesses for which
such tax has been paid.
3. The tax on a business must be paid by the person
conducting it.
4. If a person operates 2 or more businesses
mentioned in Sec 143 which are taxed;
computation shall be based on:
a. combined total gross sales/receipts IF
subject to the same tax rate
b. separate reports on gross sales/receipts if
subject to different tax rates
Condominium corporations are not business entities,
and are thus not subject to local business tax. Even
though the corporation is empowered to levy
assessments or dues from the unit owners, these
amounts are not intended for the incurrence of profit
by the corporation, but to shoulder the multitude of
necessary expenses for maintenance of the
condominium. [Yamane vs. BA Lepanto Condominium
Corp., G.R. No. 154993 (1995)]
Business tax must be based on gross receipts, it being
different from gross revenue. The right to receive
income, and not the actual receipt determines when
to include the amount in gross income. [Ericsson
Telecoms vs. City of Pasig, G.R. No. 176667 (2006)]
Page 219 of 290
TAXATION LAW
Other Information
sales or receipts of the preceding
calendar year
FEES AND CHARGES FOR REGULATION &
LICENSING
General rule: As a condition to the conduct of business
or profession, the municipality may impose
reasonable fees and charges not yet imposed by the
province, commensurate with the cost of regulation,
inspection and licensing. [Sec. 147, LGC]
Exception: Professional tax in Sec. 139
Specific rules:
1. Municipality has power to impose reasonable
rates for sealing and licensing of weights and
measures [Sec. 148, LGC]
2. The Municipality has exclusive authority to grant
fishery privileges in municipal waters. The
sangguniang bayan may:
a. Grant fishery privileges to erect fish corrals,
oysters, mussels or other aquatic beds or
bangus fry areas, within a definite zone of the
municipal waters, as
b. Grant marginal fishermen the privilege to
gather, take or catch bangus fry, prawn fry or
kawag-kawag or fry of other species and fish
from the municipal waters by nets, traps or
other fishing gears free of rental, fee, charge
or imposition.
c. Issue licenses for the operation of fishing
vessels of three [3] tons or less
d. Penalize the use of explosives, noxious or
poisonous substances, electricity, muro-ami,
and other deleterious methods of fishing and
prescribe a criminal penalty therefor [Sec.
149, LGC]
SITUS OF TAX COLLECTED
According to Sec. 150 of the LGC, situs shall be
determined by the following rules:
RULE 1: In case of persons maintaining/operating a
branch or sales outlet making the sale or transaction,
the tax shall be recorded in said branch or sales outlet
and paid to the municipality/city where the branch or
sales outlet is located.
U.P. LAW BOC TAXATION II
RULE 2: Where there is NO branch or sales outlet
in the city/municipality where the sale is made, sale
shall be recorded in the principal office and the tax
shall be paid to such city/municipality.
RULE 3: In the case of manufacturers, contractors,
producers, and exporters having factories, project
offices, plants, and plantations, proceeds shall be
allocated as follows:
1. 30% of sales recorded in the principal office shall
be made taxable by the city/municipality where
the principal office is located
2. 70% shall be taxable by the city/municipality
where the factory, project office, plant, or
plantation is located
Illustration of Rules 1 to 3
A company has a principal office in Mandaluyong,
while its sales office and factory are in Sta. Rosa:
1. Sales made in Mandaluyong will be recorded
Mandaluyong;
2. Sales made in Sta. Rosa by the Sta. Rosa sales
office will be recorded in Sta. Rosa;
3. Sales made in Los Baños, Calamba or Cabuyao
[i.e., delivered to customers located in those
places and not made by the Sta. Rosa sales office],
will be recorded in Mandaluyong;
4. Aside from sales made in Sta. Rosa, 70% of sales
recorded in Mandaluyong shall be taxable by Sta.
Rosa since a factory is located there.
RULE 4: In case the plantation is located in a place
other than the place where the factory is located, the
70% in Rule 3 will be divided as follows:
60% to the city/municipality where the factory is
located
40% to the city/municipality where the
plantation is located
RULE 5: In case of 2 or more factories, plantations,
etc. in different localities, the 70% shall be prorated
among the localities where the factories, plantations,
etc. are located in proportion to their respective
volume of production.
Illustration:
A company has a principal office in Valenzuela and
has its factory in Bulacan. It also has branches selling
merchandise in Muntinlupa, Bacolod, Cebu.
1. Sales made in Valenzuela will be recorded in
Valenzuela;
2. Sales made in Muntinlupa, Bacolod and Cebu
shall be taxable by the said cities;
Page 220 of 290
TAXATION LAW
3. Sales in all other places which do not have a sales
branch shall be distributed as follows: 30% to
Valenzuela and 70% to Bulacan.
Note: The sales allocation shall be applied irrespective
of whether or not sales are made in the locality where
the factory, project office, plant, or plantation is
located.
Excise Tax: Tax is imposed on the performance of
an act or occupation, enjoyment of a privilege. The
power to levy such tax depends on the place in which
the act is performed or the occupation is engaged in;
not upon the location of the office. [Allied Thread Co.,
Inc. v. City Mayor of Manila, G.R. No. L-40296 (1984)]
Sales Tax: It is the place of the consummation of the
sale, associated with the delivery of the things which
are the subject matter of the contract that determines
the situs of the contract for purposes of taxation, and
not merely the place of the perfection of the contract.
[Shell Co., Inc. v. Municipality of Sipocot, Camarines Sur,
G.R. No. L-12680 (1959)]
Branch or Sales Office a fixed place in a locality
which conducts operations of the business as an
extension of the principal office. Offices used only as
display areas of the products where no stocks or items
are stored for sale, although orders for the products
may be received thereat, are not branch or sales
offices as herein contemplated. A warehouse which
accepts orders and/or issues sales invoices
independent of a branch with sales office shall be
considered as a sales office. [Art. 243(a)(2) of the LGC
IRR]
d. Taxing Powers of Barangays
The following shall exclusively accrue to the
barangays:
1. Taxes on Stores or Retailers with Fixed Business
Establishments.
a. Rate: not greater than one percent (1%)
b. Base:
1. Cities: gross sales or receipts of the
preceding calendar year of P50,000.00
or less
2. Municipalities: gross sales or receipts of
P30,000.00 or less
2. Service Fees or Charges. For services rendered in
connection with the regulations or the use of
barangay-owned properties or facilities such as
palay, copra, or tobacco dryers.
U.P. LAW BOC TAXATION II TAXATION LAW

3. Barangay Clearance. A city or municipality

cannot issue a permit for business without a 3. Toll fees or charges
clearance from the barangay concerned. The a. The sanggunian may prescribe the terms and
sangguniang barangay may impose a reasonable fee conditions and fix the rates for the
on the clearance. imposition of toll fees or charges for the use
4. Other Charges Allowed. of any public road, pier, or wharf, waterway,
a. charges on commercial breeding of fighting bridge, ferry or telecommunication system
cocks, cockfights and cockpits; funded and constructed by the local
b. charges on places of recreation which charge government unit concerned.
admission fees; and
c. charges on billboards, signboards, neon b. The sanggunian may also discontinue the
signs, and outdoor advertisements. [Sec. 152, collection of the tolls when public safety and
LGC] welfare requires.
c. No toll fees or charges shall be collected
e. Common Revenue Raising from:
1. Officers and enlisted men of the AFP
Powers and members of the PNP on mission
2. Post office personnel delivering mail
1. Service fees and charges 3. Physically-handicapped
LGUs may impose and collect such reasonable 4. Disabled citizens who are sixty-five (65)
fees and charges for services rendered. [Sec. 153, years or older. [Sec. 155, LGC]
LGC]

2. Public utility charges

LGUs may fix the rates for the operation of
public utilities owned, operated and maintained
by them within their jurisdiction. [Sec. 154, LGC]

f. Community Tax
Who may levy
Cities or municipalities
[Sec. 156, LGC]
1. Individuals who are:
Inhabitants of the Philippines
18 years of age or over
Either:
Regularly employed on a wage or salary basis for at least 30 consecutive
Persons Liable working days during any calendar year
[Sec. 157 & 158, Engaged in business or occupation
LGC] Owns real property with an aggregate assessed value of P1,000 or more
Is required by law to file an income tax return
2. Juridical Persons
Every corporation no matter how created or organized,
Whether domestic or resident foreign,
Engaged in or doing business in the Philippines
1. Individuals
a. Annual community tax of P5.00 PLUS annual additional tax of P1.00 per
P1,000.00 of income regardless whether from business, exercise of profession or
Rates [Sec. 157 & property
158, LGC] b. Never to exceed P5000
c. Husband and wife shall pay a basic tax of P5.00 each PLUS additional tax based
on total property owned by them and the total gross receipts or earnings derived
therefrom

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U.P. LAW BOC TAXATION II TAXATION LAW

2. Juridical Persons
a. Annual community tax of P500.00 PLUS annual additional tax of not more than
P10,000.00 according to the ff. schedule:
P2.00 for every P5,000 worth of real property in the Philippines owned
during the preceding year based
P2.00 for every P5,000.00 of gross receipts derived from business in the
Philippines during the preceding year.
b. Dividends received by a corporation from another corporation shall be deemed
part of the gross receipts or earnings for purposes of computing additional tax.
Persons Exempt 1. Diplomatic and consular representatives
[Sec. 159, LGC] 2. Transient visitors who stay in the Philippines for not more than 3 months
Place of Payment
Where individual resides, or where the principal office of the juridical entity is located.
[Sec. 160, LGC]
Accrues on the 1st day of January of each year to be paid not later than the last day of
February of each year.

If a person reaches 18 years of age or otherwise loses the benefit of exemption on or

before June 30, he shall be liable on the day he reaches such age or upon the day the
exemption ends; if on or before the March 31, he shall have 20 days to pay without being
Time of Payment
delinquent. Persons who come to reside in the Philippines, or reach 18 years old, or ceases
[Sec 161, LGC]
to belong to an exempt class on or after July 1, shall not be subject to community tax for
that year.

Corporations established and organized on or before June 30 shall be liable to community

tax for that year; those on or before March 31 shall have 20 days to pay without becoming
delinquent; if on or after July 1, shall not be subject to community tax for that year.
If unpaid within the prescribed period, an interest of 24% shall be added per annum from
Penalty
the due date until payment. [Sec. 161, LGC]

Presentation of Community Tax Certificate is
necessary when an individual subject to
community tax:
1. Acknowledges any document before a notary
public
2. takes the oath of office upon election or
If: actually and directly collected by the city or
municipal treasurer, community tax accrues entirely to
the general fund. If: collected through the barangay
treasurers, apportioned equally. [Sec. 164, LGC]
6. Common Limitations on the

appointment to any position in the government
service
3. receives any license, certificate, or permit from
any public authority
4. pays any tax or fee
5. receives any money from any public fund
6. transacts other official business
7. receives any salary or wage from any person or
commission
Presentation of certificate is not needed in the
registration of a voter. [Sec. 163, LGC]
The city or municipal treasurer shall deputize the
barangay treasurers to collect, provided the latter be
bonded.
÷
Taxing Powers of LGUs
Unless otherwise provided, the following cannot be
levied by the local governments: [IDEC-GAPEP-
GRR-ECN]:
a. Income tax, except when levied on banks and
other financial institutions;
b. Documentary stamp tax;
c. Estate tax, inheritance, gifts, legacies and other
acquisitions mortis causa, except as otherwise
provided;
d. O 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;

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U.P. LAW BOC TAXATION II TAXATION LAW

e. Taxes, fees or charges on Goods carried into or Doctrine of Preemption. Preemp ion in he ma er
out of, or passing through, the territorial of taxation simply refers to an instance where the
jurisdictions of local government units in the national government elects to tax a particular area,
guise of charges for wharfage, tolls for bridges or impliedly withholding from the local government the
otherwise, or other taxes, fees, or otherwise delegated power to tax the same field. This doctrine
primarily rests upon the intention of Congress.
Sec.133(e) prohibits the imposition, in the guise Conversely, should Congress allow municipal
of wharfage, of fees, as well as all other taxes or corporations to cover fields of taxation it already
charges in any form whatsoever, on goods or occupies, then the doctrine of preemption will not
merchandise. It is therefore irrelevant if the fees appl . [Victorias Milling v. Municipality of Victoria, G.R.
imposed are actually for police surveillance on No. L-21183 (1968)]
the goods, because any other form of imposition
on goods passing through the territorial 7. Collection of Business Tax
jurisdiction of the municipality is clearly
prohibited. [See Palma Development Corp. v.
Municipality of Managas, G.R. No. 152492 (2003)] a. Tax Period and Manner of
Payment
f. Taxes, fees or charges on Agricultural and aquatic
products when sold by marginal farmers or Based on calendar year, unless otherwise provided.
fishermen;
g. Taxes on business enterprises certified to by the May be paid annually or in quarterly instalments. [Sec.
Board of Investments as Pioneer or non-pioneer 165, LGC]
for a period of 6 and 4 years, respectively from
the date of registration;
h. Excise taxes on articles enumerated under the
b. Accrual of Tax
NIRC, as amended, and taxes, fees or charges on
General rule: Accrues on the first day of January of each
petroleum products;
year
i. Percentage or VAT on sales, barters or
exchanges or similar transactions on goods or
Except: New taxes, fees or charges, or changes in the
services except as otherwise provided herein;
rates thereof which shall accrue on the first day of the
j. Taxes on the Gross receipts of transportation
quarter next following the effectivity of the ordinance
contractors and persons engaged in the
imposing such new levies or rates. [Sec. 166, LGC]
transportation of passengers or freight by hire
and common carriers by air, land or water, except
as provided in the Code; c. Time of Payment
k. Taxes on premiums paid by way or Reinsurance
or retrocession; Within the 20 days of January or of each subsequent
l. Taxes, fees or charges for the Registration of quarter. [i.e., Jan 20, Apr 20, July 20, and Oct 20]. It
motor vehicles and for the issuance of all kinds may be extended by the sanggunian for justifiable
of licenses or permits for the driving thereof, reasons, without surcharges or penalties. Extension
except tricycles; cannot exceed 6 months. [Sec. 167, LGC]
m. Taxes, fees, or other charges on Philippine
products actually Exported, except as otherwise d. Penalties on Unpaid Taxes, Fees
provided;
n. Taxes, fees, or charges, on Countryside and
or Charges
Barangay Business Enterprises and cooperatives
1. Surcharge not exceeding 25% on taxes, fees or
duly registered under the Cooperative Code of
charges NOT paid on time; and
the Philippines; and
2. Interest not exceeding 2% per month of the
o. Taxes, fees or charges of any kind on the
unpaid taxes, fees or charges including
National Government, its agencies and
surcharges, until the amount is fully paid
instrumentalities, and local government units.
3. In no case shall the total interest exceed 36
[Sec. 133, LGC]
months. [Sec. 168, LGC]

Page 223 of 290

U.P. LAW BOC TAXATION II
e. Authority of Treasurer in
Collection and Inspection of
Books
All local taxes, fees and charges shall be collected by
the local treasurer or their duly authorized deputies
[Sec. 170, LGC]
The local treasurer may, by himself or through his
deputies duly authorized in writing, examine the
books, accounts, and other pertinent records of any
person subject to local taxes, fees and charges in order
to ascertain, assess and collect the correct amount of
the tax, fee or charge.
Examination must be done during business hours,
only once for every tax period and shall be certified to
by the examining official. [Sec. 171, LGC]
8. Ta a R
a. Periods of Assessment and
Collection of Local Taxes, Fees
or Charges
Assessment: Within 5 years from the date they
become due
In case of Fraud or Intent to Evade Tax: Within
10 years from discovery of fraud or intent to evade
payment. [Sec. 194, LGC]
Collection: 5 years from the date of assessment by
administrative or judicial action. No such action shall
be instituted after the expiration of said period.
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 60 days from the receipt of the notice of
assessment issued by the local treasurer or his duly
authorized representative, the taxpayer may file a
Page 224 of 290
TAXATION LAW
written protest with the local treasurer contesting the
assessment; otherwise it shall become final and
executory. The local treasurer shall decide within 60
days from the time of filing.
If the protest is found to be wholly or partly
meritorious, a notice cancelling wholly or partially the
assessment will be issued. If the protest was denied or
when the 60-day period already lapsed, the taxpayer
shall have 30 days from the receipt of denial or the
end of the 60-day period to appeal with the court of
competent jurisdiction; otherwise, the assessment
becomes conclusive and unappealable. [Sec. 195,
LGC]
The court of competent jurisdiction where an appeal
can be made is the Regional Trial Courts then Court
of Tax Appeals via a Petition for Review to the CTA
Division under Rule 42 (if from RTC acting original),
or Petition for Review under Rule 43 (if from RTC
acting in its appellate jurisdiction).
c. Question the newly enacted
ordinance
Procedure:
1. Appeal within 30 days from effectivity of the
ordinance to the Secretary of Justice
2. Secretary must render a decision within 60 days
from receipt of appeal
3. Within 30 days from the lapse of the 60 days
without any action from the Secretary of Justice,
or within 30 days from receipt of decision, the
aggrieved taxpayer may go to court
NOTE: Secretary of Justice can only review the
constitutionality or legality of the tax ordinance, and,
if warranted, to revoke it on either or both of these
grounds and there is no need for a written protest
when disputing an ordinance [Ingles, p. 537]
d. Claim for Refund of Tax Credit
for Erroneously or Illegally
Collected Tax, Fee or Charge
Requires a written claim for refund or credit to be
filed with local treasurer before protest is entertained,
which must be brought within 2 years from payment
of tax or from the date the taxpayer became entitled
to refund or credit. After the expiration of the 2-year
period, no case or proceeding shall be entertained in
any court. An appeal can be filed before the court of
U.P. LAW BOC TAXATION II
competent jurisdiction 30 days from receipt of denial
of claim. [Sec. 196, LGC]
9. Civil Remedies by the LGU
for Collection of Revenues
a. L a G L Further distraint or levy
Delinquent Taxes, Fees or
Charges
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.
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
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
LEVY OF REAL PROPERTY: Levy upon Real
Property and Interest in or Rights to Real
Property
Procedure [Sec. 176, LGC]
a. Preparation of a duly authenticated certificate by
the LGU Treasurer effecting the levy on the real
property
b. Service of written notice of levy to the assessor,
Register of Deeds, and delinquent taxpayer
Page 225 of 290
TAXATION LAW
(agent if absent from the Philippines, or occupant
of the property in question if none)
c. Report on any levy
d. Annotation of the levy on the tax declaration and
the certificate of title
e. Advertisement and Sale [Sec. 178, LGC]
The remedies by distraint or levy may be repeated if
necessary until the full amount due, including all
expenses, is collected [Sec. 184, LGC]
Note: Either of these remedies or all may be pursued
concurrently or simultaneously at the discretion of the
local government unit concerned [Sec. 174, LGC]. In
case the levy on real property is not issued before or
simultaneously with the warrant of distraint on
personal property, and the personal property of the
taxpayer is not sufficient to satisfy his delinquency,
the provincial, city or municipal treasurer, as the case
may be, shall within thirty (30) days after execution of
the distraint, proceed with the levy on the taxpayer's
real property. [Sec. 176, LGC]
Exemption of personal property from distraint or
levy (ToB-CUPLA)
a. Tools and implements necessarily used by the
taxpayer in his trade or employment
b. One horse, cow, carabao, or other Beast of
burden, such as the delinquent taxpayer may
select and 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
Appeal before the Secretary of Justice
(Procedure)
a. Appeal to the Secretary of Justice within 30 days
from effectivity
b. The Secretary of Justice has 60 days to decide but
an appeal does not suspend the effectivity of the
ordinance
 U.P. LAW BOC
I
c. Wi hin 30 da from he Secre ar of J ice
decision or after 60 days inaction, an appeal may
0
be filed with the RTC. [Sec. 187, LGC]
Penalty on local treasurer for failure to issue and
execute warrant of distraint or levy
Automatically dismissed from the service after due
notice and hearing [Sec. 177, LGC]
2. Judicial Action
The local government may institute an ordinary civil
action with regular courts of proper jurisdiction for
the collection of delinquent taxes, fees, charges or
other revenues.
The civil action shall be filed by the local treasurer.
[Sec. 183, LGC]
LGC does not contain a provision prohibiting courts
from enjoining the collection of local taxes. Such
lapse may have allowed preliminary injunction under
Rule 58, ROC where local taxes are involved. [Valley
Trading Co. vs. CFI of Isabela, G.R. No. L-49529(1989);
Angeles City v. Angeles City Electric Corporation, G.R. No.
166134 (2010)]
Page 226 of 290
TAXATION II TAXATION LAW
B. Real Property Taxation
1. Fundamental Principles
a. 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]
b. Actual use shall be the basis of classification for
assessment
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.
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]
MCIAA v. Marcos [G.R. No. 120082 (1996)]:
U age mean direc , immedia e and ac al
application of the property
c. Private persons cannot be left to the appraisal,
assessment, levy and collection of real property
tax.
d. Uniform classification within each local
government unit shall be observed.
e. equitable appraisal and assessment is required.
[Sec. 197, LGC]
2. Nature of Real Property Tax
a. It is a direct tax on the ownership or use of real
property.
b. It is an ad valorem tax. Value is the tax base.
c. It is proportionate because the tax is calculated
on the basis of a certain percentage of the value
assessed.
d. It creates a single, indivisible obligation.
e. It attaches on the property [i.e., a lien] and is
enforceable against it.
f. With respect to LGUs, it is levied thru a delegated
power
U.P. LAW BOC
3. Imposition of Real Property
Tax
a. Power to Levy Real Property Tax
A province or city or a municipality within the
Metropolitan Manila Area may levy an annual ad
valorem tax on real property such as land, building,
machinery, and other improvement not hereinafter
specifically exempted. [Sec. 232, LGC]
The following may levy real property tax:
1. Province
2. City
3. A municipality within the Metro Manila area
Coverage; for a Province, or a City or
Municipality within Metro Manila
1. Land
2. Building
3. Machinery
4. Other improvements not specifically exempted
[Sec. 232, LGC]
The rate shall be as follows:
1. Province: not exceeding one percent (1%) of the
assessed value of real property; and
2. 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 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
Lands covered
1. Agricultural Lands
More than one hectare in area suitable for
cultivation, dairying, inland fishery, and other
agricultural uses, one-half of which remain
uncultivated or unimproved
2. Other than Agricultural
More than one thousand square meters in area
one half of which remain unutilized or
unimproved [Sec. 236 and 237, LGC]
3. Residential lots in subdivisions
Regardless of land area; lot owner shall be liable
if ownership of the lot has been transferred;
otherwise, developer shall be liable for the
additional tax.
Page 227 of 290
TAXATION II TAXATION LAW
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 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
5 nor more than 10 years.
The sanggunian may fix different rates for different
parts or sections thereof, depending on whether such
land is more or less benefited by the proposed work.
[Sec. 241, LGC]
Special Education Fund (SEF)
A province, or city or municipality within Metro
Manila may levy and collect an annual tax of one
percent (1%) on the assessed value of real property
which shall be in addition to the basic real property
tax.
b. Exempt from Real Property Tax
1. Owned by the Republic of the Philippines or any
of its political subdivisions except when
beneficial use is granted for a consideration or to
a taxable person.
2. Charitable institutions, churches, parsonages, or
convents appurtenant thereto, mosques, non-
profit or religious cemeteries, and all lands,
buildings, and improvements actually, directly
and exclusively used for religious, charitable, or
educational purposes.
3. Machinery and equipment actually, directly and
exclusively used by local Water utilities and
GOCCs engaged in the supply and distribution
of water and/or generation and transmission of
electric power.
4. Real property owned by duly registered
cooperatives as provided for under Republic Act
No. 6938 [Cooperative Code of the Philippines].
5. Machinery and equipment used for pollution
control and Environmental protection. [Sec. 234,
LGC]
U.P. LAW BOC TAXATION II TAXATION LAW

Provision
SC Ruling
Provincial Assessor of Marinduque v. CA [G.R. No. involved
170532 (2009)]: A claim for exemption under Sec. 234 Mactan The Mactan
(e) should be supported by evidence that the property Airport Airport is a
sought to be exempt is actually, directly and Authority government
exclusively used for pollution control and vs. City of instrumentality;
environmental protection. Lapu- only portions of
Lapu, the land leased to
Proof of Exemption G.R. taxable persons
1. Documentary evidence such as affidavits, by- No. like private parties
laws, contract, articles of incorporation 181756 are subject to real
2. Given to local assessor (2015) estate tax.
3. Within 30 days from date of declaration
4. Failure to file, will be listed as in Assessment Charitable Institutions
Rolls as taxable A charitable institution does not lose its character and
its exemption simply because it derives income from
GOCCs paying patients so long as the money received is
GOCCs are not covered by the exemption since the devoted to the charitable object it was intended to
exemption only refers to instrumentalities without achieve, and no money inures to the benefit of
personalities distinct from the government. [Philippine persons managing the institution. [Lung Center of the
Ports Authority vs. City of Iloilo, G.R. No. 109791 (2003)] Philippines vs. Quezon City, G.R. No. 144104 (2004)]

Provision Property leased to private entities is not exempt from

SC Ruling
involved RPT, as it is not actually, directly and exclusively used
Sec 133 (o), for charitable purposes. Portions of the land occupied
LGC. LGUs by the hospital and portions used for its patients,
not allowed to whether paying or non-paying, are exempt from real
le [o] property taxes.
taxes/fees/
charges of any
Mactan kind on the Airport Authority
4. Appraisal and Assessment of
Airport na ional go , is a GOCC, not Real Property Tax
Authority its agencies, exempt from RPT.
vs. instrumentalities Legislature in a. Rule on Appraisal of Real
Marcos, and LGUs. amending the law
G.R. specifically deleted Property Tax at Fair Market
No. Sec 234 (a), GOCCs from the Value
1120082 LGC. Properties enumeration in
(1996) exempt from Sec 234 (a). All real property shall be appraised at the current and
RPT: real fair market value prevailing at the locality where the
properties property is situated. [Sec. 201, LGC]
owned by the
Republic or any FMV is the price at which property may be sold by a
of its political seller who is not compelled to sell and bought by a
subdivisions. buyer who is not compelled to buy. [Sec. 199(l), LGC]
Manila MIAA falls under
Airport the term b. Declaration of Real Property
Authority instrumentality
Sec 133 (o), LGC
vs. CA, outside the scope Declaration by the Owner or Administrator
G.R. of LGS local Prepare a sworn statement declaring the true value of
Sec 234 (a), LGC
No. taxing powers the property which shall be the current and fair
155650 under Sec 133[o]. market value of the property.
(2006)

Page 228 of 290

U.P. LAW BOC TAXATION II
It must contain a sufficient description of the
property to enable the assessor or his deputy to
identify the same for assessment purposes
The declaration must be filed with the assessor once
every three (3) years during the period from January 1
to June 30. [Sec. 202, LGC]
Declaration by Any Person Acquiring Real
Property or Making Improvements
The sworn statement declaring the true value of the
property must be filed to the provincial, city or
municipal assessor within sixty [60] days after the
acquisition or upon completion or occupancy of the
improvement, whichever comes earlier. [Sec. 203,
LGC]
Declaration by the Provincial or City or
Municipal Assessor
When the person required to file the sworn
declaration refuses or fails to make such declaration,
the provincial, city or municipal assessor shall declare
the property in the name of the defaulting owner.
Notice of Transfer of Real Property
Any person who shall transfer real property
ownership to another shall notify the provincial, city
or municipal assessor within sixty [60] days from the
date of such transfer.
The notification shall include:
1. Mode of transfer,
2. Description of the property alienated, and
3. Name and address of the transferee [Sec. 208,
LGC]
c. Listing of Real Property in the
Assessment Rolls
The local assessor must maintain an assessment roll
wherein all real property, whether taxable or exempt,
located within the territorial jurisdiction of the LGU,
is listed.
Real property in general
Shall be listed, valued and assessed in the name of the
owner or administrator, or anyone having legal
interest in the property.
For undivided real property
May be in the name of the estate or of the heirs and
devisees, or in the name of one or more co-owners
Page 229 of 290
TAXATION LAW
Real property of a corporation, partnership or
association
Same manner as an individual
Real property owned by the Republic of the
Philippines, its instrumentalities, political subdivision,
the beneficial use has been granted to a taxable
person
In the name of the possessor, grantee or of the public
entity if such property has been acquired or held for
resale or lease. [Sec. 205, LGC]
d. Preparation of Schedules of FMV
Authority of assessor to take evidence
The assessor of the province, city or municipality or
his deputy may summon the owners or persons
having legal interest therein and witnesses, administer
oaths, and take deposition concerning the property,
its ownership, amount nature, and value. [Sec. 213,
LGC]
Amendment of schedule of fair market value
Before any general revision of property assessment is
made, there shall be prepared a schedule of FMV by
the provincial, city or municipal assessors; which shall
be published in a newspaper of general circulation or
in the absence thereof, shall be posted in the
provincial capital, city or municipal hall and in two
other conspicuous public places therein. [Sec. 212,
LGC]
e. Classes of Real Property
1. Residential Is land principally devoted to
habitation
2. Agricultural Is land devoted principally to the
planting of trees, raising of crops, livestock and
poultry, dairying, salt making, inland fishing and
similar aquaculture activities and other
agricultural activities and is not classified as
mineral, timber, residential, commercial or
industrial land
3. Commercial Is land devoted principally for
the object of profit and is not classified as
agricultural, industrial, mineral, timber or
residential land
4. Industrial Is land devoted principally to
industrial activity as capital investment and is not
classified as agricultural, commercial, timber,
mineral or residential land
U.P. LAW BOC TAXATION II TAXATION LAW

5. Mineral Are lands in which minerals exist in Machinery

sufficient quantity or grade to justify the
necessary expenditures to extract and utilize such
minerals
6. Timberland
7. Special all lands, buildings and other
improvements actually, directly and exclusively
used for hospitals, cultural, or scientific purposes,
and those owned and used by local water
districts, and GOCCs rendering essential public
services in the supply and distribution of water
and/or generation and transmission of electric
power [Sec. 216, LGC]
N.B. The Local Government Code contains no
defini ion of he erm real proper . Therefore,
reference should be made to the enumeration of real
property under Art. 415 of the Civil Code, as follows:
1. Land, buildings, roads and constructions of all
kinds adhered to the soil;
2. Trees, plants, and growing fruits, while they are
attached to the land or form an integral part of an
immovable;
3. Everything attached to an immovable in a fixed
manner, in such a way that it cannot be separated
therefrom without breaking the material or
deterioration of the object;
4. Statues, reliefs, paintings or other objects for use
or ornamentation, placed in buildings or on lands
by the owner of the immovable in such a manner
that it reveals the intention to attach them
permanently to the tenements;
5. Machinery, receptacles, instruments
implements intended by the owner of the
tenement for an industry or works which may be
carried on in a building or on a piece of land, and
which tend directly to meet the needs of the said
industry or works;
6. Animal houses, pigeon-houses, beehives, fish
ponds or breeding places of similar nature, in case
their owner has placed them or preserves them
with the intention to have them permanently
attached to the land, and forming a permanent
part of it; the animals in these places are included;
7. Fertilizer actually used on a piece of land;
8. Mines, quarries, and slag dumps, while the matter
thereof forms part of the bed, and waters either
running or stagnant;
9. Docks and structures which, though floating, are
intended by their nature and object to remain at
a fixed place on a river, lake, or coast;
10. Contracts for public works, and servitudes and
other real rights over immovable property.
The FMV is the acquisition
cost
If the machinery is imported,
the acquisition cost includes
freight, insurance, bank and
Brand New other charges, brokerage,
arrastre and handling, duties
and taxes, plus cost of inland
transportation, handling, and
installation charges at the
present site. [Sec. 224, LGC]
FMV is determined by
dividing the remaining
economic life of the
All other machinery by its estimated
Cases economic life and multiplied
by the replacement/
reproduction cost. [Sec. 224,
LGC]
Rate not exceeding five
percent (5%) of its original
cost or replacement cost, for
each year of use
Depreciation The remaining value shall be
Allowance fixed at not less than twenty
percent (20%) of such
original, replacement or
reproduction cost for so long
as the machinery is useful and
in operation. [Sec. 225, LGC]
or
f. Actual Use of Property as Basis
of Assessment
Real property shall be classified, valued and assessed
on the basis of actual use regardless of where located,
whoever owns it, and whoever uses it. [Sec. 217,
LGC]
Unpaid realty taxes attach to the property and are
chargeable against the person who had actual or
beneficial use and possession of it regardless of
whether or not he is the owner. To impose the RPT
on the subsequent owner which was neither the
owner nor the beneficial user of the property during
the designated periods would not only be contrary to
law but also unjust. [Estate of Lim v. City of Manila, G.R.
No. 90639 (1990)]

Page 230 of 290

U.P. LAW BOC TAXATION II
g. Assessment of Real Property
Assessment levels
Assessment level is the percentage applied to the
fair market value to determine the taxable value of the
property [Sec. 199(g), LGC]
Assessment levels shall be fixed by ordinances of the
sanggunian at rates not exceeding those prescribed in
Sec. 218
Assessed Value/ Taxable Value = Fair Market
Value x Assessment Level [Sec. 199(h), LGC]
General revisions of assessments and property
classification
The local assessor shall undertake a general revision
of real property assessments every 3 years. [Sec. 219,
LGC]
Date of effectivity of assessment or reassessment
General rule: All assessments or reassessments made
after the first day of January of any year shall take
effect on the first day of January of any year
Exceptions: Reassessments due to
1. partial or total destruction
2. major change in actual use;
3. great and sudden inflation or deflation of real
property values;
4. gross illegality of the assessment when made; or
5. any other abnormal cause shall be made within
ninety (90) days from the date of any cause and
shall take effect at the beginning of the quarter
next following the reassessment. [Sec. 221, LGC]
Assessment of property subject to back taxes
Property declared for the first time: assessed for taxes
for the period during which it would have been liable
but in no case for more than ten [10] years prior to
the date of initial assessment [Sec. 222, LGC]
Notification of new or revised assessment
When real property is assessed for the first time or
when an existing assessment is increased or decreased,
the local assessor shall within thirty [30] days give
written notice of the new or revised assessment to the
person in whose name the property is being declared.
Notice may be given personally or by registered mail
or through the assistance of the punong barangay to the
last known address of the person to be served. [Sec.
223, LGC]
Page 231 of 290
TAXATION LAW
5. Collection of Real Property
Tax
a. Date of Accrual of Real Property
Tax and Special Levies
Real property tax for any year shall accrue on the first
day of January. [Sec. 246, LGC]
b. Collection of Tax
Collecting authority: The local treasurer
He may deputize the barangay treasurer to collect all
taxes upon filing of a bond. [Sec. 247, LGC]
Duty of assessor to furnish local treasurer with
assessment rolls
The provincial, city or municipal assessor shall
prepare and submit to the local treasurer, on or before
the 31st day of December each year, an assessment
roll containing a list of all persons whose real
properties have been newly assessed or reassessed and
the values of such properties. [Sec. 248, LGC]
Notice of time for collection of tax
On or before the 31st of January or on any date
prescribed, the local treasurer shall post the notice of
the dates when the tax may be paid without interest at
a conspicuous and publicly accessible place at the city
or municipal hall.
The notice shall also be published in a newspaper of
general circulation in the locality once a week for two
consecutive weeks. [Sec. 249, LGC]
c. Period Within Which to Collect
Real Property Tax
Within five years from the date they become due.
Within ten years from discovery of fraud, in case there
is fraud or intent to evade.
It shall be suspended when:
1. The local treasurer is legally prevented to collect
tax.
2. The owner or property requests for
reinvestigation and writes a waiver before
expiration of period to collect.
U.P. LAW BOC
3. The owner of property is out of the country or
cannot be located. [Sec. 270, LGC]
d. Special Rules on Payment
Payment of real property tax in installments
Payment of real property tax and the additional tax
for the Special Education Fund, without interest, may
be made in four [4] equal instalments:
1st : March 31st
2nd : June 30th
3rd : September 30th
4th : December 31st
This shall not apply to special levies which shall be
governed by ordinance of the sanggunian concerned.
Payments of real property taxes shall first be applied
to prior years delinquencies, interests and penalties, if
any, and only after the delinquencies are settled may
tax payments be credited for the current period. [Sec.
250, LGC]
Interests on unpaid real property tax
In case of failure to pay the basic real property tax or
any other tax when due shall subject the taxpayer to
the payment of interest at the rate of two percent per
month on the unpaid amount or a fraction thereof
until the delinquent tax shall have been fully paid. But
the total interest on the unpaid tax shall not exceed
thirty-six months. [Sec. 255, LGC]
Condonation of real property tax
By SANGGUNIAN: in case of general failure
of crops or substantial decrease in the price of
agricultural or agri-based products or calamity in
any LGU [Sec. 276, LGC]
By the PRESIDENT of the Philippines: when
public interest so requires [Sec. 277, LGC]
e. Remedies of LGUs for Collection
of Real Property Tax
1. Issuance of notice of delinquency for real
property tax payment
2. L a G L The basic real
property tax shall constitute a lien on the
property subject to tax, superior to all liens,
charges or encumbrances in favor of any person,
irrespective of the owner or possessor thereof,
enforceable by administrative or judicial action
Page 232 of 290
TAXATION II TAXATION LAW
and may only be extinguished upon payment of
the tax and the related interests and expenses.
[Sec. 257, LGC]
3. 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
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.
Warrant must be mailed or served to owner or
person having legal interest in the property.
Written notice of levy must be mailed or served
to the assessor and the Register of Deeds where
the property is located.
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]
4. Resale of real estate taken for taxes, fees or
charges
The Sanggunian concerned may, by ordinance duly
approved, and upon notice of not less than
twenty (20) days, sell and dispose of the real
property acquired under the preceding section at
public auction. The proceeds of the sale shall
accrue to the general fund of the local
government unit concerned. [Sec. 264, LGC]
5. Further levy until full payment of amount due
Levy may be repeated if necessary until the full
due, including all expenses, is collected. [Sec. 265,
LGC]
6. Refund or Credit of Real
Property Tax
PAYMENT UNDER PROTEST
This is resorted to when the taxpayer questions the
excessiveness of the amount of tax imposed on him.
U.P. LAW BOC TAXATION II
Procedure
a. No protest shall be entertained unless the
taxpayer first pays the tax. There shall be
annotated on the tax receipts the words "paid
under protest."
b. The protest in writing must be filed within thirty
(30) days from payment of the tax with the local
treasurer.
c. The treasurer shall decide the protest within sixty
(60) days from receipt.
d. In the event that the protest is denied or upon the
lapse of the 60-day period, the taxpayer may avail
of the procedure in questioning an assessment:
Appeal to the LBAA within 60 days;
Then appeal to the CBAA within 30 days;
Appeal to the CTA En Banc within 30 days.
[Sec. 252, LGC]
Repayment of excessive collections
When an assessment of real property tax is found to
be illegal or erroneous and the tax is accordingly
reduced or adjusted, the taxpayer may file a written
claim for refund or credit for taxes and interests with
the provincial or city treasurer within two (2) years
from the date the taxpayer is entitled to such
reduction or adjustment.
The local treasurer shall decide the claim within sixty
(60) days from receipt thereof.
In case the claim for tax refund or credit is denied, the
taxpayer may follow the procedure in questioning an
assessment (Appeal to LBAA, and then CBAA, and
then CTA En Banc). [Sec. 253, LGC]
7. Ta a R
a. Contesting an Assessment of
Value of Real Property
APPEAL TO THE LOCAL BOARD OF
ASSESSMENT APPEALS (LBAA)
1. Appeal must be filed within 60 days from the date
of receipt of the written notice of assessment
2. By filing a petition under oath in the form
prescribed for the purpose
3. Copies of tax declarations and other affidavits or
documents must be submitted [Sec. 226, LGC]
The LBAA shall decide the appeal within 120 days
from the date of receipt of such appeal.
Page 233 of 290
TAXATION LAW
The LBAA shall have the power to summon
witnesses, administer oaths, conduct ocular
inspection, take depositions, and issue subpoena duces
tecum and/or subpoena
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
(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 (1968)]:
The failure to appeal within the statutory period
renders the assessment final and unappealable.
A taxpayer who is not satisfied with the assessment of
his property should appeal to the Local Board of
Assessment Appeals within 60 days from receipt of
the written notice of assessment. The filing of a
petition for injunction in the Regional Trial Court
upon the issuance of a warrant of levy is not in
accordance with the remedies provided in the LGC.
[Republic vs. City of Kidapawan, G.R. No. 166651 (2005)]
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 tax
under protest
a. File protest with local treasurer
Protest must be filed with the 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.
U.P. LAW BOC TAXATION II TAXATION LAW

Meralco v. Nelia Barlis [G.R. No. 114231 (2001)]:
The trial court has no jurisdiction to issue a writ
of prohibition which seeks to set aside the
warrant of garnishment over petitioner 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.
b. Appeal to the Local Board of Assessment
Appeals
c. Appeal to the Central Board of Assessment
Appeals
d. 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]
e. Appeal to the SC
Appeal must be filed within 15 days from receipt
of decision of the CTA [Rule 45, Rules of Court]
The appeal shall not have the effect of suspending the
effectivity of the tax ordinance and the accrual and
payment of the tax.
Within 30 days after receipt of the decision or the
lapse of the sixty-day period without the Secretary of
Justice acting upon the appeal, the aggrieved party
may file appropriate proceedings with a court of
competent jurisdiction. [Sec. 187, LGC]
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 per month from the date of
sale to the time of the institution of the action. [Sec.
267, LGC]

Erroneous Assessment vs. Illegal Assessment

An erroneous assessment presupposes that the
taxpayer is subject to the tax but is disputing the
correctness of the amount assessed. With an
erroneous assessment, the taxpayer claims that the
local assessor erred in determining any of the items
for computing the real property tax, i.e., the value of
the real property or the portion thereof subject to the
tax and the proper assessment levels. In case of an
erroneous assessment, the taxpayer must exhaust the
administrative remedies provided under the LGC.

On the other hand, an assessment is illegal if it was

made without the authority under the law. In case of
an illegal assessment, the taxpayer may directly resort
to judicial action without paying under protest the
assessed tax and filing an appeal with the Local and
Central Boards of Assessment Appeals. [City of Lapu-
Lapu v. PEZA, G.R. Nos. 184203 and 187583 (2014)]

c. Judicial
Question on the legality of a tax ordinance
Any question on the constitutionality or legality of a
tax ordinance may be raised on appeal within 30 days
from effectivity to the Secretary of Justice who shall
render a decision within 60 days from the date of
receipt of the appeal.

Page 234 of 290

U.P. LAW BOC
Flowchart V: Procedure for Assessment of Land Value for Real Property Tax
Purposes-L a G C
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
Submit documents
supporting exemption w/
in 30 days from
Required
declaration (sec. 206)
Documents
submitted w/in
30 days?
Property
Yes proven as tax
No exempt?
Property shall be
listed as taxable in
No
the assessment
roll (sec. 206)
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)
Appeal to the
END Supreme Court w/
in 15 days
Page 235 of 290
TAXATION II TAXATION LAW
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)
Owner may claim
Is real property
for tax exemption Yes
tax exempt?
(sec. 206)
Property shall be
dropped from
Yes
assessment roll
(sec. 206)
END
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,
owner may appeal to
the CTA en banc within
30 days from receipt of
decision
U.P. LAW BOC TAXATION II TAXATION LAW

Flowchart VI: Ta a R I C R a P
Tax-L G C
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)

Page 236 of 290

U.P. LAW BOC
Flowchart VII: Procedure for Levy for Purposes of Satisfying Real
Property Taxes-L a G C
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 II 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. a 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
Page 237 of 290
U.P. LAW BOC TAXATION II
IV. JUDICIAL
REMEDIES
[R.A. No. 1125, as amended by R.A. No. 3457 and
further amended by R.A. No. 9282 and R.A. No.
9503, and A.M. No. 05-11-07-CTA or the Revised
Rules of the Court of Tax Appeals (RRCTA)]
A. Jurisdiction of the Court
of Tax Appeals
1. Exclusive Appellate
Jurisdiction over Civil Tax
Cases
a. Civil Cases within the
Jurisdiction of the Court En
Banc
[Sec. 2(a-e), Rule 4, RRCTA]
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
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;
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
Page 238 of 290
TAXATION LAW
Division in the exercise of its exclusive original
jurisdiction over tax collection cases; and
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.
b. Civil Cases within the
Jurisdiction of the Court in
Divisions
[Sec. 3(a), Rule 4, RRCTA]
The Court in Divisions shall exercise exclusive
original or appellate jurisdiction to review by appeal
the following:
1. Decisions of the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other
matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue;
2. Inaction by the Commissioner of Internal
Revenue in cases involving disputed assessments,
refunds of internal revenue taxes, fees or other
charges, penalties in relation thereto, or other
matters arising under the National Internal
Revenue Code or other laws administered by the
Bureau of Internal Revenue, where the National
Internal Revenue Code or other applicable law
provides a specific period for action: Provided, that
in case of disputed assessments, the inaction of
the Commissioner of Internal Revenue within
the one hundred eighty day-period under Section
228 of the National Internal revenue Code shall
be deemed a denial for purposes of allowing the
taxpayer to appeal his case to the Court and does
not necessarily constitute a formal decision of the
Commissioner of Internal Revenue on the tax
case; Provided, further, that should the taxpayer opt
to await the final decision of the Commissioner
of Internal Revenue on the disputed assessments
beyond the one hundred eighty day-period
abovementioned, the taxpayer may appeal such
final decision to the Court under Section 3(a),
Rule 8 of these Rules; and Provided, still further, that
in the case of claims for refund of taxes
erroneously or illegally collected, the taxpayer
must file a petition for review with the Court
prior to the expiration of the two-year period
U.P. LAW BOC TAXATION II
under Section 229 of the National Internal
Revenue Code;
3. Decisions, resolutions or orders of the Regional
Trial Courts in local tax cases decided or resolved
by them in the exercise of their original
jurisdiction;
4. Decisions of the Commissioner of Customs in
cases involving liability for customs duties, fees
or other money charges, seizure, detention or
release of property affected, fines, forfeitures of
other penalties in relation thereto, or other
matters arising under the Customs Law or other
laws administered by the Bureau of Customs;
5. Decisions of the Secretary of Finance on customs
cases elevated to him automatically for review
from decisions of the Commissioner of Customs
adverse to the Government under Section 2315
of the Tariff and Customs Code; and
6. Decisions of the Secretary of Trade and Industry,
in the case of nonagricultural product,
commodity or article, and the Secretary of
Agriculture, in the case of agricultural product,
commodity or article, involving dumping and
countervailing duties under Section 301 and 302,
respectively, of the Tariff and Customs Code,
and safeguard measures under Republic Act No.
8800, where either party may appeal the decision
to impose or not to impose said duties.
2. Criminal Cases
a. Exclusive Original Jurisdiction
in Criminal Cases
The Court in Divisions shall exercise exclusive
original jurisdiction over all criminal offenses arising
from violations of the National internal Revenue
Code or Tariff and Customs Code and other laws
administered by the Bureau of Internal Revenue or
the Bureau of Customs, where the principal amount
of taxes and fees, exclusive of charges and penalties,
claimed is one million pesos or more. [Sec. 3(b)(1),
Rule 4, RRCTA]
b. Exclusive Appellate Jurisdiction
in Criminal Cases
The Court in Divisions shall exercise exclusive
appellate jurisdiction over appeals from the
judgments, resolutions or orders of the Regional Trial
Courts in their original jurisdiction in criminal
offenses arising from violations of the National
Page 239 of 290
TAXATION LAW
Internal Revenue Code or Tariff and Customs Code
and other laws administered by the Bureau of Internal
Revenue or Bureau of Customs, where the principal
amount of taxes and fees, exclusive of charges and
penalties, claimed is less than one million pesos or
where there is no specified amount claimed. [Sec.
3(b)(2), Rule 4, RRCTA]
Criminal cases within the jurisdiction of the
Court En Banc [Sec. 2(f-h), Rule 4, RRCTA]
The Court en banc shall exercise exclusive appellate
jurisdiction to review by appeal the following:
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).
Does the CTA have jurisdiction over a special
civil action for certiorari assailing an
interlocutory order issued by the RTC in a local
tax case? YES.
While there is no express grant of such power, with
respect to the CTA, Section 1, Article VIII of the
1987 Constitution provides, nonetheless, that judicial
power shall be vested in one Supreme Court and in
such lower courts as may be established by law and
that judicial power includes the duty of the courts of
justice to settle actual controversies involving rights
which are legally demandable and enforceable, and to
determine whether or not there has been a grave
abuse of discretion amounting to lack or excess of
jurisdiction on the part of any branch or
instrumentality of the Government.
On the strength of the above constitutional
provisions, it can be fairly interpreted that the power
of the CTA includes that of determining whether or
not there has been grave abuse of discretion
amounting to lack or excess of jurisdiction on the part
of the RTC in issuing an interlocutory order in cases
U.P. LAW BOC
falling within the exclusive appellate jurisdiction of
the tax court. It, thus, follows that the CTA, by
constitutional mandate, is vested with jurisdiction to
issue writs of certiorari in these cases. [City of Manila
v. Grecia-Cuerdo, G.R. No. 175723 (2014)]
Page 240 of 290
TAXATION II TAXATION LAW
B. Judicial Procedures
1. Judicial Action for Collection
of Taxes
a. 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: See Ta pa er Remedie Collection above.
When this remedy is resorted to:
The tax assessment becomes final and executory
because of the failure to appeal.
Even pending decision of the administrative protest
[CIR v. Union Shipping, G.R. No. L-66160 (1990)]
b. 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 shall be assessed within
five (5) years from the date they became due.
No action for the collection of such taxes, fees, or
charges, whether administrative or judicial, shall be
instituted after the expiration of such period
In case of fraud or intent to evade the payment of
taxes, fees, or charges, the same may be assessed
within ten (10) years from discovery of the fraud or
intent to evade payment.
Local taxes, fees, or charges may be collected within
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
U.P. LAW BOC TAXATION II
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;
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]
2. Civil Cases
a. Who May Appeal, Mode of
Appeal, Effect of Appeal
Appeal to CTA Division
1. A party aggrieved or adversely affected by the
decision or ruling or inaction of
a. CIR;
b. Commissioner of Customs;
c. Secretary of Finance;
d. Secretary of Trade and Industry;
e. Secretary of Agriculture; or
f. RTC exercising original jurisdiction
2. 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 appeal within 30 days from the
receipt of the copy of the decision.
SUSPENSION OF COLLECTION OF TAX
General rule: No appeal taken to the Court shall
suspend the payment, levy, distraint, or sale of any
Page 241 of 290
TAXATION LAW
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
a pa er liabili , o gh b mean 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 [Sec. 11, RA 1125, as amended]
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]
Exception: Sec. 11, RA 1125, supra.
Note: The LGC does not have a provision prohibiting
injunction in the collection of tax.
The requirement for depositing an amount or posting
a surety bond as a condition for the suspension of the
collection of taxes may be dispensed with.
The CTA has ample authority to dispense with the
deposit of the amount claimed or the filing of the
required bond, whenever the method employed by
the BIR in the collection of tax jeopardizes the
interest of the taxpayer for being patently in violation
of law. [Sps. Pacquiao v. CTA First Division, G.R. No.
213394 (2016)]
TAKING OF EVIDENCE
The Court may receive evidence in the following
cases:
1. In all cases falling within the original jurisdiction
of the Court in Division pursuant to Section 3,
Rule 4 of these Rules; and
2. In appeals in both civil and criminal cases where
the Court grants a new trial pursuant to Section
2, Rule 53 and Section 12, Rule 124 of the Rules
of Court. [Sec. 2, Rule 12, A.M. No. 05-11-07]
TAKING OF EVIDENCE BY:
1. 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
U.P. LAW BOC TAXATION II
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]
2. 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 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]
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.
May be 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.
Page 242 of 290
TAXATION LAW
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 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:
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
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.
b. Appeal to the CTA En Banc
No civil proceeding involving matter arising under the
National Internal Revenue Code, the Tariff and
Customs Code or the Local Government Code shall
be maintained, except as herein provided, until and
unless an appeal has been previously filed with the
U.P. LAW BOC TAXATION II TAXATION LAW

CTA and disposed of in accordance with the Instituted by the filing an information in the name of
provisions of this Act. the People of the Philippines

A party adversely affected by a resolution of a
Division of the CTA on a motion for reconsideration
or new trial, may file a petition for review with the
CTA en banc. [Sec. 18, RA No. 1125 as amended]
The CTA En Banc cannot annul a final and
executory judgment of a division of the court
The laws creating the CTA and expanding its
j ri dic ion, and he CTA o n r le of proced re do
not provide for a scenario where the CTA sitting en
banc is asked to annul a decision of one of its
divisions. Similarly, the SC or the CA divisions are not
considered separate and distinct courts but are
divisions of one and the same court. There is no
hierarchy of courts within the SC and the CA.
Annulment by a collegial court, sitting En Banc is
tantamount to allowing a court to annul its own
judgment and acknowledging that a hierarchy exists
within such court. A proper remedy would have been
an original action for Certiorari under Rule 65. [CIR
v. Kepco Ilijan Corp., G.R. No. 199422 (2016)]
Those involving violations of the NIRC and other
laws enforced by the BIR: Must be approved by the
CIR
Those involving violations of the tariff and
Customs Code and other laws enforced by the
Bureau of Customs: Must be approved by the
Commissioner of Customs
Institution shall interrupt the running of the period of
prescription
Prosecution of criminal action
Conducted and prosecuted under the direction and
control of the public prosecutor
Those involving violations of the NIRC and other
laws enforced by the BIR or violations of the tariff
and Customs Code and other laws enforced by
the Bureau of Customs - The prosecution may be
conducted by their respective duly deputized legal
officers.

c. Petition for Review on Certiorari INSTITUTION OF CIVIL ACTION IN

CRIMINAL ACTION
to the Supreme Court In cases within the jurisdiction of the Court, the
criminal action and the corresponding civil action for
[Rule 16, A.M. No. 05-11-07] the recovery of civil liability for taxes and penalties
shall be deemed jointly instituted in the same
A party adversely affected by a decision or ruling of proceeding. The filing of the criminal action shall
the Court en banc may appeal by filing with the necessarily carry with it the filing of the civil action.
Supreme Court a verified petition for review on No right to reserve the filing of such civil action
certiorari within fifteen days from receipt of a copy of separately from the criminal action shall be allowed or
the decision or resolution, as provided in Rule 45 of recognized.
the Rules of Court. If such party has filed a motion
for reconsideration or for new trial, the period herein
fi ed hall r n from he par receip of a cop of b. Appeal and Period to Appeal in
the resolution denying the motion for reconsideration Criminal Cases
or for new trial.
Deciding Period to Mode of
The motion for reconsideration or for new trial filed Body Appeal Appeal
before the Court shall be deemed abandoned if, Regional Trial Appeal
during its pendency, the movant shall appeal to the Court in the pursuant to
Supreme Court. exercise of its 15 days from Sec. 3[a] and 6,
original receipt of Rule 122 of
3. Criminal Cases jurisdiction decision the Rules of
[to CTA Court
Division]
a. Institution and Prosecution of 15 days from
CTA Division Petition for
Criminal Actions [to CTA En
receipt of
review as
decision
Banc] provided in
Institution of criminal action

Page 243 of 290

U.P. LAW BOC TAXATION II TAXATION LAW

May be Rule 43 of the

extended for Rules of Court
good cause for
not more than The Court En
15 days Banc shall act
on the appeal.
Regional Trial
Petition for
Courts in the
15 days from review as
exercise of
receipt of provided in
their appellate
decision Rule 43 of the
jurisdiction
Rules of Court
[To CTA
division]

Solicitor General as counsel for the People and

government officials sued in their official
capacity
The Solicitor General shall represent the People of
the Philippines and government officials sued in their
official capacity in all cases brought to the Court in
the exercise of its appellate jurisdiction. He may
deputize the legal officers of the Bureau of Internal
Revenue in cases brought under the National Internal
Revenue Code or other laws enforced by the Bureau
of Internal Revenue, or the legal officers of the
Bureau of Customs in cases brought under the Tariff
and Customs Code of the Philippines or other laws
enforced by the Bureau of Customs, to appear in
behalf of the officials of said agencies sued in their
official capacity: Provided, however, such duly
deputized legal officers shall remain at all times under
the direct control and supervision of the Solicitor
General.

c. Petition for Review on Certiorari

to the Supreme Court
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 Civil Procedure. [Sec. 19,
R.A. No. 1125 as amended]

Page 244 of 290

U.P. LAW BOC TRAIN LAW TAXATION LAW

TRAIN LAW
Taxation Law

Page 245 of 290

U.P. LAW BOC TRAIN LAW TAXATION LAW

On December 19, 2017, the President signed into law package 1 of the Tax Reform for Acceleration and Inclusion
( TRAIN ) bill or Rep blic Ac ( R.A. ) No. 10963. The la con ain amendments to several provisions of the National
In ernal Re en e Code of 1997 ( NIRC or Ta Code ) on indi id al income a a ion, pa i e income for bo h
individuals and corporations, e a e a , donor a , al e-added a ( VAT ), e ci e a , and documentary stamp tax
( DST ), among o her . Belo i a compari on of he old NIRC pro i ion and he change in rod ced b TRAIN.
(PWC Tax Alert No. 34-2018)

TRAIN Law (RA

Tax Particulars NIRC
10963)
On powers and authority granted to the Commissioner of Internal Revenue
Added: Cooperatives
Development Authority
required to submit a tax
incentive report to the
BIR and Dep of
Finance. The report
Power to obtain
Sec. 5 (B) Commi ioner po er o ob ain informa ion from an shall include
information, and
person other than the person whose internal revenue tax liability information on the
to summon,
is subject to audit or investigation or from any office or officer of income tax, VAT and
examine, and take
the national and local governments, government agencies and other tax incentive
testimony of
instrumentalities. availed of. The report
persons
shall be included in the
database created under
the Tax Incentives
Management and
Transparency Act
(TIMTA) (RA 10708).
Added: Exercise of this
authority
Examination of Sec. 6 (A) The Commissioner or his duly authorized
notwithstanding any law
returns and representative may authorize the examination of any taxpayer and
requiring the prior
determination of the assessment of the correct amount of tax after a return has
authorization of any
tax due been filed.
government agency or
instrumentality.
Added: Now requires
mandatory
consultation from both
public and private
appraisers, and with
prior notice to affected
parties. There is an
automatic adjustment
of the zonal valuation
Authority to
Sec. 6 (E) The Commissioner is authorized to determine the fair once every three years
prescribe real
market value of real properties. through issuance of
property values
regulations by the
Secretary of Finance.
No adjustment in zonal
valuation shall be valid
unless published or
posted. The basis of
valuation, as well as
records of consultation,
shall be public records

Page 246 of 290

U.P. LAW BOC TRAIN LAW TAXATION LAW

available for inquiry of

any taxpayer.
Adjustments in personal income taxation
(A) Reduced personal
income tax rates

Effective 1 Jan 2018

Not over
0%
250k
Over 250k20% of the
but notexcess over
over 400k 250k
Over 400k30k + 25%
but notof the excess
over 800k over 400k
Over 800k130k + 30%
but notof the excess
over 2M over 800k
Over 2M490k + 32%
but notof the excess
Sec. 24 (A) (2) Personal income tax over 8M over 2M
2.41M +
35% of the
Not over 10k 5% Over 8M
excess over
500 + 10% of the excess over 8M
Over 10k but not over 30k
10k
2.5k + 15% of the excess over Effective 1 Jan 2019
Individual income Over 30k but not over 70k
30k Not over
tax 0%
8.5k + 20% of the excess over 250k
rates Over 70k but not over 140k
70k Over 250k15% of the
22.5k + 25% of the excess over but notexcess over
Over 140k but not over 250k
140k over 400k 250k
50k + 30% of the excess over Over 400k22.5k + 20%
Over 250k but not over 500k
250k but notof the excess
125k + 32% of the excess over over 800k over 400k
Over 500k
500k 102.5k +
Over 800k
25% of the
but not
excess over
over 2M
800k
402.5k +
Over 2M
30% of the
but not
excess over
over 8M
2M
2,202.5k +
35% of the
Over 8M
excess over
8M

(B) New: Purely self-

employed and
professionals
If gross sales/receipts
and other non-operating

Page 247 of 290

U.P. LAW BOC TRAIN LAW TAXATION LAW

income do not exceed

the 3M VAT threshold,
taxpayer may opt to be
taxed at: (i) 8% of gross
sales/receipts and other
non-operating income in
excess of 250k in lieu of
graduated rates and
percentage tax; or (ii)
graduated rates in (A)
above.

(C) New: Mixed

income earners:
On their compensation
income at graduated
rates
On their income from
the conduct of trade or
business or the practice
of profession same as
(B) above
Now taxed: PCSO and
lotto winnings exceeding
Passive income
10k subject to the 20%
from interest, Sec. 24 (B) (1) PCSO and lotto winnings are exempt from the
final tax.
royalties, prizes 20% final tax.
and other
Increased Tax: Interest
winnings of Interest income from a depository bank under the EFCDS is
income from a
individual citizen subject to a final tax of 7.5%.
depository bank under
and resident alien
the EFCDS, final tax
now at 15%.
Capital gains from
sale of shares of
stock not traded
Sec. 24 (C) Capital gains tax on sale of shares not traded in the Increased Tax: now
in the local stock
stock exchange: first 100k at 5%, and excess at 10% flat rate of 15%.
exchange of
individual citizen
and resident alien
New: Sunset clause
Preferential tax
treatment shall not apply
for employees of
ROHQ, RHQ, OBU,
Alien individuals Sec. 25 (C), (D) and (E) A rate of 15% final withholding tax on and Petroleum service
and qualified the gross compensation income of alien individuals and qualified contractors and
Filipinos Filipinos employed by the following employers: RHQ, ROHQ, subcontractors which
employed by OBUs, and Petroleum service contractors and subcontractors. registered with the
specific employers Securities and Exchange
Commission beginning
1 January 2018.

[ITEM VETOED]
Grandfather clause:

Page 248 of 290

U.P. LAW BOC TRAIN LAW TAXATION LAW

Present and future

qualified employees of
existing ROHQ, RHQ,
OBU, and Petroleum
service contractors and
subcontractors as of 31
Dec 2017 shall enjoy
preferential tax
treatment.
Adjustments in corporate income tax provisions
Government-
owned or
controlled Sec. 27 (C) GSIS, SSS, PhilHealth, the local water districts and the Removed Tax
corporations, PCSO are exempt from corporate income tax. exemption of PCSO
agencies or
instrumentalities
Passive income on
interest from
deposits and yield Increased Tax: Interest
or any other income from a
Sec. 27 (D) (1) Interest income from a depository bank under the
monetary benefit depository bank under
EFCDS subject to final tax of 7.5%.
from deposit the EFCDS, final tax
substitutes, trust now at 15%.
funds and
royalties
Capital gains from
sale of shares of
stock not traded
Sec. 27 (D) (2) Capital gains tax on sale of shares not traded in the Increased Tax: now
in the local stock
stock exchange: first 100k at 5%, and excess at 10% flat rate of 15%.
exchange of
domestic
corporations
Adjustments on provisions for exclusions and deductions
Increased exemption:
Amount of exempt 13th
Sec. 32 (B) (7) (e) 13th month pay and other benefits amounting month pay and other
On exemption of
to 82k is excluded from the computation of gross income. benefits is increased to
13th month pay
90k.
and other benefits
The President shall adjust the amount of said exemption to its
exemption
present value using the Consumer Price Index (CPI) Removed CPI
adjustments on said
amount.
Increased tax:
Effective 1 Jan 2018,
Sec. 33 (A) Fringe benefits given to non-rank and file employees
final tax rate now 35%;
Fringe benefit tax are subject to 32% final tax rate. The grossed-up monetary value
grossed-up monetary
is determined by dividing the actual monetary value by 68%.
value determined using
65%.
New: OSD may be
availed of by a general
Optional standard Sec. 34 (L) In lieu of the itemized allowable deductions, an
professional partnership
deduction individual subject to tax, other than a non-resident alien, may elect
only once, either the
( OSD ) an OSD of 40% of gross sales or gross receipts.
partnership or the
partners.

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U.P. LAW BOC TRAIN LAW TAXATION LAW

Deduction of
premium Sec. 34 (M) Allowed deduction of 24k per year or 200 per month
payments on worth of premium payments on health and/or hospitalization
Repealed
health and/or insurance of an individual provided that the family has a gross
hospitalization income not exceeding 250k for the taxable year.
insurance
Secs. 35 and 79 (D) Exemptions on the following:
On personal and
50k worth of basic personal exemption; 25k worth of additional
additional Repealed
exemption per qualified dependent not exceeding four; Personal
exemptions
exemption allowable to non-resident alien individual
Exemption
Sec. 62 Exemption of 20k allowed from the income of the estate
allowed to estate Repealed
or trust.
and trust
Income tax Sec. 79 (F) Husband deemed head of the family and proper
collected at source claimant of the additional exemption. Taxes to be withheld from
Repealed
husband and the wages of the wife must be in accordance with the table for
wife zero exemption of the withholding tax table.
Filing of tax returns
An individual whose
taxable income (not
from business or
profession) does not
exceed 250k shall not be
required to file an ITR.
Those engaged in
business or profession
required to file ITR
regardless of gross
income.

New, Form of an ITR:

The ITR shall consist of
a maximum of four
pages in paper or
Sec. 51 (A) (2) (a) An individual whose gross income does not electronic form
Individual exceed his total personal and additional exemptions for dependents containing only the
are no req ired o file an income a re rn ( ITR ). following information:
(i) Personal profile and
information; (ii) Total
gross sales, receipts or
income from
compensation of
services rendered,
conduct of trade or
business or the exercise
of a profession, except
income subject to final
tax as provided under
the Tax Code; (iii)
Allowable deductions
under the Tax Code;
(iv) Taxable income as
defined in the Tax

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U.P. LAW BOC TRAIN LAW TAXATION LAW

Code; and (v) Income

tax due and payable.
Entirely new
provision: Sec. 51-A
An individual receiving
purely compensation
income from one
employer wherein the
tax of which has been
correctly withheld shall
not be required to file
Substituted Filing [instituted via Revenue Regulation]
an annual ITR.
The certificate of
withholding, filed by the
employer and stamped
recei ed by the BIR,
shall be tantamount to
the substituted filing of
income tax return of the
employees.
New provision
prescribing the form
of an ITR same as with
individuals (supra)
Sec. 52 (A) The return shall be filed by the president, vice-
Corporate president or other principal officer, and shall be sworn to by such
The foregoing
officer and by the treasurer or assistant treasurer.
provisions shall not
affect the
implementation of
TIMTA.
Payment and Sec. 56 (A) (2) When a tax due is in excess of 2k, the taxpayer Changed date: Second
assessment of other than a corporation may elect to pay the tax due in two equal instalment to be paid on
income tax for instalments; the first instalment paid at the time the return is filed or before 15 Oct
individuals and and the second instalment on or before 15 July following the close following the close of
corporations of the calendar year. the calendar year.
Reduced withholding
Sec. 57 (B) Secretary of Finance may require withholding of tax rate: Beginning 1 Jan
Withholding of on items of income payable to natural or juridical persons, 2019, rate of
creditable tax at residing in the Philippines by payor-corporations/persons at the withholding shall not be
source rate of 1% to 32% thereof, which shall be credited against the less than 1% but not
income tax liability of the taxpayer. more than 15% of the
income payment.
Changed date,
Sec. 58 Return for final withholding tax filed and paid made
simplified: The return
within 25 days from the close of each calendar quarter.
for both final and creditable
withholding taxes shall
Return for creditable withholding taxes filed and paid not later
be filed and the
On return and than the last day of the month following the close of the quarter
payment made not later
payment of taxes during which the withholding taxes was made.
than the last day of the
withheld at source
month following the
The Commissioner, with the approval of the Secretary of Finance,
close of the quarter
may require the withholding agents to pay or deposit the taxes
during which the
deducted or withheld at more frequent intervals when necessary
withholding was made.
to protect the interest of the government.

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Removed: The
provision allowing the
Commissioner of
Internal Revenue to
adjust the withholding
of tax at more frequent
intervals is removed.
Changed date: Filing
Sec. 74 (A) Every individual subject to income tax and is receiving of declaration of
Declaration of
self-employment income shall make and file a declaration of his estimated income shall
income tax for
estimated income for the current taxable year on or before 15 be on or before 15 May
individuals
April of the same taxable year. of the same taxable
year.
Changed date:
Return and Payment of the fourth
Sec. 74 (B) The amount of estimated income shall be paid in 4
payment of instalment shall be paid
instalments with the fourth instalment to be paid on or before 15
estimated income on or before 15 May of
April of the following calendar year.
tax the following calendar
year.

Tax
NIRC TRAIN Law (RA 10963)
Particulars
Estate Tax Table
Over But not The tax Plus Of the
Over shall be Excess
Over
Sec. 84. 0 200,000 Exempt
Rate of Estate Estate tax rate is fixed at 6%
200,000 500,000 0 5% 200,000
Tax
500,000 2,000,000 15,000 8% 500,000
2,000,000 5,000,000 135,000 11% 2,000,000
5,000,000 10,000,000 465,000 15% 5,000,000
10,000,000 And Over 1,215,000 20% 10,000,000
Citizens or residents are allowed the following deductions, among Removed the
others: deductions of funeral
Expenses, losses, indebtedness, and taxes (among others, expenses, judicial
Sec. 86(A) funeral expenses not to exceed PHP200,000 and judicial expenses, and medical
Deductions for expenses) expenses.
Citizens or Increased allowance
Family home not to exceed PHP1m
Residents for deduction of family
Standard deduction of PHP1m home to PHP10m.
Medical expenses not to exceed PHP500,000. Increased the standard
deduction to PHP5m
Removed allowance
A nonresident alien is allowed the following deductions, among for deduction of
others: expenses, losses,
Sec. 86(B) indebtedness, and
Expenses, losses, indebtedness, and taxes (among others,
Deductions for taxes.
funeral expenses not to exceed PHP200,000 and judicial
Nonresident expenses) Provides for a
not a citizen standard deduction of
Property previously taxed
PHP500,000.
Transfers for public use
Provides that a
proportion of the

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claims against the

estate, claims against
insolvent persons, and
unpaid mortgages may
be claimed as a
deduction from the
estate.

Sec. 86(D) An Individual who is a nonresident not citizen of the Philippines

Deductions for shall not be allowed to claim any deduction unless the value of the
Repealed
Nonresident nonre iden gro e a e i a ed o ide he Philippine i
not a citizen included in the return filed.
Sec. 89
Filing a Written notice of death required for gross estates exceeding
Repealed
Notice of PHP20,000
Death
All transfers subject to
Sec. 90(A)(1) estate tax or regardless of
All transfers subject to estate tax or those, though exempt from
When required the gross value of the estate
tax, have gross values exceeding PHP200,000, or regardless of the
to file an where the said estate
gross value of the estate where the said estate consists of registered
estate tax consists of registered or
or registrable property shall file an estate tax return.
return registrable property shall
file an estate tax return.
Sec. 90(A)(3) Estate tax returns showing
When CPA Estate tax returns showing a gross value exceeding a gross value exceeding
Certificate PHP2M must be certified by a CPA. PHP5m must be certified
required by a CPA
Sec. 90(B)
The estate tax return must
Deadline of The estate tax return must be filed within six months from the
be filed within one year
Estate Tax deceden dea h.
from he deceden dea h.
Return
An estate with insufficient
Sec. 91 cash is allowed to pay the
Additional estate tax due by
Provision installment within two
allowing years from the statutory
Payment by date for its payment
Installment without civil penalty and
interest.
Sec. 97 A bank shall not allow i hdra al from a deceden bank
Sec. 97 Banks, which has
account without the Commissioner certifying that taxes imposed
Banks can knowledge of the death of
thereon have already been paid.
now allow the person, shall allow
withdrawal withdrawals from a
The administrator of the estate or any one of the heirs may, when
from deceden depo i acco n
authorized by the Commissioner, withdraw an amount not
subject to a 6% final
exceeding PHP20, 000 even without the certification from the
deposit withholding tax.
Commissioner that the estate taxes have been paid.
Donor a ra e are a follo : Donor a ra e fixed at
6% based on total gifts in
Sec. 84. Not stranger based on total net gift excess of PHP250,000
Rate of Over But not The tax Plus Of the (exempt gift) made during
D Ta Over shall be Excess the calendar year whether
Over the donee is a stranger or
0 100,000 Exempt not.

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100,000 200,000 0 2% 100,000

200,000 500,000 2,000 4% 200,000
500,000 1,000,000 14,000 6% 500,000
1,000,000 3,000,000 44,000 8% 1,000,000
3,000,000 5,000,000 204,000 10% 3,000,000
5,000,000 10,000,000 404,000 12% 5,000,000
10,000,000 1,004,000 15% 10,000,000

Stranger 30% based on net gifts

A sale, exchange, or other
Sec. 100. transfer made in the
Additional ordinary course of business
Provision on (i.e., bona fide transaction,
transfer for The amount by which the fair market value exceeded the value of a arm leng h, and free
less than the consideration in a transfer of property shall be deemed a gift. from donative intent) shall
adequate and be considered as made for
full an adequate and full
consideration consideration.

Sec. 101
Exemption of Sec. 101 (A) PHP10,000 amount of dowries or gifts made on
Repealed
Dowries acco n of marriage are e emp from donor a .
Repealed
[ITEM VETOED]
Expressly added as
e por ale he ale
The following sales by VAT-registered persons shall be subject to and delivery of goods
zero percent (0%) rate: to registered
a. Export sales which include the following: enterprises within a
1. sale and actual shipment of goods from the Philippines to separate customs
a foreign country; territory as provided
2. sale of raw materials or packaging materials to a under special laws and
nonresident buyer for delivery to a resident local export- within Tourism
oriented enterprise; Enterprise Zones
3. sale of raw materials or packaging materials to export- declared by TIEZA.
oriented enterprise whose export sales exceed seventy Items 2, 3, and 5 shall
Sec. 106 (A) (2)
percent (70%) of total annual production; be subject to 12%
Limiting the
4. sale of gold to the Bangko Sentral ng Pilipinas (BSP); VAT upon the
zero-rated sale
5. those considered export sales under Executive Order No. successful
of goods
226, otherwise known as the Omnibus Investment Code establishment and
transactions
of 1987, and other special laws; and implementation of an
6. sale of goods, supplies, equipment and fuel to persons enhanced VAT refund
engaged in international shipping or international air system.
transport operations. For Item 4, Sale of
gold to BSP is
b. Foreign currency denominated sales; and reclassified from
export sales to exempt
c. Sales to persons or entities exempted under special laws or transactions.
international agreements Item 6 will qualify as
export sales provided
that the goods,
supplies, equipment
and fuel shall be used

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for international
shipping and air
transport operations.
Foreign currency
denominated sales are
removed from zero-
rated sale of goods.
Inclusion of sale of
electricity by generation
companies, transmission by
Sec 108(A) any entity, and distribution
Additional Sec. 108 (A) Provision defines sale or exchange of services. companies,
Provision including electric
cooperatives in the
definition of sale or
exchange of services.
Item 1 will qualify as
zero-rated sale of
services if these
services are exclusively
for international
shipping and air
transport operations.
For Item 2, Zero-
rating for transport of
passenger and cargo
from the Philippines
Sec. 108 (B) Zero-rated sales of services include:
to foreign country
1. Services rendered to persons engaged in international
shall apply for
shipping or international air transport operations;
domestic air or sea
2. Transport of passengers and cargo by air or sea vessels from
vessels only.
the Philippines to a foreign country;
Sec 108(B) Items 3 and 4 shall be
3. Services performed by subcontractors and/or contractors in
Limiting the subjected to 12% VAT
processing, converting, of manufacturing goods for an
zero-rated sale upon successful
enterprise whose export sales exceed 70% of total annual
of services establishment and
production; and
transactions implementation of an
4. Processing, manufacturing or repacking goods for other
persons doing business outside the Philippines which goods enhanced VAT refund
are subsequently exported, where the services are paid for in system.
acceptable foreign currency and accounted for in accordance [ITEM VETOED]
with the rules and regulations of BSP Expressly added as
zero-rated transactions
the sale of services to
registered enterprises
within a separate
customs territory as
provided under special
laws and within
Tourism Enterprise
Zones as declared by
TIEZA.

VAT exemptions include, among others, the following Item 1 was expanded
Sec 109(1)
transactions: to include those

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U.P. LAW BOC TRAIN LAW TAXATION LAW

Expansion of 1. Importation of professional instruments, etc. belonging to belonging to overseas

VAT Exempt persons coming to settle in the Philippines, for their personal Filipinos, and their
Transactions use, accompanying such persons or arriving within 90 days families and
before or after their arrival; descendants who are
2. Sale of real property utilized for low- cost housing, sale of now residents or
residential lot valued at PHP1,919,500 and sale of house and citizens of other
lot and other residential dwellings valued at PHP3,199,200; countries.
3. Lease of residential unit with monthly rental of PHP12,800 For item 2, beginning 1
4. Importation of fuel, goods, and supplies by persons engaged in January 2021, the VAT
international shipping of air transport operations; and exemption shall only
5. Other sale of lease of goods or properties or the performance apply to sale of real
of services, the amount of which does not exceed properties not primarily
PHP1.919,500. held for sale to
customers or held for
lease in the ordinary
course of trade or
business, sale of real
property utilized for
socialized housing and
sale of house and lot
and other residential
dwellings with
threshold reduced to
PHP2m.
For item 3, the lease
threshold would be
increased to
PHP15,000 and it will
no longer be adjusted
to its present value.
For item 4, exemption
of the importation of
fuel, goods and
supplies shall only
apply if such are used
for international
shipping or air
transport operations.
For item 5, the VAT
threshold is increased
to PHP3m.
Added the exemption
of sale or lease of
goods and services to
senior citizens and
persons with
disabilities.
Added the exemption
for transfers of
property pursuant to
Section 40 (C)(2) of the
Tax Code.

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Added the exemption

for association dues,
membership fees, and
other assessments and
charges collected by
homeowners
associations and
condominium
corporations.
Sale of gold to BSP is
now classified under
VAT exempt
transactions.
Beginning 1 January
2019, sale of drugs and
medicines prescribed
for diabetes, high
cholesterol and
hypertension would be
included as VAT
exempt transactions.
The amortization of the
input VAT shall only be
Sec. 110 (A)
The input tax on goods purchased or imported for use in trade or allowed until 31 December
(2)(b)
business for which deduction for depreciation is allowed shall be 2021 after which taxpayers
No more
spread evenly over the month of acquisition and the 59 succeeding with unutilized input VAT
amortization
months if the aggregate acquisition cost for such on capital goods purchased
of input VAT
goods, excluding the VAT component thereof, exceeds PHP1M. or imported shall be
on purchases
allowed to apply the same
exceeding 1m
as scheduled until fully
utilized.
The Commissioner shall
grant a refund for
creditable input taxes
within 90 days from the
date of submission of the
official receipts or invoices
The Commissioner shall grant a refund or issue the tax credit
and other documents in
certificate for creditable input taxes within 120 days from the date
support of the application
of submission of complete documents.
Sec. 112(c) filed.
Period within
In case of full or partial denial of the claim for tax refund or tax
which the Should the Commissioner
credit, or the failure on the part of the Commissioner to act on the
VAT claim find that the grant of
application within the period prescribed above, the taxpayer
should be refund is not proper, the
affected may, within 30 days from the receipt of the decision
decided by the Commissioner must state
denying claim or after the expiration of the 120 day period, appeal
BIR in writing the legal and
the decision or the unacted claim with the Court of Tax Appeals
factual basis for the denial.
(CTA).
In case of full or partial
denial of claim for tax
refund, the taxpayer may
within 30 days from receipt
of the decision denying the
claim appeal the decision
with the CTA.

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Penalty for failure on the

part of any official, agent,
or employee of the BIR to
act on the application
within the 90-day period
shall be imposed.
Effective 1 January 2023,
Sec. 114(a) Every person liable to pay the VAT shall file a quarterly return of
the filing and payment of
Filing of his gross amount of his gross sales/receipts within 25 days
VAT shall be done within
Quarterly VAT following the close of each taxable quarter. Moreover, VAT-
25 days following the close
Returns registered persons shall pay VAT on a monthly basis.
of each taxable quarter.
Effective 1 January 2021,
the VAT withholding
The Government or any of its political subdivisions,
system shall shift from final
instrumentalities or agencies shall, before making payment of
to a creditable system.
purchase of goods and services, deduct and withhold a final VAT
Sec. 114(c) at the rate of 5% of the gross payment thereof.
Payments for purchase of
goods and services arising
Payment for lease or use of properties or property rights to
from Official Development
nonresident owners shall be subject to 12% withholding tax at the
Assistance funded projects
time of payment.
shall not be subject to the
final withholding VAT.
Sec. 129
Excise tax Excise taxes apply to goods manufactured or produced in the Excise taxes also apply to
now covers Philippines for domestic sales or consumption or for any other services performed in the
both goods disposition and to things imported. Philippines
and services

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U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

TARIFF AND
CUSTOMS CODE
Taxation Law

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U.P. LAW BOC TARIFF AND CUSTOMS CODE
V. TARIFF AND
CUSTOMS CODE OF
THE PHILIPPINES91
[as amended by R.A. No. 10863 or the Customs
Modernization and Tariff Act (CMTA) which took
effect on June 16, 2016]
Note: The CMTA has both saving and repealing
clauses. Laws, rules and regulations previously issued
pertaining to the importation of goods that are
consistent with the CMTA will remain valid unless the
same be repealed or amended. While those which are
inconsistent are expressly repealed, amended or
modified accordingly. [Sec. 1802 and 1803, CMTA]
A. Tariff and Duties
1. Definition
Tariff can mean:
The list or schedule of articles with their
corresponding duties imposed on the same; or
The duties imposed on the articles which are
payable to the government.
Taxes or list of articles liable to duties 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.
Customs duties taxes on the importation or
exportation of commodities, the tariff or tax assessed
upon the merchandise imported from or exported to
a foreign country. [Garcia v. Exec. Sec., G.R. No.
101273 (1992)]
Note: Customs and tariffs are used interchangeably.
They both refer to the taxes imposed on imported or
exported wares, articles, or merchandise.
Export tariff duty levied, assessed and collected on
the gross FOB value at the time of shipment based on
the prevailing exchange rate on traditional export
products, such as certain wood products, mineral
91
Not Included in the Bar Examination Coverage for 2019.
Page 260 of 290
TAXATION LAW
products, plant and vegetable products [Sec. 514,
TCC]
Note: Export duties imposed upon all export products
under Sec. 514, TCCP had been abolished, except the
export duty upon logs [Sec. 1, EO 26 issued on 1 July
1986].
Import tariff Except as otherwise provided for in
this Act or in other laws, all goods, when imported
into the Philippines, shall be subject to duty upon
importation, including goods previously exported
from the Philippines. [Sec. 104, CMTA]
2. Purpose for Imposition
a. Generation of governmental revenues
b. Regulation of economic activity such as
protecting local industries -- where such local
industries actually exist and are producing
comparable goods
3. Kinds or Classification of
Duties
a. Ordinary/Regular Duties
Ordinary or regular duties refer to those that, as a
matter of course, are imposed on dutiable articles as a
revenue-generating measure
AD VALOREM; METHODS OF VALUATION
The tax rates are based on the value of the imported
article.
Methods for determining dutiable value
1. Transaction value an ad valorem rate of duty
equivalent to the price actually paid or payable for
the goods when sold for export to the
Philippines, as adjusted; [Sec. 701, CMTA]
2. Transaction value of identical goods the
transaction value of identical goods sold for
export to the Philippines and exported at or
about the same time as the goods being valued;
a refer to goods which are the
same in all respects, including physical
characteristics, quality and reputation,
discounting minor differences in appearances;
[Sec. 702, CMTA]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
3. Transaction value of similar goods the
transaction value of similar goods sold for export
to the Philippines and exported at or about the
same time as the goods being valued; a
refer to goods which, although not alike
in all respects, have like characteristics and similar
component materials which enable them to
perform the same functions and to be
commercially interchangeable; factors to be
considered in determining whether goods are
similar may include quality of the goods, its
reputation and the existence of a trademark [Sec.
703, CMTA]
4. Deductive value an amount based on the unit
price at which the imported goods or identical or
similar imported goods are sold in the
Philippines, in the same condition as when
imported, in the greatest aggregate quantity, at or
about the time of importation of the goods being
valued, to persons not related to the persons
from whom they buy such goods, subject to
certain deductions [Sec. 704, CMTA]
5. Computed value the aggregate value of the
cost or value of materials and fabrication or other
processing employed in producing the imported
goods; amount for profit and general expenses;
freight, insurance fees and other transportation
expenses for the importation of the goods,
among others; and [Sec. 705, CMTA]
6. Fallback value an amount determined by
using other reasonable means and on the basis of
data available in the Philippines. [Sec. 706,
CMTA]
Note:
General rule: Imported goods shall be valued using the
transaction value. [Sec. 700, CMTA]
Exception: Where the dutiable value cannot be
determined under the transaction value system, the
succeeding methods are sequentially applied.
However, the order of methods 4 and 5 may be
reversed at the request of the importer, subject to the
approval of the Commissioner. [Sec. 700, CMTA;
CAO 4-2004]
Ground to refuse the request: if the Commissioner
deems that the BOC will experience real difficulties in
determining the dutiable value using Method 5
Dutiable Value (DV) must not include:
1. Charges for construction, erection, assembly
maintenance or technical assistance undertaken
after importation;
2. Cost of transport after importation;
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TAXATION LAW
3. Duties and taxes of the Philippines; and
4. Other permissible deduction under the WTO
Valuation Agreement [CAO 4-2004]
ALL of the following conditions must be satisfied
so that the dutiable value shall be the Transaction
Value (TV):
1. No restrictions as to the disposition or use of
goods by the buyer except restrictions which:
a. are imposed by law or by Philippine
authorities
b. limit the geographical area where goods may
be resold
c. do not substantially affect the value of the
goods
2. The sale or price is not subject to some condition
or consideration for which value cannot be
determined
3. Buyer and seller are not related or if they are, that
the transaction value is acceptable for customs
purposes [Sec. 701, CMTA]
Persons are deemed related if:
1. They are officers or direc or of one ano her
business;
2. They are legally recognized partners in business;
3. There exists an employer-employee relationship
between them;
4. Any person directly or indirectly owns, controls
or holds 5% or more of the outstanding voting
stock or shares of both seller and buyer;
5. One of them directly or indirectly controls the
other;
6. Both of them are directly or indirectly controlled
by a 3rd person;
7. Together they directly or indirectly control a 3rd
person; or
8. They are members of the same family, including
those related by affinity or consanguinity up to
the 4th civil degree. [Sec. 701, CMTA]
If related, use of TV is acceptable if the importer
demonstrates that such value closely
approximates one of the following:
1. TV in sales to unrelated buyers of identical or
similar goods
2. Deductive value of identical or similar goods
determined according to method #4
3. Computed value of identical or similar goods
determined according to method #5 [Sec. 701,
CMTA]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
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
1. Same in all respects (physical characteristics,
quality and reputation)
2. Produced in the same country as the goods being
valued
3. Produced by producer of the goods being valued
Excludes: imported goods for which
engineering, development, artwork, design work,
plans and sketches are undertaken in the country
of importation and provided by the buyer to the
producer free of charge or at a reduced rate
[CAO 4-2004]
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,
1. TV of identical goods at a different commercial
level and different quantity may be utilized
2. TV shall be adjusted upward or downward to
account for the difference [CAO 4-2004]
Similar Goods
1. like characteristics and like component materials
2. capable of performing same functions
3. commercially interchangeable
4. produced in same country
5. 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,
1. TV of similar goods at a different commercial
level and different quantity may be utilized
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TAXATION LAW
2. TV shall be adjusted upward or downward to
account for the difference [CAO 4-2004]
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:
1. Commissions or
2. additions made in connection with profit and
general expenses and
3. transport, insurance and associated costs
4. customs duties and other national taxes
PRICE
Less: COMMISSIONS/ADDITIONS
Less: COSTS
Less: DUTIES and TAXES
DEDUCTIVE VALUE
The sales must meet the following conditions:
1. sold in the Philippines in the same condition as
imported
2. sale has taken place at or about the same time of
importation of goods being valued
If no sale took place at or about the time of
importation, use sales at the earliest date after
importation (of the imported goods or similar or
identical goods) but before expiration of 90 days
If no sale meets the above conditions, dutiable value
shall be based on the unit price at which the imported
goods, after further processing, are sold in the greatest
aggregate quantity to unrelated persons in the
Philippines [Sec. 704, CMTA]
A ab a
45 days prior to and 45 days following the importation
[CAO 4-2004]
DV is calculated by:
Determining aggregate of relevant costs, charges and
expenses or value of
1. materials and
2. production or processing costs
Additional Costs*
Cost of containers, packing, assists, engineering,
artwork, plans and sketches undertaken in the
U.P. LAW BOC TARIFF AND CUSTOMS CODE
Philippines and charged to producer profits and
general expenses cost of transport, insurance and
charges to the port or place of importation
*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
If DV cannot be determined using any of the above
methods, use other reasonable means consistent with
principles and general provisions of the General
Agreements on Tariffs and Trade [GATT]
SPECIFIC
Rates are based on units of weight number or
measurement [Sec. 202, TCC]
Kinds of weight:
1. 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
2. Legal Weight weight at the time of their sale
to the public in usual retail quantities
3. Net Weight only the actual weight at the time
of importation excluding the weight of the
immediate and all other containers
b. Special Duties
These are additional import duties imposed on
specific kinds of imported articles. [See Table of
Special Duties below]
Dumping duties
CMTA, Sec. 711. Dumping Duty. The
provisions of Republic Act No. 8752, otherwise
known as the "Anti-Dumping Act of 1999", are
hereby adopted.
Countervailing duties
CMTA, Sec. 713. Countervailing Duty. The
provisions of Republic Act No. 8751, otherwise
known as "An Act Strengthening the
Mechanisms for the Imposition of
Countervailing Duties on Imported Subsidized
Products, Commodities or Articles of Commerce
in Order to Protect Domestic Industries from
Unfair Trade Competition, Amending for the
Purpose Section 302, Part 2, Title II, Book I of
Page 263 of 290
TAXATION LAW
Presidential Decree No. 1464", otherwise known
as the "Tariff and Customs Code of the
Philippines, as Amended", are hereby adopted.
Marking duties
CMTA, Sec. 710. Marking of Imported Goods
and Containers.
(A) Marking of Goods, Except as hereinafter
provided, all goods of foreign origin imported
into the Philippines or their containers, as
provided in subsection (B) hereof shall be
conspicuously marked in any official language of
the Philippines as legibly, indelibly and
permanently as the nature of the goods or
container will permit and in such manner as to
indicate to an ultimate purchaser in the
Philippines the name of the country of origin of
the goods. Pursuant thereto, the Commissioner
shall, with the approval of the Secretary of
Finance:
(1) Determine the character of words and phrases
or abbreviation thereof which shall be acceptable
as indicating the country of origin and prescribe
any reasonable method of marking, whether by
printing, stenciling, stamping, branding, labeling
or by any other reasonable method, and in a
conspicuous place on the goods or container
where the marking' shall appear;
(2) Require the addition of other words or
symbols which may be appropriate to prevent
deception or mistake as to the origin of the goods
or as to the origin of any other goods with which
such imported goods is usually combined
subsequent to importation but before delivery to
an ultimate purchaser; and
(3) Authorize the exception of any goods from
the requirements of marking if:
(i) Such goods are incapable of being marked;
(ii) Such goods cannot be marked prior to
shipment to the Philippines without injury;
(iii) Such goods cannot be marked prior to
shipment to the Philippines, except at an expense
economically prohibitive of their importation;
(iv) The marking of a container of such goods will
reasonably indicate the origin of such goods;
(v) Such goods are crude substances;
(vi) Such goods are imported for use by the
importer and not intended for sale in their
imported or any other form;
(vii) Such goods are to be processed in the
Philippines by the importer or for the importer's
account other than for the purpose of concealing
U.P. LAW BOC TARIFF AND CUSTOMS CODE
the origin of such goods and in such manner that
any mark contemplated by this section would
necessarily be obliterated, destroyed, or
permanently concealed;
(viii) An ultimate purchaser, by reason of the
character of such goods or by reason of the
circumstances of their importation, must
necessarily know the country of origin of such
goods even though they are not marked to
indicate their origin;
(ix) Such goods were produced more than twenty
(20) years prior to their importation into the
Philippines; or
(x) Such goods cannot be marked after
importation except at an expense which is
economically prohibitive, and the failure to mark
the goods before importation was not due to any
purpose of the importer, producer, seller or
shipper to avoid compliance with this section.
(B) Marking of Containers. Whenever goods
are exempt under paragraph (3) of subsection (A)
of this section from the requirements of marking,
the immediate container, if any, of such goods, or
such other container or containers of such goods,
shall be marked in such manner as to indicate to
an ultimate purchaser in the Philippines the name
of the country of origin of such goods in any
official language of the Philippines, subject to all
provisions of this section, including the same
exceptions as are applicable to goods under
paragraph (3) of subsection (A).
(C) Fine for Failure to Mark. If, at the time of
importation any good or its container, as
provided in subsection (B) hereof, is not marked
in accordance with the requirements of this
section, there shall be levied, collected, and paid
upon such good a marking duty of five percent
(5%) of dutiable value, which shall be deemed to
have accrued at the time of importation,
(D) Release Withheld Until Marked. No
imported goods held in customs custody for
inspection, examination, or assessment shall be
released until such goods or their containers shall
have been marked in accordance with the
requirements of this section and until the amount
of duty estimated to be payable under subsection
(C) of this section shall have been deposited.
(E) The failure or refusal of the owner or
importer to mark the goods as herein required
within a period of thirty (30) days after due notice
Page 264 of 290
TAXATION LAW
shall constitute as an act of abandonment of said
goods and their disposition shall be governed by
the provisions of this Act relative to
abandonment of imported goods.
Retaliatory/discriminatory duties
CMTA, Sec. 714. Discrimination by Foreign
Countries. Without prejudice to the Philippine
commitment in any ratified international
agreements or treaty, the following recourse shall
be applicable in case of discrimination by foreign
countries:
(a) When the President finds that the public
interest will be served thereby, the President shall,
by proclamation, specify and declare new or
additional duties in an amount not exceeding one
hundred percent (100%) ad valorem upon goods
wholly or in part the growth or product of, or
imported in a vessel of any foreign country
whenever the President shall find as a fact that
such country:
(1) Imposes, directly or indirectly, upon the
disposition or transportation in transit or through
reexportation from such country of any goods
wholly or in part the growth or product of the
Philippines, any unreasonable charge, exaction,
regulation or limitation which is not equally
enforced upon the like goods of every foreign
country; or
(2) Discriminates in fact against the commerce of
the Philippines, directly or indirectly, by law or
administrative regulation or practice, by or in
respect to any customs, tonnage, or port duty,
fee, charge, exaction, classification, regulation,
condition, restriction or prohibition, in such
manner as to place the commerce of the
Philippines at a disadvantage compared with the
commerce of any foreign country.
(b) If at any time the President shall find it to be
a fact that any foreign country has not only
discriminated against the commerce of the
Philippines, as aforesaid, but has, after the
issuance of a proclamation as authorized in
subsection (a) of this section, maintained or
increased its said discrimination against the
commerce of the Philippines, the President is
hereby authorized, if deemed consistent with the
interests of the Philippines and of public interest,
to issue a further proclamation directing that such
U.P. LAW BOC TARIFF AND CUSTOMS CODE
product of said country or such goods imported
in their vessels be excluded from importation
into the Philippines.
(c) Any proclamation issued by the President
under this section shall, if the President deems it
consistent with the interest of the Philippines,
extend to the whole of any foreign country or
may be confined to any subdivision or
subdivisions thereof: Provided, That the
President may, whenever the public interest
requires, suspend, revoke, supplement or amend
any such proclamation.
(d) All goods imported contrary to the provisions
of this section shall be forfeited to the
government of the Philippines and shall be liable
to be seized, prosecuted and condemned in like
manner and under the same regulations,
restrictions, and provisions as may from time to
time be established for the recovery, collection,
distribution, and remission or forfeiture to the
government by the tariff and customs laws.
Whenever the provision of this section shall be
applicable to importations into the Philippines of
goods wholly or in part the growth or product of
any foreign country, it shall be applicable thereto,
whether such goods are imported directly or
indirectly.
(e) It shall be the duty of the Commission to
ascertain and at all times be informed whether
any of the discriminations against the commerce
of the Philippines enumerated in subsections (a)
and (b) of this section are practiced by any
country; and if and when such discriminatory acts
are disclosed, it shall be the duty of the
Commission to bring the matter to the attention
of the President, and to recommend measures to
address such discriminatory acts.
(f) The Secretary of Finance shall make such rules
and regulations as are necessary for the execution
of a proclamation that the President may issue in
accordance with the provisions of this section.
Safeguard measure
CMTA, Sec. 712. Safeguard Duty. The
provisions of Republic Act No. 8800, otherwise
known as the "Safeguard Measures Act", are
hereby adopted.
Page 265 of 290
TAXATION LAW
4. Flexible Tariff Clause
Constitutional Basis
Sec. 28[2], Art. VI, 1987 Constitution. The
Congress may, by law, authorize the President to
fix with specified limits, and subject to such
limitations and restrictions, as it may impose, tariff
rates, import and export quotas, tonnage and
wharfage duties, and other duties or imposts
within the framework of the national development
program of the Government.
Definition
The Flexible Clause refers to the power of the
President upon recommendation of the National
Economic and Development Authority (NEDA) to:
a. Increase, reduce or remove existing protective
tariff rates of import duty, but in no case shall be
higher than 100% ad valorem;
b. Establish import quota or to ban importation of
any commodity as may be necessary; and
c. Impose additional duty on all imports not
exceeding 10% ad valorem, whenever necessary.
[Sec. 102(u), CMTA]
Specific Rule
CMTA, Sec. 1608. Flexible Clause. (a) In the
interest of the general welfare and national
security, and, subject to the limitations prescribed
under this Act, the President, upon the
recommendation of the NEDA, is hereby
empowered to:
(1) Increase, reduce, or remove existing rates of
import duty including any necessary change in
classification. The existing rates may be increased
or decreased to any level, in one or several stages,
but in no case shall the increased rate of import
duty be higher than a maximum of one hundred
percent (100%) ad valorem; (2) Establish import
quotas or ban imports of any commodity, as may
be necessary; and
(3) Impose an additional duty on all imports not
exceeding ten percent (10%) ad valorem
whenever necessary: Provided, That upon
periodic investigations by the Commission and
recommendation of the NEDA, the President
may cause a gradual reduction of rates of import
duty granted in Section 1611 of this Act,
including those subsequently granted pursuant to
this section.
U.P. LAW BOC TARIFF AND CUSTOMS CODE
(b) Before any recommendation is submitted to
the President by the NEDA pursuant to the
provisions of this section, except in the
imposition of an additional duty not exceeding
ten percent (10%) ad valorem, the Commission
shall conduct an investigation and shall hold
public hearings wherein interested parties shall be
afforded reasonable opportunity to be present, to
produce evidence and to be heard. The
Commission shall also hear the views and
recommendations of any government office,
agency, or instrumentality. The Commission shall
submit its findings and recommendations to the
NEDA within thirty (30) days after the
termination of the public hearings.
(c) The power of the President to increase or
decrease rates of import duty within the limits
fixed in subsection (a) hereof shall include the
authority to modify the form of duty. In
modifying the form of duty, the corresponding
ad valorem or specific equivalents of the duly
with respect to imports from the principal
competing foreign country for the most recent
representative period shall be used as basis.
(d) Any order issued by the President pursuant to
the provisions of this section shall take effect
thirty (30) days after promulgation, except in the
imposition of additional duty not exceeding ten
percent (10%) ad valorem which shall take effect
at the discretion of the President.
(e) The power delegated to the President as
provided for in this section shall be exercised
only when Congress is not in session.
(f) The power herein delegated may be withdrawn
or terminated by Congress through a joint
resolution.
The NEDA shall promulgate rules and
regulations necessary to carry out the provisions
of this section.
Page 266 of 290
TAXATION LAW
B. Requirements of
Importation
1. Beginning and Ending of
Importation
Importation begins when the carrying vessel or
aircraft enters the Philippine territory with the
intention to unload therein. [Sec. 1202, TCC; Sec. 103,
CMTA]
Importation is deemed terminated
a. The duties, taxes and other charges due upon the
goods have been paid or secured to be paid at the
port of entry unless the goods are free from
duties, taxes and other charges and legal permit
for withdrawal has been granted; or
b. In case the goods are deemed free of duties, taxes
and other charges, the goods have legally left the
jurisdiction of the Bureau. [Sec. 1202, TCC; Sec.
103, CMTA]
Note: The payment of the duties, taxes, fees and other
charges must be in full. [Papa v. Mago, G.R. No. L-
27360 (1968)]
D
Impor ed good hall be deemed en ered in he
Philippines for consumption when the goods
declaration is electronically lodged, together with
any required supporting documents, with the
pertinent customs office. [Sec. 115, CMTA]
Under Sec. 206, TCC, imported articles shall be
deemed "entered" in the Philippines for consumption
when the specified entry form is properly filed and
accepted, together with any related documents
required by the TCC and/or regulations to be filed
with such form at the time of entry, at the port or
station by the customs official designated to receive
such entry papers and any duties, taxes, fees and/or
other lawful charges required to be paid at the time of
making such entry have been paid or secured to be
paid with the customs official designated to receive
such monies, provided that the article has previously
arrived within the limits of the port of entry.
U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

Manifests for the Commission on Audit and

2. Obligations of Importer District Collector
1. the Bureau of Customs shall provide electronic
copies to the COA Chairperson;
a. Cargo Manifest 2. the master shall present to the District Collector
[Sec. 1005, TCC; the same under CMTA, Sec. 1204] the original properly endorsed by the boarding
officer [Sec. 1206, CMTA]
Every vessel from a foreign port must have on board
a complete manifest of all her cargo. [Under Sec. 1007, TCC, it is the master who delivers
and mails the cargo manifest to the Auditor General
All cargoes intended to be landed at a port in the and Collector]
Philippines must be described in separate manifests
for each port of call. b. Import Entry
The manifest shall include:
N ca ed G d Dec a a de e CMTA
1. Port of departure
2. Port of delivery
Goods Declaration
3. Marks, numbers, quantity and description of the
a statement made in the manner prescribed by the
packages
Bureau and other appropriate agencies, by which the
4. Names of the consignees
persons concerned indicate the procedure to be
observed in the application for the entry or admission
Requirement to provide advance copy
of imported goods and the particulars of which the
A true and complete copy of the cargo manifest shall
customs administration shall require [Sec. 102(y),
be electronically sent in advance by the shipping
CMTA]
company, NVOCC (Non-Vessel Operating Common
Carrier), freight forwarder, cargo consolidator, or
Declarant
their agents within the cut-off period as may be
may be a consignee or a person who has the right to
determined by the Bureau before the arrival of the
dispose of the goods.
carrying vessel at the port of entry. [Sec. 1204, CMTA]
The declarant shall lodge a goods declaration with the
General rule: It cannot be changed or altered after
Bureau and may be:
entry of vessel.
1. The importer, being the holder of the bill of
lading; or
Exception:
2. The exporter, being the owner of the goods to
Amendment, under oath, by the master, consignee or
be shipped out; or
agent, which shall be attached to the original manifest
3. A customs broker acting under the authority of
the importer or from a holder of the bill; or
CANNOT amend the manifest after the invoice
4. A person duly empowered to act as agent or
and/or entry covering the importation have been
attorney-in-fact for each holder.
received and recorded in the office of the appraiser
In case the consignee or the person who has the right
EXCEPT: (a) Obvious clerical error or any other
to dispose of the goods is a juridical person, it may
discrepancy is committed in the preparation; (b)
authorize a responsible officer of the company to sign
Without fraudulent intent; (c) Discovery would not
the goods declaration as declarant on its behalf. [Sec.
have been made until after examination of the
106 and 407, CMTA] [Sec. 1301, TCC #2 pertains
importation is completed.
o an other holder of the bill of lading in due
co r e ]
The cargo manifest and each copy thereof shall be
accompanied by a translation in English if originally
Importations Subject to Goods Declaration
written in another language. [Sec. 1205, CMTA; Sec.
Unless otherwise provided for in this Act, all
1006, TCC pre io l ae in o the official
imported goods shall be subject to the lodgement of
language of the Philippines ]
a goods declaration. A goods declaration may be for
consumption, for customs bonded warehousing, for

Page 267 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE
admission, for conditional importation, or for
customs transit. [Sec. 401, CMTA]
Kinds of Goods Declaration
1. For Consumption
2. For Customs Bonded Warehousing
3. For admission
4. For conditional importation
5. For customs transit
Sec. 1302, TCC All imported articles, except
importation admitted free of duty, shall be subject to
a formal or informal entry.
Kinds of Import Entry [Sec. 1302, TCC]
1. Formal Entry A formal entry may be:
2. For immediate consumption, or
3. Under irrevocable domestic letter of credit, bank
guarantee or bond for:
4. Placing the article in customs bonded warehouse;
5. constructive warehousing and immediate
transportation to other ports of the Philippines
upon proper examination and appraisal; or
6. Constructive warehousing and immediate
exportation.
7. Informal Entry
Statements in Goods Declaration
1. The invoice and goods declaration contain an
accurate and faithful account of the prices paid or
payable for the goods, and other adjustments to
the price actually paid or payable, and that
nothing has been omitted therefrom or concealed
whereby the government of the Republic of the
Philippines might be defrauded of any part of the
duties and taxes lawfully due on the goods;
2. To the best of the declarant's information and
belief, all the invoices and bills of lading or airway
bills relating to the goods are the only ones in
existence relating to the importation in question,
and that these documents are in the same state as
when they were received by the declarant, and the
declaration thereon are in all respects genuine
and true. [Sec. 412, CMTA]
[U de Sec. 1304, TCC, e f g c ded: T a e
entry delivered to the Collector contains a full account of the
value or price articles, including b ec f e e . ]
Content of Goods Declaration
1. shall contain the names of the consignee,
importing vessel or aircraft, port of departure,
port of destination and date of arrival, the
number and marks of packages, or the quantity,
Page 268 of 290
TAXATION LAW
if in bulk, the nature and correct commodity
description of the goods contained therein, its
value as set forth in a proper invoice, and such
other information as may be required by rules
and regulations. [Sec. 411, CMTA]
2. signed by the declarant [Sec. 107, CMTA]
Form
As far as practicable, the format of the goods
declaration shall conform with international
standards. The Bureau shall require the electronic
lodgement of the goods declaration. [Sec. 407, CMTA]
[Sec. 1306, TCC requires a number of copies in such form as
prescribed by regulations and excludes consignee and port of
destination from the content of the import entry]
Articles to be cleared on informal entry
1. Goods of a commercial nature with Free on
Board (FOB) or Free Carrier At (FCA) value of
less than P50,000.00, subject to adjustment every
three years; and
2. Personal and household effects or goods, not in
commercial quantity, imported in a passenger's
baggage or mail.
The Commissioner may adjust the value of goods of
commercial nature that shall be cleared through an
informal entry process. [Sec. 402, CMTA; Sec. 1302,
TCC value of #1 is P2,000 or less]
Articles to be cleared on formal entry
All goods declaration for consumption shall be
cleared through a formal entry process. [Sec. 402,
CMTA]
Note: All importations entered through a formal entry
process shall be covered by a letter of credit or any
verifiable commercial document evidencing payment
or in cases where there is no sale for export, by any
commercial document indicating the commercial
value of the goods. [Sec. 402, CMTA; RA 9135
(2001)]
c. Declaration of Correct Weight or
Value
Unless otherwise provided for in this Act, all
imported goods shall be subject to the lodgement of
a goods declaration.
PROVISIONAL GOODS DECLARATION
(PGD) UNDER CMTA, SEC. 403: Where the
U.P. LAW BOC TARIFF AND CUSTOMS CODE
declarant does not have all the information or
supporting documents required to complete the
goods declaration, the lodging of a provisional goods
declaration may be allowed: Provided, That it
substantially contains the necessary information
required by the Bureau and the declarant undertakes
to complete the information or submit the supporting
documents within 45 days from the filing of the PGD,
extendible for another 45 days for valid reasons.
If the Bureau accepts a PGD, the duty treatment of
the goods shall not be different from that of goods
with complete declaration.
Goods under a PGD may be released upon posting
of any required security equivalent to the amount
ascertained to be the applicable duties and taxes. [See
also Sec. 1400, CMTA on misdeclaration]
INFORMATION TO BE FURNISHED [SEC.
1313, TCC]
Classification
When article is not specifically classified in the Code,
the interested party, importer or foreign exporter may
submit a sample with full description of component
materials in a written request.
Value
Upon written application, Collector shall furnish
importer within 30 days the latest information as to
the value of the articles to be imported.
Importer must present all pertinent papers and
documents, act in good faith and unable to obtain
information due to unusual conditions
Information given is not an appraisal nor is it binding
pon he Collec or righ of apprai al.
The declaration, ascertainment or verification of the
correct weight of the cargo at the port of loading is
the duty or obligation of the master, pilot, owner,
officer or employee of the vessel. If he omits or
disregards this duty and a punishable discrepancy
between the declared weight and actual weight of the
cargo exists, the inevitable conclusion is that he is
negligent or careless. Similarly, if in the exercise or
performance of this duty, he is negligent or careless
resulting in the commission of excessive discrepancy
in the weight of the ship's cargo penalized under the
law, carelessness or incompetency is, nonetheless,
imputable to him.
Page 269 of 290
TAXATION LAW
d. Liability for Payment of Duties
General rule: the liability for duties, taxes, fees and
other charges attached to importation constitutes a
personal debt due from the importer in favor of the
government; it constitutes a lien upon the imported
goods which may be enforced while such goods are
nder c om c od . [CMTA, Sec. 405; same
under Sec. 1204, TCC]
How to discharge: Discharged only by payment in
full of all duties, taxes, fees and other charges legally
accruing
Exception: Relieved by laws or regulations
e. Liquidation of Duties
When made: Upon approval by the Collector of the
returns of the appraiser and reports of the weights,
gauge or quantity [Sec. 1601, TCC]
How: the liquidation shall be made on the face of the
entry showing the particulars thereof, initiated by the
liquidating clerk, approved by the chief liquidator, and
recorded in the record of liquidations. [Sec. 1601,
TCC]
Additional Process: A daily record of all entries
liquidated shall be posted in the public corridor of the
customhouse, stating the name of the vessel or
aircraft, the port from which she arrived, the date of
her arrival, the name of the importer, and the serial
number and date of the entry. A daily record must also
be kept by the Collector of all additional duties, taxes
and other charges found upon liquidation, and notice
shall promptly be sent to the interested parties. [Sec.
1601, TCC]
TENTATIVE AND FINAL LIQUIDATION
Tentative Liquidation [Sec. 1602, TCC]
When liquidation shall be deemed to be tentative:
If to determine the exact amount due under the law
in whole or in part some future action is required
[only as to item/s affected]
Effect: shall to that extent be subject to future and
final readjustment and settlement; entry in such case
shall be stamped "Tentative liquidation"
Final Liquidation [Sec. 1603, TCC as amended by
RA 9135]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
When liquidation is final and conclusive upon all
the parties: when articles have been entered and
passed free of duty or final adjustment of duties made,
after the expiration of 3 years from the date of the
final payment of duties.
Exceptions:
1. Fraud
2. Protest
3. Compliance audit pursuant to the provisions of
the Code
Note: Exceptions do not apply in case of tentative
liquidation
Fractions in the Liquidation a fraction of a peso
less than fifty centavos shall be disregarded, and a
fraction of a peso amounting to fifty centavos or more
shall be considered as one peso. In case of
overpayment or underpayment of duties, taxes,
surcharges, wharfage and/or other charges paid on
entries, where the amount involved is less than five
pesos, no refund or collection shall be made. [Sec.
1604, TCC]
Notes:
READJUSTMENT OF APPRAISAL,
CLASSIFICATION OR RETURN
[Sec. 1407, TCC]
Prescriptive Period for Appraisal, Classification
or Return
General rule: Appraisal, classification or return as finally
passed upon and approved or modified by the
Collector shall not be altered or modified in any
manner.
Exceptions:
1. Within one year after payment of the duties, upon
statement of error in conformity with seventeen
hundred and seven hereof, approved by the
Collector
2. Within fifteen days after such payment upon
request for reappraisal and/or reclassification
addressed to the Commissioner by the Collector,
if the appraisal and/or classification is deemed to
be low
3. Upon request for reappraisal and/or
reclassification, in the form of a timely protest
addressed to the Collector by the interested party
Page 270 of 290
TAXATION LAW
if the latter should be dissatisfied with the
appraisal or return
4. Upon demand by the Commissioner of Customs
after the completion of compliance audit
pursuant to the provisions of this Code." [R.A.
9135 (2001)]
f. Keeping of Records
1. All importers are required to keep at their
principal place of business, in the manner
prescribed by regulations to be issued by the
Commissioner and for a period of 3 years from
the date of final payment of duties and taxes or
customs clearance, as the case may be, all records
pertaining to the ordinary course of business and
to any activity or information contained in the
records required by this title in connection with
any such activity.
2. All parties engaged in customs clearance and
processing are required to keep at their principal
place of business, in the manner prescribed by
regulations to be issued by the Commissioner and
for a period of 3 years from the date of filing of
the goods declaration, copies of the
abovementioned records covering the
transactions handled.
3. Locators or persons authorized to bring
imported goods into free zones, such as the
special economic zones and free ports, are
required to keep subject-records of all its
activities, including in whole or in part, records
on imported goods withdrawn from said zones
into the customs territory for a period of three (3)
years from the date of filing of the goods
declaration. [Sec. 1003, CMTA]
Audit examination
Any authorized officer of the Bureau shall be given by
the importer and customs broker full and free access
to the premises where the records are kept, to conduct
audit examination, inspection, verification, and
investigation of those records relevant to such
investigation or inquiry. [Sec. 1002, CMTA]
[Sec. 3514, TCC also required all importers and brokers, to
keep records for 3 years for inspection by customs officers
authorized by BOC]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
C. Accrual and Payment of
Tax and Duties
1. General Rule: All Imported
Articles are Subject to Duty
a. Free Importation and
Exportation
Unless otherwise provided by law or regulation, all
goods may be freely imported into and exported from
the Philippines without need for import and export
permits, clearances or licenses. [Sec. 116, CMTA]
b. Regulated Importation and
Exportation
These goods shall be imported or exported only after
securing the necessary goods declaration or export
declaration, clearances, licenses, and any other
requirements, prior to importation or exportation. In
case of importation, submission of requirements after
arrival of the goods but prior to release from customs
custody shall be allowed but only in cases provided
for by governing laws or regulations. [Sec. 116,
CMTA]
c. Prohibited importations
1. Written or printed goods in any form containing
any matter advocating or inciting treason,
rebellion, insurrection, sedition against the
government of the Philippines, or forcible
resistance to any law of the Philippines, or written
or printed goods containing any threat to take the
life of, or inflict bodily harm upon any person in
the Philippines;
2. Goods, instruments, drugs and substances
designed, intended or adapted for producing
unlawful abortion, or any printed matter which
advertises, describes or gives direct or indirect
information where, how or by whom unlawful
abortion is committed;
3. Written or printed goods, negatives or
cinematographic films, photographs, engravings,
lithographs, objects, paintings, drawings or other
representation of an obscene or immoral
character;
4. Any goods manufactured in whole or in part of
gold, silver or other precious metals or alloys and
Page 271 of 290
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the stamp, brand or mark does not Indicate the
actual fineness of quality of the metals or alloys;
5. Any adulterated or misbranded food or goods for
human consumption or any adulterated or
misbranded drug in violation of relevant laws and
6.
regulations;
Infringing goods as defined under the Intellectual
Property Code and related laws; and
7. All other goods or parts thereof which
importation and exportation are explicitly
prohibited by law or rules and regulations issued
by the competent authority. [Sec. 118, CMTA]
d. Restricted Importation and
Exportation
Except when authorized by law or regulation, the
importation and exportation of the following
restricted goods are prohibited:
1. Dynamite, gunpowder, ammunitions and other
explosives, firearms and weapons of war, or parts
thereof;
2. Roulette wheels, gambling outfits, loaded dice,
marked cards, machines, apparatus or mechanical
devices used in gambling or the distribution of
money, cigars, cigarettes or other goods when
such distribution is dependent on chance,
including jackpot and pinball machines or similar
contrivances, or parts thereof;
3. Lottery and sweepstakes tickets, except
advertisements thereof and lists of drawings
therein;
4. Marijuana, opium, poppies, coca leaves, heroin or
other narcotics or synthetic drugs which are or
may hereafter be declared habit forming by the
President of the Philippines, or any compound,
manufactured salt, derivative, or preparation
thereof, except when imported by the
government of the Philippines or any person duly
authorized by the Dangerous Drugs Board, for
medicinal purposes;
5. Opium pipes or parts thereof, of whatever
material; and
6. Any other goods whose importation and
exportation are restricted.
e. De Minimis Importations (Small
Value Importations)
No duties and taxes shall be collected on goods with
an FOB or FCA value of 10,000.00 or below.
U.P. LAW BOC TARIFF AND CUSTOMS CODE
The Secretary of Finance shall adjust the de minimis
value every 3 years. The value shall be adjusted to its
present value using the CPI, as published by the PSA.
[Sec. 423, CMTA]
CAO 2-2016
De Minimis importations shall be lodged and
processed under a simplified system and with the
use of information and communications
echnolog ( ICT ) enabled em o allo
advance clearance, and ensure proper customs
monitoring and control;
De Minimis importations shall, as far as
practicable, be subject to a nonintrusive
examination (e.g. x-ray or any other equivalent
device) on a random basis based.
The customs examiner may physically inspect the
imported goods.
Exclusions from Immediate Release as De
Minimis importations:
1. Importations declared a i ho commercial
al e or of no commercial al e or i h
pecific amo n b q alified b he phra e for
c om p rpo e or analogo phra e . The
party concerned must declare the specific value
of the goods, supported by available invoice,
receipt or equivalent document.
2. Tobacco and liquor products carried by
passengers in excess of the allowable limits but
within the De Minimis value.
3. Goods subject to requirements or conditions
imposed by the concerned regulatory agency,
unless for personal use and within the limits
allowed by regulations.
4. Prohibited and restricted importations.
5. Importations to be entered conditionally-free, for
warehousing, for transit, and / or admission to a
free zone [CAO 2-2016]
f. Conditionally-Free and Duty-
Exempt Importations [Sec. 800,
CMTA]
The following goods shall be exempt from the
payment of import duties upon compliance with the
formalities prescribed in the regulations which shall
be promulgated by the Commissioner with the
approval of the Secretary of Finance: Provided, That
goods sold, bartered, hired or used for purposes other
than what they were intended for and without prior
payment of the duty, tax or other charges which
would have been due and payable at the time of entry
Page 272 of 290
TAXATION LAW
if the goods had been entered without the benefit of
this section, shall be subject to forfeiture and the
importation shall constitute a fraudulent practice
against customs laws: Provided, However, That a sale
pursuant to a judicial order or in liquidation of the
estate of a deceased person shall not be subject to the
preceding proviso, without prejudice to the payment
of duties, taxes and other charges; Provided, Further,
That the President may, upon the recommendation of
the Secretary of Finance, suspend, disallow or
completely withdraw, in whole or in part, any
conditionally free importation under this section:
1. Aquatic products such as 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; Provided, However, That they have not
been landed in any foreign territory or, if so
landed, that they have been landed solely for
transshipment without having been advanced in
condition;
2. Equipment for use in the salvage of vessels or
aircrafts, not available locally, upon identification
and the giving of a security in an amount equal to
100% of the ascertained duties, taxes and other
charges thereon, conditioned for the exportation
thereof or payment of corresponding duties,
taxes and other charges within six (6) months
from the date of acceptance of the goods
declaration; Provided, That the Bureau 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;
3. Cost of repairs, excluding the value of the goods
used, made in foreign countries upon vessels or
aircraft documented, registered or licensed in the
Philippines, upon proof satisfactory to the
Bureau: (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 their voyage or flight, were 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 vessels or aircrafts to enable them to reach
their port of destination;
4. Goods brought into the Philippines for repair,
processing or reconditioning to be reexported
U.P. LAW BOC TARIFF AND CUSTOMS CODE
upon completion of the repair, processing or
reconditioning: Provided, That the Bureau shall
require security equal to 100% of the 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 goods declaration;
5. Medals, badges, cups, and other small goods
bestowed as trophies or prizes, or those received
or accepted as honorary distinction;
6. Returning residents
Personal and household effects belonging to
returning residents including household
appliances, jewelry, precious stones, and other
goods of luxury which were formally declared
and listed before departure and identified under
oath before the District Collector when exported
from the Philippines by such returning residents
upon their departure therefrom or during their
stay abroad; personal and household effects
including wearing apparel, goods of personal
adornment, toilet goods, instruments related to
one's profession and analogous personal or
household effects, excluding luxury items,
vehicles, watercrafts, aircrafts and animals
purchased in foreign countries by residents of the
Philippines which were necessary, appropriate,
and normally used for their comfort and
convenience during their stay abroad,
accompanying them on their return, or arriving
within a reasonable time which, barring
unforeseen and fortuitous events, in no case shall
exceed 60 days after the owner's return.
For purposes of this section, the phrase
re rning re iden hall refer o na ional ho
have stayed in a foreign country for a period of at
least six (6) months.
Conditions for exemption from tax and
duties
Returning residents shall have tax and duty
exemption on personal and household effects: 7.
Provided, That:
a. It shall not be in commercial quantities;
b. It is not intended for barter, sale or for hire;
and
c. Limited to the FCA or FOB value of:
350,000.00 for those who have stayed
in a foreign country for at least 10 years
and have not availed of this privilege
Page 273 of 290
TAXATION LAW
within 10 years prior to returning
resident's arrival;
250,000.00 for those who have stayed
in a foreign country for a period of at
least five (5) but not more than 10 years
and have not availed of this privilege
within five (5) years prior to returning
resident's arrival; or
150,000.00 for those who have stayed
in a foreign country for a period of less
than five (5) years and have not availed
of this privilege within six (6) months
prior to returning resident's arrival.
Any amount in excess of the above-stated
threshold shall be subject to the
corresponding duties and taxes under this
Act.
Every three (3) years after the effectivity of
this Act, the Secretary of Finance shall adjust
the amount herein stated to its present value
using the CPI as published by the PSA.
In addition to the privileges granted under the
immediately preceding paragraph, returning
Overseas Filipino Workers (OFWs) shall have
the privilege to bring in, tax and duty-free, home
appliances and other durables, limited to one of
every kind once in a given calendar year
accompanying them on their return, or arriving
within a reasonable time which, barring
unforeseen and fortuitous events, in no case shall
60 days after every returning OFW's return upon
presentation of their original passport at the port
of entry: Provided, That any amount in excess of
FCA value of 150,000.00 for personal and
household effects or of the number of duty-free
appliances as provided for under this section,
shall be subject to the corresponding taxes and
duties; Provided, Further, That every three (3)
years after the effectivity of this Act, the Secretary
of Finance shall adjust the amount herein stated
to its present value using the CPI as published by
the PSA;
Balikbayan box
Residents of the Philippines, OFWs or other
Filipinos while residing abroad or upon their
return to the Philippines shall be allowed to bring
in or send to their families or relatives in the
Philippines balikbayan boxes which shall be
exempt from applicable duties and taxes imposed
under the NIRC of 1997, as amended: Provided,
That balikbayan boxes shall contain personal and
U.P. LAW BOC TARIFF AND CUSTOMS CODE
household effects only and shall neither be in
commercial quantities nor intended for barter,
sale or for hire and that the FCA value of which
shall not exceed 150,000.00; Provided, Further,
That every three (3) years after the effectivity of
this Act, the Secretary of Finance shall adjust the
amount herein stated to its present value using
the CPI as published by the PSA; Provided,
Finally, That residents of the Philippines, OFWs
or other Filipinos can only avail of this privilege
up to three (3) times in a calendar year. Any
amount in excess of the allowable non-dutiable
value shall be subject to the applicable duties and
taxes;
For purposes of this Act, OFWs refer to holders
of valid passports duly issued by the Department
of Foreign Affairs (DFA) and certified by the
Department of Labor and Employment (DOLE)
or the Philippine Overseas Employment
Administration (POEA) for overseas
employment purposes. They cover all Filipinos,
working in a foreign country under employment
contracts, regardless of their professions, skills or
employment status in a foreign country; and
Calendar Year refers to the period from January
1 to December 31.
8. Wearing apparel, goods of personal adornment,
toilet goods, portable tools and instruments,
theatrical costumes and similar effects
accompanying travelers, or tourists, or arriving
within a reasonable time before or 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 convenience; Provided, That this
exemption shall not apply to goods intended for
other persons or for barter, sale or hire: Provided,
However, That the Bureau may require either a
written commitment or a security in an amount
equal to 100% of the ascertained duties, taxes and
other charges thereon, 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 goods declaration: Provided,
Further, That the Bureau 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.
Page 274 of 290
TAXATION LAW
Personal and household effects and vehicles
belonging to foreign consultants and experts
hired by, 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 said items, for
their own use and not for barter, sale or hire:
Provided, That the Bureau may require either a
written commitment or a security in an amount
equal to 100% of the ascertained duties, taxes and
other charges thereon, upon the goods classified
under this subsection; conditioned for the
exportation thereof or payment of the
corresponding duties, taxes and other charges
within three (3) months after the expiration of
their term or contract; Provided, However, That
the Bureau 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;
9. 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 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 said items, for their own use and not
for barter or sale, accompanying such persons, or
arriving within a reasonable time: Provided, That
the Bureau may, upon the production of
satisfactory evidence that such persons are
actually coming to settle in the Philippines and
that the goods are brought from their former
place of abode, exempt such goods from the
payment of duties and taxes; Provided, Further,
That vehicles, vessels, aircrafts, machineries and
other similar goods for use in manufacture, shall
not fall within this classification and shall
therefore be subject to duties, taxes and other
charges;
10. Goods used exclusively for public entertainment,
and for display in public expositions, or for
exhibition or competition for prizes, and devices
for projecting pictures and parts and
appurtenances thereof, upon identification,
U.P. LAW BOC TARIFF AND CUSTOMS CODE
examination, and appraisal and the giving of a
security in an amount equal to 100% of the
ascertained duties, taxes and other charges
thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and
other charges within three (3) months from the
date of acceptance of the goods declaration:
Provided, That the Bureau 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; 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 films is
exhibited for profit, the proceeds therefrom, shall
be subject to confiscation, in addition to the
penalty provided under this Act;
11. Goods 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
security in an amount equal to 100% of the
ascertained duties, taxes and other charges
thereon, conditioned for exportation thereof or
payment of the corresponding duties, taxes and
other charges within three (3) months from the
date of acceptance of the goods declaration,
unless extended by the District Collector for
another three (3) months; photographic and
cinematographic films, underdeveloped, 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, he erm ac or and ar i
include the persons operating the photographic
camera or other photographic and sound
recording apparatus by which the film is made;
12. 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.
Goods imported for the personal or family use of
members and attaches of foreign embassies,
legations, consular officers and other
representatives of foreign governments;
Page 275 of 290
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Provided, However, That such privilege shall be
accorded under special agreements between the
Philippines and the countries which they
represent: Provided, Further, That the privilege
may be granted only upon specific instructions of
the Secretary of Finance pursuant to an official
request of the DFA on behalf of members or
attaches of foreign embassies, legations, consular
officers and other representatives of foreign
governments;
13. Imported goods donated to or, for the account
of the Philippine government or any duly
registered relief organization, not operated for
profit, for free distribution among the needy,
upon certification by the DSWD or the
Department of Education (DepED), or the
Department of Health (DOH), as the case may
be;
14. 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 security in an amount equal to 100%
of the ascertained duties, taxes and other charges
thereon, within six (6) months from the date of
acceptance of the goods declaration;
15. Supplies which are necessary for the reasonable
requirements of the vessel or aircraft in its voyage
or flight outside the Philippines, including goods
transferred from a bonded warehouse in any
Customs 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
aircraft as sea or air stores; or goods 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;
16. Goods 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
U.P. LAW BOC TARIFF AND CUSTOMS CODE
vessel or its equipment, wrecked or abandoned in
Philippine waters or elsewhere: Provided, That
goods and salvage recovered within the said
period of two (2) years shall be dutiable;
17. Coffins or urns containing human remains,
bones or ashes, used personal and household
effects (not merchandise) of the deceased person,
except vehicles, the FCA value of which does not
exceed 150,000.00, upon identification as such:
Provided, That every three (3) years after the
effectivity of this Act, the value herein stated shall
be adjusted to its present value using the CPI as
published by the PSA;
18. Samples of the kind, in such quantity and of such
dimension or construction as to render them
unsaleable or of no commercial value; models not
adapted for practical use; and samples of
medicines, properly marked ample-sale
p ni hable b la , for he p rpo e of
introducing new goods 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 medicines shall have been previously
authorized by the Secretary of Health, and that
such samples are new medicines not available in
the Philippines: Provided, Further, That samples
not previously authorized 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 as in the case of
precious and semi-precious stones, cut or uncut,
and jewelry set with precious or semi-precious
stones, the value of any single importation of
which does not exceed FCA value of 50,000.00
upon the giving of a security in an amount equal
to the ascertained duties, taxes and other charges
thereon, conditioned for the exportation of said
samples within three (3) months from the date of
the acceptance of the goods declaration or in
default thereof, the payment of the
corresponding duties, taxes and other charges:
Provided, That if the FCA value of any single
consignment of such commercial samples
exceeds 50,000.00, the importer thereof may
select any portion of the same not exceeding the
FCA value of 50,000,00 for entry under the
Page 276 of 290
TAXATION LAW
provision of this subsection, and the excess of the
consignment may be entered in bond, or for
consumption, as the importer may elect:
Provided, Further, That every three (3) years after
the effectivity of this Act, the Secretary of
Finance shall adjust the amount herein stated to
its present value using the CPI as published by
the PSA.
19. Animals, except race horses, and plants for
scientific, experimental propagation or breeding,
andfor other botanical, 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,
However, That the free entry of animals for
breeding purposes shall be restricted to animals
of recognized breed, duly registered in the record
or registry established for that breed, and
certified as such by the Bureau of Animal
Industry (BAI): Provided, Further, That the
certification of such record, and pedigree of such
animal duly authenticated by the proper
custodian of such record or registry, shall be
submitted to the District Collector, together with
the affidavit of the owner or importer that such
animal is the animal described in said certificate
of record and pedigree: Provided, Finally, That
the animals and plants are certified by the NEDA
as necessary for economic development;
20. Economic, technical, vocational, scientific,
philosophical, historical and cultural books or
publications, and religious books like Bibles,
missals, prayer books, the Koran, Ahadith and
other religious books of similar nature and
extracts therefrom, hymnal and hymns for
religious uses; Provided, That those which may
have already been imported but are yet to be
released by the Bureau at the effectivity of this
Act may still enjoy the privilege herein provided
upon certification by the DepED 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 (XAESCM)
signed by the President of the Philippines on
August 2, 1952, or other agreements binding
upon the Philippines. Educational, scientific and
U.P. LAW BOC TARIFF AND CUSTOMS CODE
cultural materials covered by international
agreements or commitments binding upon the
Philippine government so certified by the
DepED;
21. Philippine goods previously exported from the
Philippines and returned without having been
advanced in value, or improved in condition by
any process of manufacturing or other means,
and upon which no drawback or bounty has been
allowed, including instruments and implements,
tools of trade, machinery and equipment, used
abroad by Filipino citizens in the pursuit of their
business, occupation or profession; and foreign
goods 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 goods 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 Philippine
goods falling under this subsection upon which
drawback or bounty have been allowed shall,
upon reimportation thereof, be subject to a duty
under this subsection equal to the amount of
such drawback or bounty;
22. Aircraft, equipment and machinery, spare parts,
commissary and catering supplies, aviation gas,
fuel and oil, whether crude or refined except
when directly or indirectly used for domestic
operations, and such other goods or supplies
imported by and for the use of scheduled airlines
operating under congressional franchise:
Provided, That such goods or supplies are not
locally available in reasonable quantity, quality
and price and are necessary or incidental to the
proper operation of the scheduled airline
importing the same;
23. Machineries, equipment, tools for production,
plans to convert mineral ores into saleable form,
spare parts, supplies, materials, accessories,
explosives, chemicals, and transportation and
communications facilities imported by and for
the use of new mines and old mines which
resume operations, when certified to as such by
the Secretary of the Department of Environment
and Natural Resources (DENR), upon the
recommendation of the Director of Mines and
Page 277 of 290
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Geosciences Bureau, for a period ending five (5)
years from the first date of actual commercial
production of saleable mineral products:
Provided, That such goods 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,
when certified to as such by the Secretary of the
Department of Agriculture (DA) or the Secretary
of the Department of Trade and Industry (DTI),
as the case may be;
24. Spare parts of vessels or aircraft of foreign
registry engaged in foreign trade when brought
into the Philippines exclusively as replacements
or for the emergency repair thereof, upon proof
satisfactory to the District Collector that such
spare parts shaft he utilized to secure the safety,
seaworthiness or airworthiness of the vessel or
aircraft, to enable it to continue its voyage or
flight;
25. Goods exported from the Philippines for repair,
processing or reconditioning without having
been substantially advanced in value, and
subsequently reimported in its original form and
in the same state: Provided, That in case the
reimported goods advanced in value, whether or
not in their original state, the value added shall be
subject to the applicable duty rate of the tariff
heading of the reimported goods; and
26. Trailer chassis when imported by shipping
companies for their exclusive use in handling
containerized cargo, upon posting a security in an
amount equal to 100% of the ascertained duties,
taxes and other charges due thereon, to cover
aperiod of one (1) year from the date of
acceptance of the entry, which period, for
meritorious reasons, may be extended by the
Commissioner from year to year, subject to the
following conditions:
a. That they shall be properly identified and
registered with the Land Transportation
Office (LTO);
b. That they shall be subject to customs
supervision fee to be fixed by the District
Collector and subject to the approval of the
Commissioner;
c. That they shall be deposited in the customs
territory when not in use; and
U.P. LAW BOC TARIFF AND CUSTOMS CODE
d. That upon the expiration of the period
prescribed above, duties and taxes shall be
paid unless otherwise reexported.
2. Goods Declaration
Goods Declaration A statement made in the
manner prescribed by the Bureau and other
appropriate agencies, by which the persons concerned
indicate the procedure to be observed in the
application for the entry or admission of imported
goods and the particulars of which the customs
administration shall require. [Sec. 102(y), CMTA]
Importations subject to Goods Declaration
Unless otherwise provided for, all imported goods
shall be subject to the lodgement of a goods
declaration. A goods declaration may be for
consumption, for customs bonded warehousing, for
admission, for conditional importation, or for
customs transit. [Sec. 401, CMTA]
a. Formal Entry distinguished from
Informal Entry
All goods declaration for consumption shall be
cleared through a formal entry process except for the
following goods which shall be cleared through an
informal entry process:
1. Goods of a commercial nature with Free on
Board (FOB) or Free Carrier At (FCA) value of
less than fifty thousand pesos ( 50,000.00).
Every three (3) years after the effectivity of this
Act, the Secretary of Finance shall adjust this
amount as provided herein to its present value,
using the Consumer Price Index (CPI) as
published by the PSA; and
2. Personal and household effects or goods, not in
commercial q an i , impor ed in a pa enger
baggage or mail.
The Commissioner may adjust the value of goods of
commercial nature that shall be cleared through an
informal entry process without prejudice to the
periodic adjustment period in subparagraph (a) of this
section.
All importations entered through, a formal entry
process shall be covered by a letter of credit or any
verifiable commercial document evidencing payment
or in cases where there is no sale for export, by any
commercial document indicating the commercial
value of the goods. [Sec. 402, CMTA]
Page 278 of 290
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b. Filing of Goods Declaration
As far as practicable, the format of the goods
declaration shall conform with international
standards. The data required in the goods declaration
shall be limited to such particulars that are deemed
necessary for the assessment and collection of duties
and taxes, the compilation of statistics and
compliance with this Act. The Bureau shall require the
electronic lodgement of the goods declaration.
The Bureau shall only require supporting documents
necessary for customs control to ensure that all
requirements of the law have been complied with.
Translation of supporting documents shall not be
required except when necessary.
Goods declaration must be lodged within 15 days
from the date of discharge of the last package from
the vessel or aircraft. The period to file the goods
declaration may, upon request, be extended on valid
grounds for another 15 days: Provided, That the
request is made before the expiration of the original
period within which to file the goods declaration:
Provided, However, That the period of the lodgement
of the goods declaration may be adjusted by the
Commissioner. [Sec. 407, CMTA]
c. Assessment and Payment of
Duties and Taxes, Interest and
Surcharge
Tentative Assessment of Provisional Goods
Declaration
Assessment of a provisional goods declaration shall
be deemed tentative and such assessment shall be
completed upon final readjustment and submission
by the declarant of the additional information or
documentation required to complete the declaration
within the period provided in Section 403 of this Act.
[Sec. 426, CMTA]
Readjustment of Appraisal, Classification or
Return
Such appraisal, classification or return, as finally
passed upon and approved or modified by the District
Collector, shall not be altered or modified in any
manner, except:
1. Within one (1) year after payment of the duties,
upon statement of error in conformity with
Section 912 of this Act, as approved by the
District Collector;
U.P. LAW BOC TARIFF AND CUSTOMS CODE
2. Within 15 days after such payment, upon request
for reappraisal or reclassification addressed to the
Commissioner by the District Collector, if the
appraisal or classification is deemed to be low;
3. Upon request for reappraisal and/or
reclassification, in the form of a timely protest
addressed to the District Collector by the
interested party if the latter should be dissatisfied
with the appraisal or return; or
4. Upon demand by the Commissioner after the
completion of compliance audit in accordance
with the provisions of this Act. [Sec. 427, CMTA]
Assessment of Duty on Less Than Entered Value
Duty shall not be assessed in any case upon an
amount less than the entered value, unless by
direction of the Commissioner in cases when the
importer certifies at the time of entry that the entered
value is higher than the dutiable value and that the
goods are so entered in order to meet increases made
by the appraiser in similar cases then pending re-
appraisement; and the lower assessment shall be
allowed only when the importer's contention is
sustained by a final decision, and shall appear that
such action of the importer was taken in good faith
after due diligence and inquiry. [Sec. 428, CMTA]
Final Assessment
Assessment shall be deemed final 15 days after receipt
of the notice of assessment by the importer or
consignee. [Sec. 429, CMTA]
Period of Limitation
In the absence of fraud and when the goods have
been finally assessed and released, the assessment
shall be conclusive upon all parties three (3) years
from the date of final payment of duties and taxes, or
upon completion of the post clearance audit. [Sec.
430, CMTA]
Release of Goods after Payment of Duties and
Taxes
Goods declared shall be released when duties and
taxes and other lawful charges have been paid or
secured and all the pertinent laws, rules and
regulations have been complied with. [Sec. 431,
CMTA]
Fine or Surcharge on Goods
Goods subject to any fine or surcharge shall be
released only after the payment of the fine or
surcharge. [Sec. 436, CMTA]
Page 279 of 290
TAXATION LAW
d. Provisional Goods Declaration
Where the declarant does not have all the information
or supporting documents required to complete the
goods declaration, the lodging of a provisional goods
declaration may be allowed: Provided, That it
substantially contains the necessary information
required by the Bureau and the declarant undertakes
to complete the information or submit the supporting
documents within 45 days from the filing of the
provisional goods declaration, which period may be
extended by the Bureau for another 45 days for valid
reasons.
If the Bureau accepts a provisional goods declaration,
the duty treatment of the goods shall not be different
from that of goods with complete declaration.
Goods under a provisional goods declaration may be
released upon posting of any required security
equivalent to the amount ascertained to be the
applicable duties and taxes. [Sec. 404, CMTA]
e. Relief Consignment
Goods such as food, medicine, equipment and
materials for shelter, donated or leased to government
institutions and accredited private entities for free
distribution to or use of victims of calamities shall be
treated and entered as relief consignment.
Upon declaration of a state of calamity, clearance of
relief consignment shall be a matter of priority and
subject to a simplified customs procedure. The
Bureau shall provide for:
1. Lodging of a simplified goods declaration or of a
provisional or incomplete goods declaration
subject to completion of the declaration within a
specified period;
2. Lodging, registering and checking of the goods
declaration and supporting documents prior to
the arrival of the goods, and their release upon
arrival;
3. Clearance beyond the designated hours of
business or away from customs offices and
waiver of any corresponding charges; and
4. Examination and/or sampling of goods only in
exceptional circumstances.
The DOF and the DSWD shall jointly issue the rules
and regulations for the implementation of this
provision. [Sec. 120, CMTA]
U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

Duty and Tax Treatment Prima facie evidence of fraud

Relief consignment imported during a state of A discrepancy in duty and tax to be paid between what
calamity and intended for a specific calamity area for is legally determined and what is declared amounting
the use of the calamity victims therein, shall be to more than 30% shall constitute a prima facie
exempt from duties and taxes. [Sec. 121, CMTA] evidence of fraud.

f. Misdeclaration, Misclassification IMPOSITION OF SURCHARGE

When the misdeclaration, misclassification or
and Undervaluation in Goods undervaluation is intentional or fraudulent, such as
Declaration when a false or altered document is submitted or
when false statements or information are knowingly
[Sec. 1400, CMTA] made, a surcharge shall be imposed equivalent to
500% of the duty and tax due and that the goods shall
DEFINITION AND DISTINCTION be subject to seizure regardless of the amount of the
Misdeclaration as to quantity, quality, description, discrepancy without prejudice to the application of
weight, or measurement of the goods, or fines or penalties provided under Section 1401 of this
misclassification through insufficient or wrong Act against the importer and other person or persons
description of the goods or use of wrong tariff who willfully participated in the fraudulent act.
heading resulting to a discrepancy in duty and tax to
be paid between what is legally determined upon
assessment and what is declared, shall be subject to a
surcharge equivalent to 250% of the duty and tax due.
No surcharge shall be imposed when the discrepancy
in duty is less than 10%, or when the declared tariff
heading is rejected in a formal customs dispute
settlement process involving difficult or highly
technical question of tariff classification, or when the
tariff classification declaration relied on an official
government ruling.

There is undervaluation when:

1. the declared value fails to disclose in frill the price
actually paid or payable or any dutiable
adjustment to the price actually paid or payable;
or
2. when an incorrect valuation method is used or
the valuation rules are not properly observed,
resulting in a discrepancy in duty and tax to be
paid between what is legally determined as the
correct value against the declared value. When
the undervaluation is established without the
need to go through the formal dispute settlement
process provided for in this Act, a surcharge shall
be imposed equivalent to 250% of the duty and
tax due. No surcharge shall be imposed when the
discrepancy in duty is less than 10%, or the
declared value is rejected as a result of an official
ruling or decision under the customs dispute
settlement process involving difficult or highly
technical question relating to the application of
customs valuation rules.

Page 280 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

l. Disappearance of manifested goods

D. Unlawful Importation
or Exportation
Smuggling refers to the fraudulent act of importing
any goods into the Philippines, or the act of assisting
in receiving, concealing, buying, selling, disposing or
transporting such goods, with full knowledge that the
same has been fraudulently imported, or the
fraudulent exportation of goods. Goods referred to
under this definition shall be known as smuggled
goods. [Sec. 101(nn), CMTA]
1. Technical Smuggling and
Outright Smuggling
Technical Smuggling
The act of importing goods into the country by means
of fraudulent, falsified or erroneous declaration of the
goods to its nature, land, quality, quantity or weight,
for the purpose of reducing or avoiding payment of
prescribed taxes, duties and other charges [Sec.
101(pp), CMTA]
m. Discrepancy between actual and declared weight
of manifested goods
n. Discrepancy with the master's or pilot's-in-
command deport
o. Failure to report fraud
p. False statement of vessel's or aircraft's
destination
q. Affixing seals
r. Breaking of seal placed by customs officers
s. Breaking of lock or fastening placed by customs
officers
t. Removal, breakage, and alteration of marks
u. Unauthorized withdrawal of imported goods
from bonded warehouse
v. Removing or repacking goods in warehouse
w. Removing goods from customs custody
x. Failure to pay duties, taxes and other charges
y. Breach of security
z. Failure to keep importation records and full
access to customs officers
aa. Concealment or destruction of evidence of fraud

Outright Smuggling
The act of importing goods into the country without
complete customs prescribed importation
documents, or without being cleared by customs or
other regulatory government agencies, for the
purpose of evading payment of prescribed taxes,
duties and other government charges. [Sec. 101(ff),
CMTA]

2. Other Fraudulent Practices

[Secs. 1402-1428, CMTA]
a. Failure or refusal of party to give evidence or
submit documents for assessment
b. Other fraudulent practices against customs
revenue
c. Failure to declare baggage
d. Vessel, seacraft, or aircraft departing before
undergoing customs formalities
e. Obstruction to boarding officer
f. Unlawful boarding or leaving of vessel or aircraft
g. Unloading of cargo before arrival at port of entry
h. Unloading of cargo at improper time or place
after arrival
i. Failure to exhibit or deposit documents
j. Bringing of unmanifested arms, explosives or war
equipment
k. Failure to supply advance and requisite manifests

Page 281 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE
E.Remedies
1. Government
a. Administrative/Extrajudicial
SEARCH, SEIZURE, FORFEITURE, ARREST
Persons exercising police authority
The following persons are authorized to effect search,
seizure, and arrest:
1. Officials of the Bureau, District Collectors,
Deputy District Collectors, police officers,
agents, inspectors and guards of the Bureau;
2. Upon authorization of the Commissioner,
officers and members of the Armed Forces of the
Philippines (AFP) and national law enforcement
agencies; and
3. Officials of the BIR on all cases falling within the
regular performance of their duties, when
payment of internal revenue taxes is involved.
[Sec. 214, CMTA]
Place where authority may be exercised
Within customs premises, and within the limits of the
authority granted by the Commissioner, Port and
airport authorities in all ports of entry shall provide
authorized customs officers with unhampered access
to all premises within their administrative jurisdiction.
[Sec. 215, CMTA]
CAO 01-2017 (Clearance Procedures for all Travelers
and Crew and their Baggage) Sec 4.11: District
Collector shall coordinate with the Port or Airport
authorities as to the premises that should be under
customs control and jurisdiction and only the District
Collector shall be authorized to grant access to said
premises.
Customs premises The Bureau shall, for customs
purposes, have exclusive control, direction and
management of customs offices, facilities,
warehouses, ports, airports, wharves, infrastructure
and other premises in the Customs Districts, in all
cases without prejudice to the general police powers
of the local government units (LGUs), the Philippine
Coast Guard and of law enforcement agencies in the
exercise of their respective functions. [Sec. 303,
CMTA]
Exercise of power of seizure
Any person exercising police authority, as defined in
the CMTA, has the power and duty to seize any
Page 282 of 290
TAXATION LAW
vessel, aircraft, cargo, goods, animal or any other
movable property when the same is subject to
forfeiture or when they are subject of a fine imposed
under the CMTA. [Sec. 216, CMTA; Sec 4.12.1 of
CAO 01-2017]
Other Authorized Searches
1. Authority to enter properties [Sec. 219, CMTA]
2. Authority to search dwelling house [Sec. 220,
CMTA]
3. Authority to search vessels or aircrafts and
persons or goods conveyed therein [Sec. 221,
CMTA]
4. Authority to search vehicles, other carriers,
persons and animals [Sec. 222, CMTA]
5. Authority to search persons arriving from foreign
countries [Sec. 223, CMTA]
CAO 1-2017, Sec 4.5: Baggage of arriving Travelers
and Crew shall be subject to non-intrusive inspection.
When necessary, scanned baggage may be subject to
physical inspection.
Property subject to seizure and forfeiture [Sec.
1113, CMTA]
1. Any vehicle, vessel or aircraft, including cargo,
which shall be used unlawfully in the importation
or exportation of goods or in conveying or
transporting smuggled goods in commercial
quantities into or from any Philippine port or
place. The mere carrying or holding on board of
smuggled goods in commercial quantities shall
subject such vehicle, vessel, aircraft, or any other
craft to forfeiture: Provided, That the vehicle,
vessel, aircraft or any other craft is not used as a
common carrier which has been chartered or
leased for purposes of conveying or transporting
persons or cargo;
2. Any vessel engaging in the coastwise trade which
shaft have on board goods of foreign growth,
produce, or manufacture in excess of the amount
necessary for sea stores, without such goods
having been properly entered or legally imported;
3. Any vessel or aircraft into which shall be
transferred cargo unloaded contrary to law prior
to the arrival of the importing vessel or aircraft at
the port of destination;
4. Any part of the cargo, stores, or supplies of a
vessel or aircraft arriving from a foreign port
hich i nloaded before arri al a he e el or
aircraf por of de ina ion and i ho
authority from the customs officer; but such
cargo, ship, or aircraft stores and supplies shall
not be forfeited if such unloading was due to
U.P. LAW BOC TARIFF AND CUSTOMS CODE
accident, stress of weather, or other necessity and
is subsequently approved by the District
Collector;
5. Goods which are fraudulently concealed in or
removed contrary to law from any public or
private warehouse, container yard, or container
freight station under customs supervision;
6. Goods, the importation or exportation of which
are effected or attempted contrary to law, or any
goods of prohibited importation or exportation,
and all other goods which, in the opinion of the
District Collector, have been used, are or were
entered to be used as instruments in the
importation or the exportation of the former;
7. Unmanifested goods found on any vessel or
aircraft if manifest therefor is required;
8. Sea stores or aircraft stores adjudged by the
District Collector to be excessive, when the
duties and taxes assessed by the District Collector
thereon are not paid or secured forthwith upon
assessment of the same;
9. Any package of imported goods which is found
upon examination to contain goods not specified
in the invoice or goods declaration including all
other packages purportedly containing imported
goods similar to those declared in the invoice or
goods declaration to be the contents of the
misdeclared package;
Misdeclared Shipment
Shipments declared as consolidated Balikbayan
Boxes but are found to be otherwise shall be
considered as misdeclared and subjected to
seizure and forfeiture proceedings. [Sec. 8, CMO
33-2016 (Guidelines on the Implementation of
CAO 05-2016 on Consolidated Shipment of
Duty and Tax-Free Balikba an Bo e )]
10. Boxes, cases, trunks, envelopes, and other
containers of whatever character used as
receptacle or as device to conceal goods which
are subject to forfeiture under this Act or which
are so designed as to conceal the character of
such goods;
11. Any conveyance actually used for the transport
of goods subject to forfeiture under this Act, with
its equipage or trappings, and any vehicle
similarly used, together with its equipment and
appurtenances. The mere conveyance of
smuggled goods by such transport vehicle shall
be sufficient cause for the outright seizure and
confiscation of such transport vehicle but the
forfeiture shall not be effected if it is established
that the owner of the means of conveyance used
as aforesaid, is engaged as common carrier and
Page 283 of 290
TAXATION LAW
not chartered or leased, or that the agent in
charge thereof at the time, has no knowledge of
the unlawful act; and
12. Goods sought to be imported or exported:
a. Without going through a customs office,
whether the act was consummated,
frustrated, or attempted;
b. Found in the baggage of a person arriving
from abroad and undeclared by such person;
c. Through a false declaration or affidavit
executed by the owner, importer, exporter,
or consignee concerning the importation of
such goods;
d. On the strength of a false invoice or other
document executed by the owner, importer,
exporter, or consignee concerning the
importation or exportation of such goods; or
e. Through any other practice or device
contrary to law by means of which such
goods entered through a customs office to
the prejudice of the government.
Conditions Affecting Forfeiture of Goods
The forfeiture shall be effected only
when and while the goods are in the custody or within
the jurisdiction of customs officers, or
in the possession or custody of or subject to the
control of the importer, exporter, original owner,
consignee, agent of another person effecting the
importation, entry or exportation in question, or
in the possession or custody of or subject to the
control of persons who shall receive, conceal, buy,
sell, or transport the same, or aid in any of such acts,
with knowledge that the goods were imported, or
were the subject of an attempt at importation or
exportation contrary to law. [Sec. 1115, CMTA]
Seizure or Release of Goods
The District Collector shall issue an order of release
or a warrant of seizure within five (5) days, or two (2)
days in case of perishable goods, upon the
recommendation of the alerting officer or any other
customs officer.
The District Collector shall immediately make a
report of such seizure or release to the Commissioner.
[Sec. 1116, CMTA]
Warrant of Seizure or Order of Release
The District Collector shall have the authority to issue
a warrant of seizure of the goods upon determination
U.P. LAW BOC TARIFF AND CUSTOMS CODE
of the existence of probable cause and in case of
nonexistence thereof, the issuance of order of release.
In case the District Collector issued an order of
release, the District Collector shall immediately
transmit all the records to the Commissioner who
shall automatically review within forty-eight (48)
hours, or within twenty-four (24) hours in case of
perishable goods. When no decision is made by the
Commissioner within the prescribed period, the
imported goods shall be deemed released.
The lifting of the alert order shall he issued by the
District Collector only upon the affirmation of the
decision of the District Collector by the
Commissioner, or after the lapse of the period of
review by the Commissioner, whichever is earlier.
[Sec. 1117, CMTA]
Release of Balikbayan Boxes
Balikbayan boxes or portions thereof which are
compliant with the existing rules and regulations are
entitled to immediate release. When consolidated
Balikbayan Boxes or portions thereof are subject to
alert or any enforcement intervention, the boxes or
portions thereof which are compliant shall be
segregated and processed separately. [Sec. 4.7, CAO
05-2016]
Sale of Perishable Goods During Forfeiture
Proceedings
Upon motion of the importer of the perishable goods,
the goods may be sold at a public auction during the
pendency of the forfeiture proceedings.
The proceeds of the auction shall be held in escrow
until the final resolution of the proceedings. [Sec.
1118, CMTA]
Service of Warrant of Seizure
The District Collector shall cause the service of
warrant of seizure to the owner or importer of the
goods or the authorized representative thereof. The
owner or importer shall be given, an opportunity to
be heard during the forfeiture proceedings.
For the purpose of serving the warrant, the importer,
consignee, or person holding the bill of lading or
air a bill hall be deemed he o ner of he good .
For he ame p rpo e, a hori ed repre en a i e
shall include any agent of the owner and if the owner
or the agent is unknown, any person having
possession of the goods at the time of the seizure.
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TAXATION LAW
Service of warrant to an unknown owner shall be
effected by posting the warrant for fifteen (15) days
in a public place at the concerned district, and by
electronic or printed publication. [Sec. 1119, CMTA]
Proceedings in Case of Property Belonging to
Unknown Parties
If, within fifteen (15) days after service of warrant, no
owner or agent can he found or appears before the
District Collector, the seized goods shall be forfeited
ipso facto in favor of the government to be disposed of
in accordance with the CMTA. [Sec. 1121, CMTA]
Burden of Proof in Forfeiture Proceedings
In all proceedings for the forfeiture of any vehicle,
vessel, aircraft, or goods under this Act, the burden of
proof shall be borne by the claimant. [Sec. 1123,
CMTA]
Settlement of Pending Seizure Case by Payment
of Fine or Redemption of Forfeited Goods
Subject to the approval of the Commissioner, the
District Collector may allow the settlement by
payment of fine or the redemption of forfeited goods,
during the course of the forfeiture proceeding.
However, the Commissioner may accept the
settlement by redemption of any forfeiture case on
appeal. No settlement by payment of fine shall be
allowed when there is fraud or when the discrepancy
in duties and taxes to be paid between what is
determined and what is declared amounts to more
than thirty percent (30%).
In case of settlement by payment of fine, the owner,
importer, exporter, or consignee or agent shall offer
to pay a fine equivalent to thirty percent (30%) of the
landed cost of the seized goods. In case of settlement
by redemption, the owner, importer, exporter, or
consignee or agent shall offer to pay the redeemed
value equivalent to one hundred percent (100%) of
the landed cost.
Upon payment of the fine or payment of the
redeemed value, the goods shall be released and all
liabilities which may attach to the goods shall be
discharged without prejudice to the filing of
administrative or criminal case.
When settlement not allowed
1. Fraud
2. Importation is prohibited by law
3. Release of the goods is contrary to law
4. [Sec. 1124, CMTA]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
Decision in Forfeiture Cases
In forfeiture cases, the District Collector shall issue an
order for hearing within fifteen (15) days, or five (5)
days in case of perishable goods, from issuance of the
warrant. The District Collector shall render a decision
within thirty (30) days upon termination of the
hearing, or within ten (10) days in case of perishable
goods. The decision shall include a declaration of
forfeiture, the imposition of a fine or such other
action as may be proper. [Sec. 1125, CMTA]
Automatic Review in Forfeiture Cases
The Commissioner shall automatically review any
decision by the District Collector adverse to the
government. [Sec. 1127, CMTA]
AUTHORITY OF THE COMMISSIONER TO
MAKE COMPROMISE
Subject to the approval of the Secretary of Finance,
the Commissioner may compromise any
administrative case arising under this Act involving
the imposition of fines and surcharges, including
those arising from the conduct of a post clearance
audit, unless otherwise specified by law.
Cases involving forfeiture proceedings shall however
not be subject to any compromise. [Sec. 1131, CMTA]
b. Judicial
Requisites for filing of criminal/civil case
1. Brought in the name of the government of the
Phil;
2. Prosecuted and handled by the Bureau with the
assistance of the Department of Justice (DOJ);
and
3. With approval from the Commissioner. [Sec.
1135, CMTA]
Rules on appeal including jurisdiction
Unless otherwise provided, the party aggrieved by the
ruling or decisions of the Commissioner may appeal
to the CTA, in the manner and within the period
prescribed by law and regulations. Decisions of the
Secretary of Finance when required by this Act, may
likewise be appealed to the CTA.
Unless an appeal is made to the CTA in the manner
and within the period prescribed by law and
regulations, the ruling or decision of the
Commissioner or the Secretary of Finance shall be
final and executory. [Sec. 1136, CMTA]
Page 285 of 290
TAXATION LAW
2. Taxpayer
a. Protest
When, a ruling or decision of the District Collector or
customs officer involving goods with valuation, rules
of origin, and other customs issues is made, except
the fixing of fines in seizure cases, the party adversely
affected may appeal by way of protest against such
ruling or decision by presenting to the Commissioner
a written protest setting forth the objection to the
ruling or decision in question and the reasons
therefore. [Sec. 1106, CMTA]
When made
At the time when payment of the amount claimed to
be due the government is made, or within fifteen (15)
days thereafter. [Sec. 1106, CMTA]
Form
1. Must be in writing
2. Specify the particular decision or ruling of the
District Collector for which protest is being made
3. Indicate the particular grounds relied upon for
relief [Sec. 1108, CMTA]
Scope
Limited to the particular goods subject of a goods
declaration, but any number of issues may be raised
in a protest with reference to the goods declaration
constituting the subject matter of the protest. [Sec.
1108, CMTA]
Samples to be Furnished by Protesting Parties
If the nature of the goods permit, importers filing
protests involving questions offset must, upon
demand, present to the Commissioner samples of the
goods which are the subject matter of the protest. The
samples of the goods shall be verified by the customs
officer who made the classification against which the
protests are filed. [Sec. 1109, CMTA]
Effect of Failure to Protest
The action of the District Collector shall be final and
conclusive. [Sec. 1107, CMTA]
Decision in Protest
When a protest is filed in proper form, the
Commissioner shall render a decision within thirty
(30) days from receipt of the protest. In case the
protest is sustained, in whole or in part, the
appropriate order shall be made, and the entry
reassessed, if necessary. [Sec. 1110, CMTA]
U.P. LAW BOC TARIFF AND CUSTOMS CODE
Automatic Review
The Commissioner shall automatically review any
decision by the District Collector adverse to the
government. [Sec. 1127, CMTA]
b. Abandonment
When article deemed abandoned
Imported goods are deemed abandoned under any of
the following circumstances:
1. When the owner, importer, or consignee of the
imported goods expressly signifies in writing to
the District Collector the intention to abandon
the same; or
2. When the owner, importer, consignee, or
interested party after due notice, falls to file the
goods declaration within the prescribed period in
Section 407 of this Act; Provided, That the term
goods declaration shall include provisional or
incomplete goods declaration deemed valid by
the Bureau as provided in Section 403 of this Act.
For this purpose, it is the duty of the District
Collector to post a list of all packages discharged
and their consignees, whether electronically or
physically in the District Office, or send a notice
to the consignee within five (5) days from the
date of discharge; or
3. Having filed such goods declaration, the owner,
importer, consignee or interested party after due
notice, fails to pay the assessed duties, taxes and
other charges thereon, or, if the regulated goods
failed to comply with Section 117 of this Act,
within fifteen (15) days from the date of final
assessment: Provided, That if such regulated
goods are subject of an alert order and the
assessed duties, taxes and other charges thereof
are not paid within fifteen (15) days from
notification by the Bureau of the resolution of the
alert order, the same shall also be deemed
abandoned; or
4. Having paid the assessed duties, taxes and other
charges, the owner, importer or consignee or
interested party after due notice, fails to claim the
goods within thirty (30) days from payment. For
this purpose, the arrastre or warehouse operator
shall report the unclaimed goods to the District
Collector for disposition pursuant to the
provisions of this Act; or
5. When the owner or importer fails to claim goods
in customs bonded warehouses within the
prescribed period. [Sec. 1129, CMTA]
Treatment and Disposition of Abandoned Goods
Page 286 of 290
TAXATION LAW
Expressly abandoned goods, when the owner,
importer, or consignee of the imported goods
expressly signifies in writing to the District Collector
the intention to abandon the same, shall ipso facto be
deemed the property of the government.
If the Bureau has not disposed of the abandoned
goods, the owner or importer of goods impliedly
abandoned may, at any time within thirty (30) days
after the lapse of the prescribed period to file the
declaration, reclaim the goods provided that all legal
requirements have been complied with and the
corresponding duties, taxes and other charges,
without prejudice to charges and fees due to the port
or terminal operator, as well as expenses incurred
have been paid before the release of the goods from
customs custody.
When the Bureau sells goods which have been
impliedly abandoned, although no offense has been
discovered, the proceeds of the sale, after deduction
of any duty and tax and all other charges and expenses
incurred as provided in Section 1143, shall be turned
over to those persons entitled to receive them or,
when this is not possible, held at their disposal for a
specified period. After the lapse of the specified
period, the balance shall be transferred to the
forfeiture fund as provided in Section 1151. [Sec.
1130, CMTA]
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 (2004)]
c. Abatement and Refund
The reduction or diminution, in whole or in part, of
duties and taxes where payment has not been made.
[Sec. 102, CMTA]
When available
When goods have not yet been released for
consumption or have been placed under another
customs procedure, provided that no other offense or
violation has been committed, the declarant shall
neither be required to pay the duties and taxes nor be
entitled to refund thereof in any of the following
cases:
1. When, at the request of the declarant, the goods
are abandoned, or as determined by the Bureau,
the goods are destroyed or rendered
commercially valueless while under customs
U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

control. Any cost herein incurred shall be borne

by the declarant;
2. When goods are destroyed or irrecoverably lost
by accident or force majeure, the remaining waste
or scrap after destruction, if taken into
consumption, shall be subject to the duties and
taxes that would be applicable on such waste or
scrap if imported in same state; and
3. When there are shortages due to the nature of the
goods. [Sec. 904, CMTA]

Other cases of abatement or refund

1. Abatement for damage incurred during Voyage
[Sec. 905, CMTA]
2. Missing packages [Sec. 906, CMTA]
3. Deficiency in contents of packages [Sec. 907,
CMTA]
4. Goods lost or destroyed after arrival [Sec. 908,
CMTA]
5. Defective goods [Sec. 909, CMTA]
6. Dead or injured animals [Sec. 910, CMTA]

Refund in case of excess payments due to

1. manifest clerical error made in invoice or entry
2. error in return of weight, measure and gauge
(certified, under penalties of falsification or
perjury, by examining official)
3. 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. 912, CMTA]

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 claimed
1. Claim made in writing
2. Collector shall verify with the records in his office
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.
[Sec. 913, CMTA]

Page 287 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE 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

C Amount
decision favorable Automatic review* by Customs
Yes involved less Yes
to taxpayer/ Commisioner (Sec. 2313)
than 5M?
a ?

Is
Does
No C
commissioner
Yes decision favorable
decide w/in 30
Taxpayer appeals to taxpayer/
days?
to Customs a ?
Commissioner 15
days from receipt No
of notice
Inaction construed as affirmation
C
Does
Commissioner
Yes No, amount is at least
decide w/n 30
Is 5M
days?
C Yes
Automatic Review* by
decision
the Secretary of
favorable to Yes
Finance (SOF) (Sec.
taxpayer/
2313, CMO 3-2002)
adverse to
?

I SOF
decision Does SOF
No favorable to Yes decide within
No No taxpayer/adverse 30 days?
?

No
Yes
Inaction construed as
affirmation of
Decision becomes
No
END final &
( Appeal
unappealable
in case of inaction by to CTA
commissioner)
Appeal to the
Inaction construed
Court of Tax
as affirmation of
Appeals within 30
C
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

Page 288 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

TABLE OF SPECIAL DUTIES: When Imposed

Anti-Dumping Where a product or commodity is imported in the Philippines at an export price less than
[Sec. 301, TCCP; RA the normal value in the ordinary course of trade for the like product or article destines for
8752; Sec. 711, consumption in the exporting country or materially regarding establishment of a domestic
CMTA] industry producing the like product [Sec. 3, RA 8752]
Whenever any product, commodity or article of commerce is granted directly or indirectly
Countervailing by the government in the country of origin or exportation, any kind or form of specific
[Sec. 302, TCCP; subsidy upon the production, manufacture or exportation of such product, commodity or
RA 8751; Sec. 713, article, and the importation of such subsidized product, has caused or threatens to cause
CMTA] material injury to a domestic industry or has materially retarded the growth or prevents the
establishment of a domestic industry [Sec. 1, RA 8751]
If, at the time of importation, any good or its container is not marked in any official
Marking
language of the Philippines as legibly, indelibly and permanently as the nature of the goods
[Sec. 303, TCCP;
or container will permit, and in such manner as to indicate to an ultimate purchaser in the
Sec. 710, CMTA]
Philippines the name of the country of origin of the goods
Whenever the President finds that the public interest will be served thereby, additional
customs duty shall be imposed upon articles wholly or in part the growth or product of, or
imported in a vessel of, any foreign country whenever he shall find as a fact that such
country
Discriminatory
1. Imposes, directly or indirectly, upon any Phil product unreasonable charge, exaction,
[Sec. 304, TCCP;
regulation or limitation which is not equally enforced upon the like articles of other
Sec. 714, CMTA]
foreign countries; or
2. Discriminates in fact against the commerce of the Philippines, as to place the
commerce of the Philippines at a disadvantage compared with the commerce of any
foreign country.
[Sec 5] General Safeguard Measure: Whenever there is a positive final determination of the
Commission that a product is being imported into the country in increased quantities,
whether absolute or relative to the domestic production, as to be a substantial cause of
serious injury or threat thereof to the domestic industry; however, in the case of non-
agricultural products, the Secretary of Agriculture shall first establish that the application
Safeguard
of such safeguard measures will be in the public interest
[RA 8800; Sec. 712,
[Sec 21] Special Safeguard Measure for Agricultural Products: Imposed upon agricultural
CMTA]
products, consistent with Phil international treaty obligations, if its:
1. Cumulative import volume in a given year exceeds its trigger volume subject to the
conditions under Sec. 23, RA 8800, or but not currently; and
2. Actual CIF import price is less than its trigger price subject to conditions under Sec.
24, RA 8800

Page 289 of 290

U.P. LAW BOC TARIFF AND CUSTOMS CODE TAXATION LAW

TABLE OF SPECIAL DUTIES: Imposing Authority and Amount

Anti-
Dumping Countervailing
Marking Discriminatory
[Sec. 301, [Sec. 302 as Safeguard
[Sec. 710, [Sec. 714,
TCC as amended by RA [RA 8800]
CMTA] CMTA]
amended by 8751]
RA 8752]
For non-
agricultural
Secretary of Trade and Industry - products:
non-agricultural products Secretary of
Secretary of Agriculture - President Trade and
Commissioner of Secretary of
agricultural products [through a Industry
Customs Agriculture
Tariff Commission - decides proclamation] For agricultural
whether or not to impose anti- products:
dumping/countervailing duty Secretary of
Agriculture

For 1]:

appropriately set
to a level not
exceeding one-
third of the
applicable out-
quota customs
duty on the
agricultural
product under
tariff increase, consideration in
either ad the year when it
valorem or is imposed
specific, or
5% of dutiable both, to be paid For 2], compute
Anti-Dumping
value, deemed to Not exceeding through a cash as follows:
Duty = Equivalent to the
have accrued at 100% ad valorem bond set at a 0 - if price
Normal Value subsidy
the time of upon the articles level sufficient difference is at
- Export Price
importation to redress or most 10% of the
prevent injury trigger price
to the domestic 30% of the
industry [Sec. 8, amount by which
RA 8800] the price
difference
exceeds 10% of
the trigger price
50% - if it
exceeds 40% but
less than 60%
70% - if it
exceeds 60 but at
most 75%
90% - if it
exceeds 75%

Page 290 of 290