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GENERAL PRINCIPLES OF

TAXATION
A. DEFINITION AND CONCEPT OF TAXATION
Taxation is the power by which the sovereign raises revenue to defray the necessary
expenses of the government. It is a way of apportioning the cost of government among those
who in some way are privileged to enjoy its benefits and must bear its burden.
The term refers to both the power to tax and the act or process by which the taxing power is
exercised.
B. NATURE OF TAXATION
1. Taxation as an Inherent Attribute of Sovereignty
The power of taxation is based upon necessity. Without this power, no sovereign State can
exist nor endure without the means to pay its expenses. Its basis is the Lifeblood Doctrine.
2. Taxation as Legislative in Character
It is the Legislature which determines the coverage, object, nature, extent, and situs of the tax
to be imposed. The power of taxation is based upon the principle that taxes are a grant of
the people who are taxed, and the grant must be made by the immediate representative of
the people. And where the people have loaned the power, there it must remain and be
exercised.
Scope of Legislative Power to Tax
1. The determination of purposes for which taxes shall be levied provided it is for the benefit of
the public.
2. The determination of subjects of taxation such as the person, property or occupation within
its jurisdiction.
3. The determination as to the amount or rate of tax unless constitutionally prohibited.
4. The determination as to the kind of tax to be collected (i.e. property tax, income tax,
inheritance tax, etc).
5. The determination of agencies to collect the taxes.
6. The power to specify or provide for administrative and judicial remedies
7. The power to grant tax exemptions and condonations.
Doctrine of Unjust Enrichment applies to Government
Technicalities and legalisms, however exalted, should not be misused by the government to keep
money not belonging to it and thereby enrich itself at the expense of its law-abiding citizens (BPI
Family Savings Bank vs. CA, et al, L-122480, 12 April 2000).

The power to tax is the power to destroy


The taxing power may impose government requirements to the extent that it may prohibit,
discourage, or even destroy a certain business provided that it is exercised within the
constitutional limitations. It refers to a valid tax.
The power to tax is not the power to destroy while this Court sits
If so great an abuse is manifested as to destroy the natural and fundamental rights, it is the duty
of the judiciary to hold such an act unconstitutional. It refers to an invalid tax.
C. CHARACTERISTICS OF TAXATION

1. Comprehensive It reaches to every trade or occupation; to every object of industry, use, or


enjoyment; to every species of possession; and it imposes a burden which, in case of failure
to discharge it, may be followed by seizure and sale or confiscation of property.
2. Unlimited - It is so unlimited in force and searching in extent that courts scarcely venture to
declare that it is subject to any restrictions, except those that such rests into the discretion of
the authority which exercises it (Tio v. Videogram Regulatory Board, G.R. No. L-75697, June 18,
1987).

3. Plenary Operates on all persons and property belonging to the body politic. This is an
original principle, which has its foundation in society itself. It is granted by all for the benefit of
all.
4. Supreme No attribute of sovereignty is more pervading, and at no point does the power of
the Government affect more constantly and intimately all the relations of life than through the
exactions made under it.
D. POWER OF TAXATION COMPARED WITH OTHER POWERS
Taxation, Police Power & Eminent Domain, Distinguished
TAXATION

Purpose

Amount of
Exaction

Benefits
Received.
Non-Impairment
of Contracts

Transfer of
Property Rights

Scope
Basis

POLICE POWER

EMINENT DOMAIN

Levied for the


purpose of raising
revenue.

Exercised to promote public welfare


through regulations.

Taking of private property for


public use.

There is no limit.

Limited to cover the cost of regulation,


issuance of the license or surveillance.

No exaction; compensation is
paid by the government.

No special or direct
benefit is received.

No direct benefits are received,


damnum absque injuria.

Direct benefit results in the form


of just compensation.

The non- impairment


rule subsists.

Contracts may be impaired.

Contracts may be impaired.

Taxes paid become


part of the public
funds

No transfer but only restraint on the


exercise of property rights exist.

Property is taken by the


government upon payment of
just compensation.

Affects all persons,


property and excises

Affects all persons, property,


privileges, and even rights.

Affects only the particular


property comprehended

Public necessity.

Public necessity and the right of the


State and the public to self protection
and self preservation.

Necessity of the public for


private property.

E. PURPOSE OF TAXATION
1. Revenue-Raising
To provide funds with which the state delivers the basic services to the people.
2. Non- Revenue / Special or Regulatory
a. Regulation Taxation has a regulatory purpose as in the case of taxes levied on excises or
priviliges like those imposed on tobacco and alcoholic products, or amusement places like
night clubs, cabarets, cockpits, etc.
b. Promotion of General Welfare Taxation can be used to implement police power in order to
promote the general welfare of the people.

c.

The SC upheld the validity of the Sugar Adjustment Act, which imposed a taxed on milled
sugar since the purpose of the law was to strengthen an industry that is undeniably vital to
the economy- the sugar industry (Lutz vs. Araneta, 98 Phil 148).
While the funds collected under the OPSF are referred to as taxes, they are extracted in the
exercise of the police power of the State. From such fund, amounts are drawn to reimburse
oil companies when appropriate situations arise for increases in, as well as under recovery of,
the cost of crude oil importation (Osmena vs. Orbos, March 31, 1993).
Reduction of Social Inequity This is made possible through the progressive system of
taxation where the objective is to prevent the undue concentration of wealth in the hands of
few individuals. Progressivity is keystoned on the principle that those who are able to pay
should shoulder the bigger portion of the tax burden. Examples Income tax, Donors tax
and Estate tax.

d. Encourage economic Growth In order to promote the countrys economic growth the law,
at times, grants incentives or tax exemptions to encourage investments.
e. Protectionism It protects local industries from foreign competition i.e. protective tariffs and
custom duties.
F. PRINCIPLES OF SOUND TAX SYSTEM
1. Fiscal Adequacy
It simply means that the sources of revenues must be adequate to meet government
expenditures and their variations (Abakada Guro vs. Ermita, G.R. No. 168056, September 1, 2005).
2. Administrative Feasibility
Tax laws must be capable of effective and efficient enforcement. They must not obstruct
business growth and economic development (Dimaampao on general principles of taxation, p. 28).
3. Theoretical Justice
Section 28 (1) of the 1987 Constitution reads:
The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive
system of taxation. Tax burden should be proportion to the taxpayers ability to pay.

Non-observance of Fiscal Adequacy and Administrative Feasibility will not render the tax
imposition invalid. It will be an unsound tax but legal. However, non-observance of the
Principle of Theoretical Justice is invalid because the Constitution itself requires that taxation
must be equitable.

G. THEORY AND BASIS OF TAXATION


1.

Lifeblood Theory the government can neither exist nor endure without taxation. Taxes are
the lifeblood of the government and their prompt and certain availability is an imperious need
(Bull vs. United States, 295 U.S. 247).

2. Necessity Theory The State cannot continue without the means to pay its expenses; and
that for those means, it has the right to compel all citizens and property within its limit to
contribute.
3. Benefits-Protection Theory (Symbiotic Relationship) It is based on the power of the State to
demand and receive taxes on the reciprocal duties of support and protection. The state
demands and receives taxes from the subjects of taxation within its jurisdiction so that it may
be able to carry its mandate into effect and perform the functions of the government. The
citizen pays from his property the portion demanded in order that it may, by means thereof be
secured in the enjoyment of the benefits of organized society.
4. Jurisdiction Over Subject and Objects Taxation shall only be imposed on persons,
properties and excises within the territory of the taxing power.

H. DOCTRINES IN TAXATION
1. Prospectivity of Tax Laws
General Rule: Tax Laws are prospective in application.
Exceptions:
a. Where no vested right will be impaired;
b. Where the law allows retroactive application; and
c. If there is bad faith on the part of the taxpayer.

Section 246 of the NIRC says that tax rulings or any revocation, modification, or reversal of
any of the rules and regulations promulgated by the Commissioner or any rulings or circulars
promulgated by him shall not be given retroactive application if such revocation,
modifications, or reversal is prejudicial to the taxpayers EXCEPT:
1. When the taxpayer deliberately misstated or omitted from his return certain facts or
documents;
2. When the taxpayer or on the facts subsequently gathered are different from the facts on
which the tax ruling was based; and
3. When the taxpayer is in bad faith.

2. Imprescriptibility
General Rule: Taxes are imprescriptable.
Exceptions: When provided otherwise by the tax law itself.
Example: NIRC provides for statutes of limitation on the assessment and collection of taxes
therein imposed.

3. Double Taxation

It means taxing the same person for the same tax period and the same activity twice, by the
same jurisdiction.

a) Double taxation in strict sense same property is taxed twice when it should be taxed only
once; and that both taxes are imposed on the same property or subject matter for the same
purpose, by the same State, Government or taxing authority within the same jurisdiction or
taxing district during the same taxing period and covering the same kind of character of tax. It
violates the equal protection clause of the constitution.
Requisites:
1. Both taxes are imposed on the same property or subject matter for the same purpose;
2. Imposed by the same taxing authority;
3. Within the same jurisdiction;
4. During the same taxing period;
5. Covering the same kind or character of tax.
b) Double Taxation in Broad sense is the opposite of direct double taxation and is not legally
objectionable. The absence of one or more of the foregoing requisites of obnoxious direct tax
makes it indirect.
c) Constitutionality of double taxation
Double taxation in its stricter sense is unconstitutional but that in the broader sense is not
necessarily so.
General Rule: Our Constitution does not prohibit double taxation; in broad sense. Hence, it may
not be invoked as a defense against the validity of tax laws.
Exception: Double taxation will not be allowed if it results in a violation of the equal protection
clause.
d) Modes of eliminating double taxation
1) Tax Deduction a subtraction from gross income in arriving at the taxable income:

Section 4 (a) of the Expanded Senior Citizens Act of 2003, which provides that the 20%
discount given to senior citizens shall be considered a tax deduction, rather than a tax credit
on the part of the establishment granting the same, is not unconstitutional. While the
Constitution protects property rights, the State, in the exercise of the police power, can
intervene in the operations of a business which may result in an impairment of property rights
in the process (Carlos Super Drug Corp. vs. DSWD, G.R. No. 166494, June 29, 2007).

2) Tax Credit - an amount subtracted from an individuals or entitys tax liability (tax due) to
arrive at the total tax liability.

A deduction differs from a tax credit, that a deduction reduces taxable income while a
credit reduces tax liability.
Under the Expanded Seniors Citizens Act of 2003, the 20% discount shall be considered
as a tax deduction not as a tax credit.

Treaties with other states


A tax treaty sets out the respective rights to tax of the state of source (situs) and the state of
residence with regard to certain cases, an exclusive right to tax is conferred on one of the
contracting states; however, for other items of income or capital, both states are given the
right to tax, although the amount of tax that may be imposed by the state of source is limited.
It applies whenever the state of source is given full or limited right to tax. The treaty makes it
incumbent upon the state of residence to allow relief in order to avoid double taxation.

4. Escape From Taxation


a. Shifting of tax burden
The transfer of the burden of tax by the original payer or the one on whom the tax was
assessed or imposed to another.
(i) Ways of Shifting Tax Burden
a) Forward shifting- transfer of the tax burden from a factor of production through the factors of
distribution until finally rests on the consumer.
b) Backward shifting- transfer of the tax burden from the consumer through the factors of
distribution to the factor of production.
c) Onward shifting- transfer of the tax burden two or more times either forward or backward.
(ii) Taxes That Can Be Shifted - Indirect taxes i.e. Value Added Tax
(iii) Meaning of Impact and Incidence of Taxation
Impact of Taxation - The point on which a tax is originally imposed.
Incidence of Taxation the point on which a tax burden finally rest or settle down
Tax capitalization it means the reduction in the price of the taxed object equal to the
capitalized value of future taxes which the purchaser expects to be called upon to pay.
A special form of backward shifting except that while the latter involves the shifting back of a
single tax, the former involves the throwing back of a whole series of taxes and taxes place
before any of them, with the exemption of the first is paid.
Transformation it is the method whereby the manufacturer or producer upon whom the tax has
been imposed, fearing the loss of his market if he should add the tax to the price, pays the tax
and endeavors to recoup himself by improving his process of product at a lower costs
b) Tax avoidance
It is the use by the taxpayer of legally permissible alternative tax rates or methods of
assessing taxable property or income in order to avoid or reduce tax liability (E.g. termination
of deposits subjects to 20% final tax and re-investing it in tax-exempt government bonds).
c) Tax evasion
It is the use of taxpayer of illegal or fraudulent means to evade or lessen the payment of a tax
(E.g. Deliberate non-reporting or under-reporting of an income).
Indicia of Fraud in Tax Evasion
a. Failure to declare for taxation purposes true and actual income derived from business for 2
consecutive years; or
b. Substantial under declaration of income tax returns of the taxpayer for 4 consecutive years
coupled with intentional overstatement of deductions.
Connotes the integration of 3 Factors:
1. The end to be achieved, i.e. the payment of less than that known by the taxpayer to be legally
due;

2. An accompanying state of mind which is described as being evil, in bad faith, willful, or
deliberate and not merely accidental, and
3. A course of action or failure of action which is unlawful
Note: See also Section 248(B) of NIRC providing for prima facie evidence of filing a false or fraudulent
return.

5. Exemption From Taxation


a) Meaning of exemption from taxation
A grant of immunity, express or implied, to particular persons or corporations from the
obligation to pay taxes.
Basis of the Grant of Exemption: No law granting any tax exemption should be passed without
the concurrence of a majority of all the members of Congress (Sec. 28(4), Art. VI, Constitution).
b) Nature of tax exemption
i. It is a personal privilege of the grantee.
ii. It is generally revocable by the government unless the exemption is founded on a contract,
which is protected from impairment, but the contract must contain the other essential
elements of contracts.
It implied a waiver on the part of the government to collect what otherwise would be due,
and in this sense is prejudicial thereto.
iii. It is not necessarily discriminatory so long as the exemption has a reasonable foundation or
rationale basis.
c) Kinds of tax exemption
As to Form:
(i) Express - Expressly granted by the Constitution, statutes, treaties, franchises or similar
legislative acts.
(ii) Implied - When particular persons, properties, or exercise are deemed exempt as they fall
outside the scope of the taxing provision itself.
(iii) Contractual - Are those agreed to by the taxing authority in contract lawfully entered into by
them under enabling laws.
As to Basis:
1. Constitutional Exemptions Immunities from taxation which originate from the Constitution.
2. Statutory Exemptions those which emanate from legislation.
As To Extent:
1. Total Exemption connotes absolute immunity.
2. Partial Exemption one where a collection of a part of the tax is dispensed with.
d) Rationale/grounds for exemption
Being a waiver from its power to tax, the government, in granting tax exemption, should justify
the grant that such exemption will benefit the body of people, which is sufficient to offset the
loss of revenue occasioned thereby.
Grounds for Tax Exemption
1. Contract the grant of tax exemption is usually contained in the charter of the corporation to
which the exemption is granted.
2. Public policy, to encourage new and necessary industries, or to foster charitable institutions.
3. Reciprocity to reduce the rigors of international double or multiple taxation, tax exemptions
maybe granted in treaties. A tax exemption is a personal privilege of the grantee and

therefore not assignable; it is generally revocable by the government, unless founded on


contract and must not be discriminatory.
e) Revocation of tax exemption
If the grant of an exemption does not constitute a contract, but merely a spontaneous
concession by the legislature, not connected with any service or duty imposed it is
REVOCABLE by the power which made the grant.
Thus, if the basis of the tax exemptions is by virtue of a franchise granted by Congress, the
exemption may be revoked.
However, if the tax exemption constitutes a binding contract and for a valuable consideration,
the government cannot unilaterally revoke the tax exemption.
6. Compensation and Set-off
General Rule: Taxes cannot be the subject of compensation or set-off.
Reasons:
1. Lifeblood Doctrine
2. Taxes are not contractual obligation but arise out of duty to the government.
3. The government and the taxpayer are not mutually creditors and debtors of each other
(Francia vs. IAC No. L-67649; June 28, 1988).

Exemption: Where both claims already became overdue and demandable as well as fully
liquidated, or where the government and the taxpayer are in their own right reciprocally debtors
and creditors of each other, compensation takes place by operation of law.
Doctrine of Equitable Recoupment

Where the refund of a tax illegally or erroneously collected or overpaid by a taxpayer is


barred by prescription, a tax being assessed against a taxpayer may be recouped or set-off
against the tax whose refund is now barred by prescription (Domondon, 11th ed, p. 46, citing
UST vs. Collector, 104 Phil 1062).

Not followed in the Philippines

Thus, a tax presently being assessed against a taxpayer may not be recouped or set-off
against an overpaid tax the refund of which is already barred by prescription (Domondon, 11th
ed, p. 46, citing UST vs. Collector, 104 Phil 1062).

A tax is not an obligation that is created by contracts express or implied. It is an obligation


imposed by law. Inasmuch as taxes are not debt, it follows that the two obligations are not
subject of set-off or compensation under Art. 1279 NCC (Domingo vs. Garlitos, 8 SCRA 443)
Taxes could not be set-off against the taxpayers claim of refund for reforestation charges it
initially shouldered which should have been the obligation of the government (Republic vs.
Mambulao Lumber No. L-17725, February 28, 1962).

The obligation to pay real estate tax delinquency could not be set-off by the amount which the
government is indebted to the former by way of expropriation was effected by the national
government (Francia vs. IAC, Ibid).
There can be no offsetting of taxes against the claims that a taxpayer may have against the
government, such as reimbursement from the Oil Price Stabilization Fund (OPSF) (Caltex
Phils. vs. COA, G.R. No. 92585, May 8, 1992).

Philex cannot refuse the payment of its tax liabilities on the ground that it has pending claims
for VAT input credit/refund. A taxpayer cannot refuse to pay his taxes when they fall due
simply because he has a claim against the government or that the collection of the tax is
contingent on the result of the lawsuit it filed against the government (Philex Mining vs.
Commissioner, G.R. No. 125704, August 28, 1998).

7. Compromise
A contract whereby the parties, by making reciprocal concessions avoid litigation or put an
end to one already commenced (Article 2028, Civil Code).
Requisites:
1. The taxpayer must have a tax liability.
2. There must be an offer (by the taxpayer of an amount to be paid by the taxpayer)
3. There must be an acceptance (by the Commissioner or taxpayer as the case may be) of the
offer in the settlement of the original claim.
Persons allowed to enter into compromise of tax obligations:
1. BIR Commissioner as expressly authorized by the NIRC subject to the following
conditions.
a. When a reasonable doubt as to validity of the claim against the taxpayer exist; OR
b. The financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax.
2. Collector of Customs - with respect to custom duties limited to cases where the legitimate
authority is specifically granted such in remission of duties.
3. Customs Commissioner - subject to the approval of the Secretary of Finance, in cases
involving the imposition of fines, surcharges, and forfeitures.
8. Tax Amnesty
a) Definition
General or intentional overlooking by the State of its authority to impose penalties on persons
otherwise guilty of evasion or violation of a revenue or tax law. It partakes an absolute
forgiveness of waiver of the government of its right to collect. To give tax evaders, who wish
to relent and are willing to reform a chance to do so.
b) Distinguish from tax exemption
Tax amnesty is an immunity from all criminal and civil obligations arising from non-payment
of taxes. It is a general pardon given to all taxpayers. It applies only to past tax periods,
hence of retroactive application (People vs. Castaeda, G.R. No. L-46881, September 15, 1988).
Tax exemption is an immunity from the civil liability only. It is an immunity or privilege, a
freedom from a charge or burden of which others are subjected (Florer vs. Sheridan, 137 Ind.
28, 36 NE 365). It is generally prospective in application.
9. Construction and Interpretation of:

Tax laws
Tax laws must be construed reasonably to carry out the purpose, the intent, and the objective
of the law.

(i) General Rule: If the tax law is clear and unambiguous, apply the law strictly against the taxpayer
and in favor of the government.
(ii) Exception: If the law is doubtful and ambiguous, then the law must be construed strictly against
the Government and liberally in favor of the taxpayer.

Tax exemption and exclusion

(i) General Rule

Must be construed strictly against the grantee and liberally in favor of the taxing authority.
(ii) Exemption
1. Where the statute granting exemption expressly provides for a liberal interpretation;
2. Special taxes relating to special cases and affecting only special classes of persons;
3. Properly held in private ownership;
4. Traditional exemptees, such as those in favor of religious and charitable institutions;
5. In favor of the government, its political subdivisions or instruments; and
6. By clear legislative intent.
Implication of strictly construed
i. Tax exemptions must never be presumed. It must be established and proved by the taxpayer.
ii. The law must be limited to what it says. It must be confined the statutory language.
iii. Should be personal to the exemptee, or person to the tax beneficiary.

Tax rules and regulations


The general principles in the construction of tax laws applies in the interpretation of tax rules
and regulations. To be valid, the tax rules must be consistent with the provisions of the tax
law which they seek to implement.

Requisites for valid tax regulation:


1. Publication;
2. Germane to the public purpose embodied in the governing statute; and
3. Exercised within the authority.

Penal provisions of tax laws


Strictly construed against the government and liberally in favor of the accused.

Non-retroactive application to taxpayers


Generally, rulings cannot be given retroactive effect for to do so will be prejudicial to the
taxpayer.

(i) Exceptions
Even if a retroactive application is prejudicial to the taxpayer, rulings can be given retroactive
application in the following cases:
(1) Where the taxpayer deliberately misstates or omits material facts from his return or any
document required of him by the Bureau of Internal Revenue;
(2) Where the facts subsequently gathered by the Bureau of Internal Revenue are materially
different from the facts on which the ruling is based; or
(3) Where the taxpayer acted in bad faith.
I.

SCOPE AND LIMITATION OF TAXATION

1. Inherent Limitations
a) Public purpose
A revenue measure must be laid for public purpose it is the legislature who determines public
purpose (Dimaampao, p. 37).
The proceeds of the tax must be used for:
1. The support of the State; or
2. Some recognized object of government or directly to promote the welfare of the community.
Test in Determining Public Purpose in Tax
1. Duty Test whether the thing to be threatened by the appropriation of public revenue is
something which is the duty of the State, as a government.

2. Promotion of General Welfare Test whether the law providing the tax directly promotes
the welfare of the community in equal measure.

Public purpose is not destroyed by the fact that the tax law may not be beneficial to one
group. The fact that one sector is benefited and in the process another sector is being in a
way prejudiced would not diminish the public character of the tax (Tio v. Videogram Regulatory
Board, G.R. 75697, June, 1987)

The fact that it was donated after, does not cure the defect that the tax was not for a public
purpose at the time the tax law was passed. The public purpose must exist at the time of the
enactment of the tax legislation (Pascual v. Sec of Public Works, G.R. L-10405, Dec. 1960).

b) Inherently legislative
(i) General Rule
Since the power of taxation is a power that is exercised by the Congress as delegates of the
people, then as a general rule, Congress could not re-delegate this delegated power.
(ii) Exceptions
a. Delegation to Local Governments
The Constitution grants each LGU the power to create its own sources of revenue and to levy
taxes, fees and charges which shall accrue exclusively to the LGU.
b. Delegation to the President
Delegation by Congress to the President to fix [TITO] tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts (Section 28(2) Article VI of the
Constitution).
Delegation of Emergency powers to the President (Sec. 23(2) Article VI of the Constitution).
Delegation to the President to enter into Executive agreements, and to ratify treaties which
may contain tax exemption provisions subject to the concurrence by the Senate in the
ratification made by the President.
c. Delegation to Administrative Agencies
Also known as the power of subordinate legislation, subject to the following test:
Completeness test in order for the delegation to be valid, the law must be complete in
all aspects when it leaves the legislature. The only thing left for the delegate to do is to
implement the law. The legislative department has not delegated the power to enact the
law.
Sufficiently Determinate Standards test there must exist a sufficient standard which
should limit the boundaries of the delegates authority by defining legislative policy and
the circumstance under which it is to be pursued and implemented.
CAVEAT: Some authors would argue that Administrative Delegation is NOT an exception since
what is being delegated is not the power to tax but the administrative detail to implement what the
law provides.

On the determination of the Secretary of Finance of certain conditions wherein the VAT
will be increased to 12% from 10%
In the present case, in making his recommendation to the President on the existence of either
of the two conditions, the Secretary of Finance is not acting as the alter ego of the President
or even her subordinate. In such instance, he is not subject to the power of control and
direction of the President. He is acting as the agent of the legislative department, to
determine and declare the event upon which its expressed will is to take effect (ABAKADA
Guro vs. Exec Secretary, G.R. No. 1688056, etc., Sep 1, 2005 & MR on October 18, 2005).

c) Territorial

(i) Situs of Taxation


(a) Meaning the place or authority that has the right to impose and collect taxes.
(b) Situs of Income Tax
Factors that determine the situs of income tax (Section 23 NIRC)
1. Nationality or citizenship of the taxpayer;
2. Residence or domicile of the taxpayer;
3. Source of income;
4. Location of the property;
5. Place or exercise of the privilege;
6. Classification of the tax being levied;
7. Possible protection and benefit that may accrue to both the government and to the taxpayer.
(1) From sources within the Philippines
All kinds of taxpayers are subject to income tax derived from sources within the Philippines.
Generally, income is derived from the Philippines, if it is derived from any activity within the
Philippines, in accordance with Sec. 42 of the NIRC.
(2) From sources without the Philippines
Only Residents Citizens and Domestic Corporations are liable to income tax on income
derived from sources without the Philippines.
(3) Income partly within and partly without the Philippines
Taxable income attributable to sources within the Philippines may be determined by
processes or formulas of general appointment prescribed by the Secretary of Finance. Gains,
profits and income from the sale of personal property produced (in whole or in part) by the
taxpayer within and sold without the Philippines, or produced (in whole or in part) by the
taxpayer without and sold within the Philippines, shall be treated as derived partly from
sources without the Philippines. (For more, see under Income Taxation: Gross Income Classification
of Income as to Source).

(c) Situs of Property Taxes


Depends upon the place where the act is performed or occupation is engaged in (Allied
Thread vs. City Mayor of Manila, GR No. 40296, November 21, 1984)

(1) Taxes on real property


Places where the real property is located
(2) Taxes on personal property
Situs of tangible personal property where the property is physically located although the
owner resides in another jurisdiction
Situs of intangible personal property the situs is the domicile of the owner (movables
fallowed the person).
Exceptions:
1. When the property has acquired a business situs in another jurisdiction.
2. When the law provides for the situs of the subject of tax.
(d) Situs of Excise Tax
(1) Estate tax
The value of the gross estate of the decedent shall be determined by including the value at
the time of his death of all property, real or personal, tangible or intangible, wherever situated;

PROVIDED, however, that in the case of a nonresident alien decedent who at the time of his
death was not a citizen of the Philippines, only that part of the entire gross estate which is
situated OR deemed situated (Section 104, NICR)
(2) Donors tax
The transmission of property from the donor to a donee may be subject to taxation in the
state where the transferor is a citizen or resident or where the property is located.
(e)
(1)
(2)
(3)

Situs of Business Tax


Sale of real property where the property is located.
Sale of personal property place where the sale is perfected and consummated.
VAT Place place where the transaction was made.

Summary Situs of Tax


KIND OF TAX
Poll/Capitalization/Community
Tax

Property Tax
Real Property

Personal Property

Excise Tax

Value Added Tax

Income Tax
Non-resident alien
Non-resident foreign corporation
Non-resident citizen
Resident alien

SITUS
Residence of the
taxpayer,
regardless of the
source of income
or location of the
property of the
taxpayer.
Where the real
property is
located, following
the doctrine of Lex
rei sitae or lex
situs.
Where it was
actually kept or
located, following
the doctrine of
mobilia sequuntur
personam
(Movables follow
the person)
On the place
where the act is
performed or
occupation
engaged in.
The place where
the transaction is
made. If the
transaction is
made (perfected
and
consummated)
outside of the
Philippines, then
we can no longer
tax such
transaction.
Sources of income
derived from
within the
Philippines

Resident foreign corporation


Resident citizen
Domestic corporation
Estate and Donors Tax
Non-resident Alien
Resident/Non-resident citizen
Resident alien

Sources of income
derived from
within and without
the Philippines
Properties
situated within the
Philippines
Properties
wherever situated

d) International Comity
Posits that the property of a foreign state or government may not be taxed by another.
States find it mutually advantageous for themselves to create self-imposed restraints on their
taxing powers especially with reference to the properties of foreign governments within their
territorial domain.
Basis:
1. Sovereign equality among states one state cannot exercise powers over another;
2. Usage among states that when one enters the territory 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 latter; and
3. Foreign government may not be sued without its consent so that it is useless to assess the
tax anyway because it cannot be collected.
e) Exemption of Government Entities, Agencies, and Instrumentalities
General Rule: Agencies performing governmental functions are tax-exempt.
Exemption:
1. Agencies performing proprietary functions.
2. When expressly provided by law or their charter is subject to tax
Government-owned and controlled corporations perform propriety functions; hence, they are
subject to tax. However, certain corporations have been granted exemption under Section 27(c)
of R.A. 8424 as amended by R.A. 9337 which took effect on July 1, 2005, to wit:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)

PAGCOR failed to prove that it is still exempt from the payment of corporate income tax,
considering that Sec 1 of RA 9337 amended Sec 27c of the NIRC by omitting PAGCOR from
the exemption. However, since PAGCOR is exempt from VAT under RA 9337 (pursuant to
Sec 109k), the BIR exceeded its authority in subjecting PAGCOR to 10% VAT (PAGCOR v.
BIR, GR 12087, March 2011).

The exemption of PAL was expressly removed by R.A. No. 7716. (PAL vs. Secretary of
Finance, G.R. No. 115852, 1994).
Moreover, taxes are financial burdens imposed for the purpose of raising revenues to defray
the cost of the operation of the Government, and a tax on property of the Government,
whether national or local, would merely have the effect of taking money from one pocket to
put it in another pocket (Board of Assessment of Appeals of Laguna vs. CTA, G.R. No. L-35683, May
7, 1987).

However, it can also tax itself (Collector vs. Bisaya Land Transportation, L-35668-72, L-35683, May
7, 1987).

Notwithstanding the immunity of the government from taxes, the principle is also well
recognized that the Government may tax itself. In one case, the SC held that there is no
constitutional limitation on the power of the Congress to tax the AFP if it wishes to do so
(Bisaya Land Transportation Co., Inc. vs. CIR, 102 Phil 438).

2. Constitutional Limitations
a) Provisions directly affecting taxation
(i) Prohibition Against Imprisonment for Non-Payment of Poll Tax
No person shall be imprisoned for debt or non-payment of a poll tax. (Article III, Section 20)
Poll Tax, defined
A tax of fixed amount on individuals residing within a specified territory, whether citizens or not,
without regard to their property or the occupation in which they may be engaged.

One cannot be imprisoned for non-payment of poll tax because payment thereof is not
mandatory, it is merely permissive.
While a person may not be imprisoned for non-payment of poll tax, he may be imprisoned for
non-payment of other kind of taxes where the law expressly so provides.

(ii) Uniformity and Equality of Taxation


The rule of taxation shall be uniform and equitable. (Article VI, Section 28(1))
Uniformity means that all taxable articles or kinds of property of the same classes shall be taxed
at the same rate. A tax is uniform when it operates with the same force and effect in every place
where the subject of it is found.

Wherever found in the Philippine islands, satisfies the requirement of the Philippines Bill that
the rule of taxation in said islands shall be uniform (Churchill and Tait vs. Conception, G.R. No.
11572, September 22, 1916).

A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class shall be
taxed alike. The Legislature has the inherent power not only to select the subjects of taxation
but to grant exemptions. Tax exemptions have never been deemed violative of the equal
protection clause (Commissioner vs. Lingayen Gulf Elec. Co., G.R. No. L-23771, August 4, 1988).
A local tax on tenement houses does not violate the rule of uniformity and equality of taxation
even if the tax in question is not also levied on other classes of buildings in the locality where
such tax is imposed (Villanueva vs. City Of Iloilo, G.R. No. L-26521, December 28, 1968).
Uniformity is not disregarded if a tax is levied on admission to cinema, theaters, vaudeville
companies, theatrical shows and boxing exhibitions but does not tax other places of
amusement such as race tracks, cockpits, cabarets, concert halls, circuses and other places
of amusement (Eastern Theatrical Co. vs. Alfonso, G.R. No. L-1104, May 31, 1949).
Selections 4, 5 and 6 of RA 9337, provide for a rate of 10% (or 12%) on importation of goods
and properties, importation of goods, sale of services and use or lease of properties. 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 paid on purchase of
capital goods or the 5% final withholding tax by the government. It must be stressed that the
rule of uniform taxation does not deprive Congress of the power to classify subjects of
taxation, and only demands uniformity within the particular class (Abakada Guro Party List vs.
Ermita, Ibid).

Uniformity vs. Equitability vs. Equality


Uniformity All taxable property shall be alike to be subjected to tax

Equitability The burden of taxation falls to those better able to pay.


Equality When the burden of the tax falls equally and impartially upon all persons and property
subject to it.

The law is also equitable it is equipped with a threshold margin. The VAT rate of 0% or 10%
(now 12%) does not apply to sales of goods or services with gross annual sales or receipts
not exceeding P1,500,000.00 also, basic marine and agricultural food products in their
original state are still not subject to tax, thus ensuring that prices at the grassroots level will
remain accessible (Abakada Guro Party List vs. Ermita).
Inequalities resulting from the singling out of one particular class for taxation or exemption
infringe no constitutional limitation (Domondon).

Progressive system of taxation


The Congress shall evolve a progressive system of taxation. (Article VI, Section 28(1))
Progressivity Tax rate increases as the tax base increases.

Progressivity of taxation is also mandated by the Constitution our income tax system is one
good example of such progressivity because it is built on the principle of the taxpayers ability
to pay. Taxation is progressive when its rate goes up depending on the resources of the
person affected (Reyes vs. Almanzor, G.R. Nos. 49839-46, April 26, 1991).

(iii) Grant by Congress of Authority to the President to Impose Tariff Rates


Section 28 par. 2, Article VI, 1987 Constitution

Requisites of a valid imposition of tariff rates by the President:


1. Delegated by Congress through a law;
2. Subject to Congressional limits and restrictions; and
3. Within the framework of national development program

(iv) Prohibition Against Taxation of Religious, Charitable Entities, and Educational Entities
Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques,
non-profit cemeteries, and all lands, buildings and improvements, actually, directly and
exclusively used for religious, charitable, or educational purposes shall be exempt from
taxation. [Article VI, Section 28(3)]

The tax exemption under this constitutional provision covers PROPERTY taxes only (Section
28(3), Article VI). Exclusive is defined as possessed and enjoyed to the exclusion of others;
debarred from participation or enjoyment; and exclusively is defined, in a manner to
exclude; as enjoying a privilege exclusively. 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 (Lung Center of the
Phil. vs. Quezon City, G.R. No. 144104, June 29, 2004).

General Rule: The constitutional exemption applies only to property tax. Gifts are subject to
donors tax.
Exemption: Gifts made in favor of charitable and other institutions may also be exempt from
Donors tax, not under the Constitution but under the NIRC provided certain conditions are met
(Sections 101(A)(3) and 101(B)(2) of the NIRC).

Actual use is necessary. To be exempt from tax, the lands, buildings and improvements must
not only be exclusively but also actually and directly used for religious and charitable
purposes (Province of Abra vs. Hernando, G.R. No. L-49336, August 31, 1981).

USE overrides OWNERSHIP in that if property although actually owned by a religious,


charitable or educational institution is actually used for a non-exempt purpose; the exemption
from tax of said property vanishes.

While the use of the second floor of the main building for residential purposes of the Director
and his family may find justification under the concept of incidental use, which is
complimentary to the main or primary purpose-educational. The lease of the first floor to the
Northern Marketing Corporation cannot, be considered incidental to the purpose of education.
Since only a portion is used for purpose of commerce, it is only fair that half of the assessed
tax be returned to the school involved (Abra Valley vs. Aquino, G.R. No. L-39086, June 15, 1988).

(v) Prohibition Against Taxation of Non-Stock, Non-Profit Institutions


Non-stock, non-profit educational institution actually, directly and exclusively used for
educational purposes are exempt (Section 30E, NIRC).
Reason: Constitutional provision is self-executory.
Proprietary educational institutions are taxable under Section 27 (B) of the Tax Code.
Reason: Constitutional provision used permissive term MAY, which gives Congress discretion to
grant tax exemptions.
(vi) Majority Vote of Congress for Grant of Tax Exemption
No law granting any tax exemption shall be passed without the concurrence of a majority of
all the Members of the Congress. (Article VI, Section 28 (4))
Reason: To prevent indiscriminate grant of tax exemptions.
(vii) Prohibition on Use of Tax Levied for Special Purpose
Section 29(3), Article VI of the 1987 Constitution provides that all money collected or any tax
levied for special purposes shall be treated as 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.
(viii)
Presidents Veto Power on Appropriation, Revenue or Tariff Bills
The President shall have the power to veto any particular item or items in an appropriation,
revenue or tariff bill but the veto shall not affect the item or items which he does not object.
(Section 27 [2], Article VI 1987 Constitution)

Appropriation, revenue, tariff bill must exclusively originate in the House of


Representatives
All appropriation, revenue or tariff bills, bills authorizing the increase of public debts, bills of local
application and private bills, shall originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments. (Section 24, Article II, Constitution)
Any particular item or items in an:
a. Appropriate Bill
b. Revenue Bill
c. Tariff Bill
Shall not affect items to which he does not object
Senate may propose or concur with amendments but it cannot initiate bills
(ix) Non-Impairment of Jurisdiction of the Supreme Court
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. (Article VIII, Section 2)

The Supreme Court shall have the following powers:


a. Review, revise, reverse, modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in:
b. All cases involving the legality of any tax, impost, assessment, or toll, or any penalty imposed
in relation thereto. (Article VIII, Section 5)
(x) Grant of Power to the Local Government Units to Create its Own Sources of Revenue
Each local government unit shall have the power to create its own sources of revenues and to
levy taxes, fees and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges
shall accrue exclusively to the local government (Section 5, Article 10, 1987 Constitution).
(xi) Flexible tariff clause
The President may fix tariff rates, import and export quotas, under TCC.
a. To increase, reduce or remove existing protective rates of import duty (including any
necessary change in classification).
The existing rates may be increased or decreased to any level, on one or several
stages but in no case shall the increased rate of import duty be higher than a
maximum of 100% ad valorem.
b. To establish import quota or to ban imports of any commodity, as may be necessary; and
c. To impose an additional duty on all imports not exceeding ten (10%) percent ad valorem
whenever necessary (Sec. 28, Art. VI, Constitution and Sec. 401, TCC).
(xii)Exemption From Real Property Taxes
In real property taxation, exemption is limited only to those properties which are enumerated
in Section 234 of the Local Government Code. By specifying therein what particular
properties are exempt, it follows by clear implication that the law has withheld from local
governments the power to exempt.
(xiii)
No Appropriation or Use of Public Money for Religious Purposes
Par. 3 Section 28, 1987 Constitution
Except: If a priest is assigned to armed forces, penal institutions, government, orphanages or
leprosarium
b) Provisions indirectly affecting taxation
(i) Due Process
No person shall be deprived of life, liberty or property without due process of law (Article III,
Section 1, Constitution)

Requisites:
1. Procedural
The interest of the public generally as distinguished from those of a particular class require
the intervention of the State;
Assessment and Collection must not be arbitrary;
Right to notice and hearing;

2. Substantive
The means employed must be reasonably necessary to the accomplishment of the purpose
and not unduly oppressive.
Assessment should not be harsh, oppressive and confiscatory
It must be by authority of a valid law

It must be imposed within territorial jurisdiction

There is a denial of due process on account of the passage of an ordinance in the City of
Manila which imposes a permit fee of P50.00 on aliens as a condition to employment or
engaging in any business or occupation, where it appears that under said ordinance, the City
Mayor of Manila could withhold or refuse issuance of such permit at will. Aliens, once
admitted in the Philippines, cannot be deprived of life without due process of law and this
guarantee includes the means of livelihood (Villegas vs. Hiu Chiong Tsai Pao Ho, G.R. No. L29646, November 10, 1978).

Due process was not observed when the trial court, in an action for declaratory relief,
declared that certain property owned by the Roman Catholic Church in Bangued, Abra was
tax-exempt under the 1973 Constitution, it appearing that no court hearing was conducted
(Province of Abra vs. Hernando, G.R. No. L-49336, August 31, 1981).

The ordinance exacts the tax upon all motor vehicles operating within the City of Manila. It
does not distinguish between a motor vehicle for hire and one which is purely for private use.
Neither does it distinguish between a motor vehicle registered in the City of Manila and one
registered in another place but occasionally comes to Manila and uses its streets and public
highways. There is no pretense that the ordinance equally applies to motor vehicles who
come to Manila for a temporary stay or for short errands, and it cannot be denied that they
contribute in no small degree to the deterioration of the streets and public highway. This is an
inequality which we find in the ordinance, and which renders it offensive to the Constitution
(Association of Customs Brokers, Inc. vs. City of Manila, G.R. No. L-4376, May 22, 1953).

Due process was not violated when the VAT law (EO 273) was promulgated because there
was no grave abuse of discretion incident to its promulgation. Further, petitioners failed to
show that EO 273 was issued capriciously and whimsically or in arbitrary or despotic manner
by passion or personal hostility since it appears that a comprehensive study of the VAT was
made before EO 273 was issued (Kapatiran vs. CIR, G.R. No. L-81311, June 30, 1988).
The modified scheduler income tax whereby individual income was classified into three
different classes under different tax rates (compensation, business/other income and passive
investment income) is not a denial of due process because there is no proof of arbitrariness
in the imposition of tax rates (Sison vs. Ancheta, G.R. No. 59431, July 25, 1984).
Section 112 (B) allows a VAT registered person to apply for the issuance of a tax credit
certificate or refund for any unused input taxes, to the extent that such input taxes have not
been applied against output taxes. Such unused input tax may be used in payment of his
other internal revenue taxes. The input tax is not a property or property right within the
constitutional purview of the due process clause. A VAT-registered persons entitlement to the
creditable input tax is merely a statutory privilege (Abakada Guro Party List vs. Ermita, Ibid.).

(ii) Equal Protection


nor shall any person be denied the equal protection of laws. (Article III, Section 1)
Requisites for a Valid Classification:
1. Must be based upon substantial distinctions;
2. Must be germane to the purpose of law;
3. Must apply to both present and future conditions; and
4. Must apply equally to all members of a class.
Two ways of violating Equal Protection
1. When classification is made when there should be none
2. When classification is not made when called for

If the ordinance is intended to apply to a specific taxpayer and to no one else regardless of
whether or not other entities belonging to the same class are established in the future, it is a
violation of the equal protection clause, but if intended to apply also to similar entities which
may be established in the future, then the tax ordinance is valid (Ormoc Sugar Central vs. CIR,
G.R. No. L-23794, February 17, 1968)

The fact that the taxpayer is the only sugar central or refinery in the municipality where the
tax ordinance is enacted does not make said ordinance discriminatory. The reason is that
since other refineries to be established in the future would also be taxable, no singling out of
the taxpayer to its disadvantage has ever taken place (Victorias Milling Co., Inc. vs. Municipality
Of Victoria, G.R. No. L-21183, September 27, 1968)

The remission of taxes due and payable to the exclusion of taxes already collected does not
constitute unfair discrimination. Each set of taxes is a class by itself, and the law would be
open to attack as class legislation only if all taxpayers belonging to one class were not treated
alike (Juan Luna Subd. Vs. Sarmiento, G.R. No. L-3538, May 28, 1952)

It is true that the uniformity essential to the valid exercise of power of taxation does not
require identity or equality under all circumstances, or negate the authority to classify the
objects of taxation.

A local ordinance which levies an ad valorem tax on motor vehicles registered in Manila
without also taxing those which are registered outside the city but which enters the city and
use its streets occasionally violates the rule on the equality of taxation (Assoc. of Customs
Brokers vs. Municipality Board of Manila, G.R. No. L-4375, May 22, 1953).

There is no discrimination or class legislation if a statute authorizes the City of Manila to levy
occupation taxes whereas that same authority is withheld from other cities or municipalities. It
is not for the courts to decide what cities or municipalities should be so authorized for that is a
matter for the legislature to decide (Pursalan vs. The Municipal Board of Manila, G.R. No. L-4817,
May 26, 1954).

Taxpayers may be classified into different categories. It is enough that the classification must
rest upon substantial distinctions that make real differences (Antero M. Sison, Jr. vs. Ruben B.
Ancheta, G.R. No. L-59431, July 25, 1984).

With regard to the 5% creditable withholding tax imposed on payments made by the
government for taxable transactions, Section 114 par. C merely provides a method of
collection, or as stated by respondents, a more simplified VAT withholding system. Since it
has not been shown that the class subject to the 5% final withholding tax has been
unreasonably narrowed, there is no reason to invalidate the provision. Petitioners, as
petroleum dealers, are not the only ones subjected to the 5% final withholding tax. It applies
to all those who deal with the government (Abakada Guro Party List vs. Ermita, Ibid.).

(iii) Religious Freedom


No law shall be made respecting an establishment of religion, or prohibiting the free exercise
thereof. The free exercise and enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No religious test shall be required for
the exercise of civil or political rights. (Article III, Section 5)

The Constitutional guaranty of the free exercise of religion carries with it the right to
disseminate religious information. Any restraint on such right can only be justified on the
ground that there is a clear and present danger of any substantive evil which the State has
the right to prevent.
Activities simply and purely for propagation of faith are exempt (i.e., sale of bibles and
religious articles by non-stock, non-profit organizations at minimal profit). A license tax, which,
unlike an ordinary tax, is mainly for regulation. Its imposition on the press is unconstitutional
because it lays a prior restraint on the exercise of its right. Hence, although its application to
others is valid, its application to the press or to religious groups, such as the Jehovahs
Witnesses, in connection with the latters sale of religious books and pamphlets, is
unconstitutional (American Bible Society v. City of Manila, G.R. L-9637, April 1957).

(iv) Non-Impairment of Obligations of Contracts


No law impairing the obligation of contracts shall be passed. (Art. III, Sec. 10, 1987
Constitution)

Q: IS A TAX EXEMPTION REVOCABLE?


A: It depends

A law which changes the terms of the contract by making new conditions, or changing those
in the contract, or dispenses with those expressed, impairs the obligation.
However, the non-impairment rule does not apply to public utility franchises since a franchise
is subject to amendment, alteration or repeat by the Congress when the public interest so
requires (Article XII, Section 11). This is so because under the Constitution [now Section 11,
Article XII, 1987 Constitution], the legislature can impair a grantees franchise since a
franchise is subject to amendment, alteration or repeat by the Congress when the public
interest so requires (Cagayan G.R. No. L-60126, September 25, 1985).

Rules:
a. When the exemption is unilaterally granted by law and the same is withdrawn by virtue of
another law, there is no violation.
b. When the exemption is bilaterally agreed upon between the government and the taxpayer, it
cannot be withdrawn without impairing the contract.
c. When the exemption is granted under a franchise, it may be revoked because a franchise is
subject to amendment, alteration, or repeal by Congress.
J. STAGES OF TAXATION
1. Levy
The determination by Congress of the subject and object of taxation as well as the rate
(Domondon, 9th ed, p. 29). It refers to the enactment of tax laws or statutes (Dimaampao, 2011
ed, p. 14).

Note: This is NOT the Levy under Sec. 207 of NIRC, which refers to the remedy of the
Government to collect taxes.
2. Assessment and Collection
Assessment is a notice to the effect that the amount therein stated is due as tax and a
demand for payment thereof.
Rules governing assessment and collection of taxes to prevent its abuse
1. The tax law must designate which agency will collect the taxes
2. The circulars or regulations issued by the Secretary of Finance or the Commissioner of the
Internal Revenue must be in accordance with the tax measures imposed by Congress
Collection is the final stage and goal of tax administration.
3. Payment
The act of compliance by the taxpayer, including such options, schemes or remedies as may
be legally open or available to him.

4. Refund
The taxpayer asks for restitution of the money paid as tax.
K. Definition, Nature, and Characteristics of Taxes
Taxes are the enforced proportional contributions from persons and property levied by the
State by virtue of its sovereignty for the support of the government and for public needs.
Essential Characteristics of Taxes
1) It is imposed by the State

2)
3)
4)
5)
6)
7)
8)
9)

Levied by the law-making body


It is an enforced contribution
Payable in money
Proportionate in character
Levied on persons, property and excise
Levied for public purposes
Paid at regular periods or intervals
Personal to the taxpayer

L. REQUISITES OF A VALID TAX


1.
2.
3.
4.

It must be for a public purpose.


It must be uniform.
The party being taxed must be within the jurisdiction of the taxing authority.
The tax must not impugned on the inherent and constitutional limitations on the power of
taxation.
5. Assessment and collection of certain kinds of taxes guarantee against injustice to
individuals, especially by providing notice and opportunity for hearing.
M. TAX AS DISTINGUISHED FROM OTHER FORMS OF EXACTIONS
TAX
All embracing term to include various kinds of
enforced contributions upon persons for the
attainment of public purposes.

TOLL
A kind of tax imposed on articles which are traded
internationally

TAX
All embracing term to include various kinds of
enforced contributions upon persons for the
attainment of public purposes.
A demand of sovereignty for the purpose of raising
public revenue.

TOLL
A kind of tax imposed on articles which are traded
internationally

TAX
Basis
Power of Taxation
Purpose
To generate revenue
Limitations
Inherent and
constitutional limitations
Effect of Non-payment
Does not make the
business illegal
TAX
Imposed on persons,
property and excises
Personal liability attaches
on the person assessed
in case of non-payment
Note: An exception may
be provided in the case
of real property tax (RPT)
which attaches to the

LICENSE FEE
Police power
Regulatory
Limited to costs of
issuing the license;
Necessary inspection or
police surveillance.
Makes the business
illegal
SPECIAL
ASSESSMENT
Levied only on land
Cannot be made a
personal liability of the
person assessed

A demand or ownership; An amount charged for


the cost and maintenance of the property used.

property subject to RPT


Not based on any special
or direct benefit
Exemption granted is
applicable (Art. VI, Sec.
28(3) 1987 Constitution)
Note: The exemption
under the Constitution is
with respect only to RPT

TAX
An obligation imposed by
law. Tax is not a debt
because it is not an
obligation created by
contracts, express or
implied. Thus, if a
taxpayer fails or refuses
to pay a local tax, he is
liable for criminal
prosecution.
Not assignable.
Due to the sovereign
government.

Based wholly on benefit


Exemption does not
apply.
Note: If property is
exempt from Real
Property Tax, it is also
exempt from Special
Assessment. (See Article
234(B) LGC)
DEBT
A sum of money due
upon contract or one
which is evidenced by
judgment.

Assignable.
Due to the government
acting in its corporate
facility.

N. KINDS OF TAXES
1. As to Object
a) Personal tax also known as capitalization or poll taxes. These are taxes of fixed amount
upon all persons of a certain class within the jurisdiction of the taxing power without regard to
the amount of their property or their occupations or businesses in which they may be
engaged.
b) Property tax taxes assessed on all property or all property of a certain class within the
jurisdiction of the taxing power.
c) Privilege tax imposed on the performance of an act, the engaging in an occupation, or the
enjoyment of a privilege. (Blacks law, 6th ed.)
2. As to Burden or Incidence
a) Direct tax demanded from the very person who, as intended, should pay the tax which he
cannot shift to another. (e.g. income tax, estate tax, donors tax)
b) Indirect tax demanded in the first instance from one person with the expectation that he
can shift the burden to someone else, not as a tax but as part of the purchase price. (e.g.
VAT) (from Maceda vs. Macaraeg, 223 SCRA 217)
3. As to Tax Rates
a) Specific tax imposed and based on a physical unit of measurement, as by head or number,
weight, or length or volume (i.e. Taxes on distilled spirits and wines, see Tan vs. Mun of Pagbilao,
G.R. L-14264).

b) Ad Valorem Tax imposed on a fixed portion of the value of property with respect to which
the tax is assessed; Needs an independent appraiser to determine its value.
c) Mixed imposed both specific and ad valorem
4. As to Purposes

a) General tax levied for ordinary or general purpose of the government, to raise revenue for
governmental needs. (ex: motor vehicle registration fees (PAL vs. Edu, G.R. No. 4138, 15 August
1988).
b)

Special tax levied for a special purpose, to achieve some social or economic ends (i.e. for
regulation or the exercise of police power), irrespective of whether revenue is actually raised.
(ex: Margin Fees, which is a form of exchange control or restriction designed to discourage
imports and encourage exports (ESSO Std Eastern vs. CIR, G.R. No. 28608-9, July 1989), Oil Price
Stabilization Fund (Lozano vs. ERB, G.R. No. 95119-21, December 1990).

5. As to Scope or Authority to Impose


a) National - Levied by the National Government (ex: internal revenue taxes)
b) Local - Levied by the Local Government (ex: real property tax, municipal tax, business tax)
6. As to Graduation
a) Progressive - imposed whereby the rate or amount of tax increases as the amount of the
income or earning to be taxed increases.
b) Regressive - whereby the tax rate decreases as the amount of income or earning to be taxed
increases.
c) Proportionate - Tax rate is based on a fixed percentage of the amount of the fixed
percentage of the amount of the property, receipts or other bases to be taxed.

NATIONAL INTERNAL REVENUE CODE OF 1997 AS AMENDED (NIRC)


A. INCOME TAXATION
1.
a)

Income Tax Systems


Global tax system
It generally provides for uniform rules
It generally imposes uniform tax rate
It does not generally classify income

b)

Schedular tax system


It classifies income
It provides different tax rules
It imposes different tax rates

c) Semi-schedular or semi-global tax system


If an individual taxable income is subjected to one graduated rates
If a corporation taxable income is subjected to normal corporate income tax rate
2. Features of the Philippines Income Tax Law
a) Direct Tax
Tax burden is borne by the income tax recipient upon whom the tax is imposed.
b) Progressive
Tax rate increases as the tax base increases.
c) Comprehensive
Adopts the citizenship principle, the residence principle and the source principle.
d) Semi-schedular or semi-global tax system
Taxable income (i.e. gross income less allowable deductions and exemptions) is subjected to
one graduated tax rates (if an individual) or normal corporate income tax rate (if a
corporation)

3. Criteria in imposing Philippine Income Tax


a) Citizenship Principle
A citizen taxpayer is subject to income tax:
1) On his worldwide income (income within and without the Philippines; or
2) Only on his income from sources within the Philippines, if he qualifies as a non-resident
citizen.
b) Residence Principle
A resident alien is liable to pay income tax on his income from sources within the Philippines
but exempt from tax on his income from sources outside the Philippines.
c) Source Principle
A non-resident alien is subject to Philippine income tax because he derives income from
sources within the Philippines such as dividend, interest, rent or royalty.
4.
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.

Types of Philippine Income Tax


Net Income Tax
Final Income Tax
Gross Income Tax
Improperly Accumulated Earnings Tax
Minimum Corporate Income Tax
Optional Corporate Income Tax
Fringe Benefits Tax (FBT)
Creditable Withholding Tax (Expanded)
Special Income Tax on certain corporations
Capital Gains Tax
Branch Profit Remittance Tax
Withholding Tax on Compensation

5. Taxable Period
a) Calendar period
Accounting period from January 1 to December 31.
Taxable income is computed based on calendar year if:
1. Accounting period is other than fiscal year.
2. Taxpayer has no accounting period.
3. Taxpayer does not keep books.
4. Taxpayer is an individual.
b) Fiscal period
Accounting period of 12 months ending on the last day of any month other than December.
c) Short period
A taxpayer may have a taxable period of less than 12 months where:
1. Taxpayer dies
2. Corporation is newly organized
3. Corporation changes its accounting period
4. Corporation is dissolved
Change of Accounting Period
If a taxpayer, other than an individual, changes his accounting period, the net income shall,
with the approval of the Commissioner, be computed on the basis of such new accounting
period, subject to the provisions of Sec. 47 (Sec. 46, NIRC).

If the change is from fiscal year to calendar year, a separate final or adjustment return shall
be made for the period between the close of the last fiscal year for which the return was
made and the following Dec. 31.
If the change is from calendar year to fiscal year, a separate final or adjustment return shall
be made for the period between the close of the last calendar year for which return was made
and the date designated as the close of the fiscal year.
If the change is from one fiscal year to another fiscal year, a separate final or adjustment
return shall be made for the period between the close of the former fiscal year and the date
designated as the close of the new fiscal year.
BIR approval is necessary.

6. Kinds of Taxpayers
a) Individual taxpayers
(i) Citizens
(a) Resident Citizens - citizen of the Philippines residing therein is taxable on all income derived
from sources within and without the Philippines.
Who are citizens of the Philippines?
A: (Sec. 1, Art. IV, 1987 Constitution)
Those who are citizens of the Philippines at the time of the adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino Mothers, who elect Philippine citizenship
upon reaching the age of majority; and
Those who are naturalized in accordance with law.

(b) Non-Resident Citizens


Taxed on income derived from sources within the Philippines which includes a Filipino citizen
who:
i. Establishes to the satisfaction of the Commissioner the fact of his physical presence
abroad with a definite intention to reside therein.
ii. Leaves the Philippines during the taxable year to reside abroad, either as an immigrant or
for employment on a permanent basis.
iii. Has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines
shall likewise be treated as a non-resident citizen for the taxable year in which he arrives
in the Philippines with respect to his income derived from sources abroad until the date of
his arrival in the Philippines (Section 22[E], NIRC).

Taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be.

(ii) Aliens
(a) Resident Alien is an individual who resides in the Philippines and who is not a citizen
thereof (Section 22 F, NIRC).
(b) Non-Resident Aliens
(1) Engaged in trade or business means a non-resident who:
i. Engages in trade and/or business in the Philippines (Principle of habituality in commercial
transactions).

ii.

Exercises a profession in the Philippines.

iii. Comes to and stays in the Philippines for an aggregate period of more than 180 days
during any calendar year (Revenue Regulation 2-98).
(2) Not engaged in trade or business
Is an individual whose residence is without the Philippines and who is not a citizen and not
doing business therein is liable for income derived from sources within the Philippines.
(iii) Special Class of Individual Employees
(a) Minimum Wage Earner
Worker in the private sector paid the statutory minimum wage or an employee in the public
sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she assigned.
MWEs shall be exempt from the payment of income tax on their taxable income. 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.
b) Corporations
(i) Domestic Corporations
A corporation created or organized in the Philippines or under its laws and is liable for income
from sources within and without.
(ii) Foreign Corporations
(a) Resident Foreign Corporations
A corporation which is not domestic and engaged in trade or business in the Philippines is
liable for income from sources within.
(b) Non-Resident Foreign Corporations
A corporation which is not domestic and not engaged in trade or business in the Philippines is
liable for income from sources within.
(iii) Joint Venture and Consortium
Joint Venture or Consortium undertaking construction activity, or engaged in petroleum
operations with operating contract with the government is a partnership exempt from tax.
c) Partnerships
Under the Philippine setting on taxation, corporation includes partnership no matter how
created or organized, except general professional partnerships, joint ventures or consortium
formed for the purpose of undertaking a construction project or engaging in petroleum, coal,
geothermal and other energy operation pursuant to an operating consortium agreement
under service contract with the government.
d) General Professional 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 (Section 22B, NIRC).
e) Estates and Trusts
Estate refers to the mass of properties left by a deceased person.
Trust a right to the property, whether real or personal, held by one person for the benefit of
another.
f)

Co-Ownerships
There is co-ownership when:
Two or more heirs inherit an undivided property from a decedent
A donor makes a gift of an undivided property in favor of two or more donees.

7. Income Taxation
a) Definition
Tax on all yearly profits arising from property, profession, trades of offices, or as a tax on a
persons income, emoluments, profits and the like
b) Nature
Nature of Philippine Income Tax
Direct tax
Progressive tax
Comprehensive system
Semi-schedular or semi-global
c) General principles (Section 23, NIRC)
A citizen of the Philippines, residing therein is taxable on all income derived from sources
within and without the Philippines
A non-resident citizen is taxable only on income derived from sources within the Philippines
An individual citizen of the Philippines who is working and deriving income from abroad as an
Overseas Filipino Worker is taxable only on income from sources within the Philippines:
Provided that a seaman who is a citizen of the Philippines and receives compensation abroad
as a member of the complement of a vessel engaged exclusively in international trade shall
be treated as an overseas contract worker.
An alien individual whether as resident or not of the Philippines is taxable only on income
derived from sources within the Philippines.
A domestic corporation is taxable on all income derived from sources within and without the
Philippines
A foreign corporation whether engaged or not in the trade or business in the Philippines is
taxable only on income derived from sources within the Philippines.
8. Income
a) Definition
All wealth that flows into the taxpayer other than mere return of capital, actually or
constructively received.
Income, Capital, Revenue, Receipts Distinguished
Income it includes flow, service of wealth and fruits during a definite period of time.
Capital fund or property existing at one distinct point of time.
Receipts may constitute capital as well as income; broader scope than income.
Revenue all funds or income derived by the government whether from tax or other sources.
Sources of Income
a. Property(Capital)
b. Labor(Service)
c. Sale/Exchange of Capital asset and activity
d. Income derived from other sources
Treasure found or punitive damages representing profit loss
Amount received by mistake
Cancellation of taxpayers indebtedness
Payment of usurious interests
Illegal gains
Tax Refund
Bad Debt Recovery
b) Nature

Income is a flow of service rendered by capital by the payment of money from it or any other
benefit rendered by the fund through a period of time. Income is the fruit of the capital or
labor severed from the tree (Madrigal vs. Rafferty, GR 12287, August 7, 1918)

c) When income is taxable


(i) Existence of Income
1) There must be gain or profit.
Income tax only applies only when there is income, gain or profit. Income, in its broad sense,
means all wealth that flows into the taxpayer other than as a mere return of capital. Unless
otherwise specified, it means cash or its equivalent.
2) The gain must be realized or received
3) The gain must not be excluded by law or treaty from taxation.
(ii) Realization of Income
(a) Tests of Realization
Unless the income is deemed realized, there is no taxable income.
(b) Actual Vis--Vis Constructive Receipt
Actual receipt is the actual and physical receipt.
Constructive receipt there is no physical receipt but deemed accrued to the taxpayer. It occurs
when the consideration is placed under his complete dominion.

An item of income must be included in gross income if it is credited to the account of or set
apart for the taxpayer, or otherwise made available to the taxpayer, although not yet
physically received or placed to his actual possession.
The Assignment of Income doctrine holds that income is taxable to the taxpayer even if he did
not receive the amount by reason of assigning it to another person in a form of a gift or
donation.

(iii) Recognition of Income


Income is received not only when it is actually handed to a person but also when it is merely
constructively received by him.

(iv) Methods of Accounting


(a) Cash Method vis--vis Accrual Method
Cash method income is reported in the year of payments are received while expenses are
deducted in the year paid.
Accrual method income is reported in the year it is earned while expenses are deducted in the
year it is incurred regardless of receipt or disbursement of cash.
(b) Installment Payment vis-a-vis Deferred Payment vis-a-vis Percentage Completion (In
Long Term Contracts)

Installment method appropriate when collections of the proceeds of sales and income extend
over relatively long periods of time and there is strong possibility that full collection will not be
made.
Deferred payment Under section 43 deferred-payment sales of real property include (1)
agreements of purchase and sale which contemplate that a conveyance is not to be made at the
outset, but only after all or a substantial portion of the selling price has been paid, and (b) sales in
which there is an immediate transfer of title, the vendor being protected by a mortgage or other
lien as to deferred payments. Such sales either under (a) or (b), fall into two classes when
considered with respect to the terms of sale, as follows:
(1) Sales of property on the installment plan, that is, sales in which the payments received in
cash or property other than evidences of indebtedness of the purchaser during the taxable
year in which the sale is made do not exceed 25 percent of the selling price;
(2) Deferred-payment sales not on the installment plan that is sales in which the payments
received in cash or property other than evidences of indebtedness of the purchaser during
the taxable year in which the sale is made exceed 25 percent of the selling price;
Percentage completion method applicable in the case of a building, installation or
construction contract covering a period in excess of 1 year whereby gross income derived from
such contract may be reported upon the bases of percentage of completion.
d) Tests in determining whether income is earned for tax purposes
(i) Realization Test
Unless the income is deemed realized, there is no taxable income.
(ii) Claim of Right Doctrine or Doctrine of Ownership, Command, or Control
A taxable gain is conditioned upon the presence of a claim of right to the alleged gain and the
absence of a definite unconditional obligation to return or repay.
(iii) Economic Benefit Test, Doctrine of Proprietary Interest
What is determinative is that income is realized by the taxpayer regardless of the benefit
derived from such income. However, this principle is not controlling.
(iv) Severance Test
Income is recognized when there is separation of something which is of exchangeable value.
(v) All Events Test
Applied in recognizing income or liability under accrual method of accounting. Expenses
incurred in prior year cannot be claimed as expense in another. The determinative question
is: when do the facts present themselves in such a manner that the taxpayer must recognize
income or expense. The following are the requisites of this method:
1. The right to receive the amount must be valid, unconditional and enforceable, i.e., not
contingent upon future time;
2. The amount must be reasonably susceptible of accurate estimate; and
3. There must be a reasonable expectation that the amount will be paid in due course
(Filipinas Synthetic Fiber Corp v. CA, 316 SCRA 480, 1999).

9. Gross Income
a) Definition
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 of business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interests;

5.
6.
7.
8.
9.
10.
11.

Rents;
Royalties;
Dividends;
Annuities;
Prizes and winnings;
Pensions; and,
Partners distributive share from the net income of the general professional partnership.

b) Concept of income from whatever source derived


All income not expressly excluded or exempted from the class of taxable income, irrespective
of the voluntary or involuntary action of the taxpayer in producing the income, and regardless
of the source of income, is taxable. (Guitierrez vs CIR, CTA Case No. 65, August 31, 1995)
It may be legal or illegal.
Examples of income from whatever source
1. Amount of received by mistake
2. Payment of usurious interest
3. Illegal gains
4. Bad debts recovery
5. Tax refund claimed as deduction from gross income in the preceding year
1) J
Formulas used for determination of:
Gross income (All income less Exclusions)
Net or Taxable Income (Gross Income less Allowable Deductions)
Taxable Compensation Income (Gross Compensation Income less Personal and Additional
Exemptions Individual)
Income Tax Due (Taxable or Net Income multiplied by Income Tax Rate)
Income Tax Payable (Income Tax Due less Creditable Withholding Tax Credit)
c) Gross Income vis--vis net income vis--vis taxable income
Gross Income Means all income derived from whatever sources (Sec. 32, NIRC). It is the
accession of wealth, increase in net worth where the taxpayer has complete control over the
funds.
Net income Means gross income within one taxable period less allowable deductions and/or
personal and additional exemptions, if any, authorized for such type of income by this Code or
other special laws.
Taxable income may refer to:
(1) Net Income arrived at after subtracting the allowable deductions of the individual taxpayer,
including personal exemption or both personal and additional exemptions (Sec 31, NIRC) in the
case of:
a. RESIDENT CITIZEN as to income from all sources; and
b. A NON-RESIDENT CITIZEN as to income from sources within the Philippines (Sec 24[A,
1].

(2) Net Income within the Philippines arrived at after subtracting the allowable deductions of the
individual taxpayer, including personal exemption (when allowed in certain conditions under Sec
35D) as in the case of NON-RESIDENT ALIEN ENGAGED IN TRADE IN THE PHILIPPINES.
(3) Net Income arrived at after subtracting the allowable deductions of the taxpayer, WITHOUT
personal and additional exemptions as in the case of:

a. A NON-RESIDENT ALIEN engaged in trade in the Philippines as to income within the


Philippines (Secs 25 A, 1 and Sec 35 D);
b. A domestic corporation as to income from all sources (Sec 27A); and
c. A resident foreign corporation as to income from the Philippines
(4) Gross Income without deductions as in the case of:
a. NON-RESIDENT ALIEN not engaged in trade in the Philippines (Sec 25 B, C, D, E); and
b. NON-RESIDENT FOREIGN CORPORATION as to income received within the
Philippines (Sec 28 B).

d) Classification of income as to source


(i) Gross Income and Taxable Income from Sources Within the Philippines
1. Interest a) interest derived from sources within this refers to interest earned from deposits
on banks located in the Philippines (location of the blank), or b) residence of the debtor
interst on bonds, notes, or other interest bearing obligations
2. Dividends amount received as dividend from a domestic corporation or from a foreign
corporation, subject to the 50% rule, or at least 50% of its gross income is from sources
within the Philippines.
50% rule: If for the 3-year period preceding the declaration of such dividend, the ration of such
corporations Philippine income to the world (total-within and without) income is:
Less than 50% - Entirely without
50% or more proportionate
3. Compensation for labor or personal services services performed in the Philippines.
4. Rentals and royalties in case of rentals, those properties located in the Philippines. In case
of royalties used in the Philippines
5. Sale of real Property sale of RP located in the Philippines
6. Sale of personal property in case of sale of personal property, the following rules apply:
a. Production and Sale
Production in whole within and sold within income purely within
Produced in whole without and sold without income purely without
Produced within or sold without income partly within and partly without
Produced without and sold within income partly within and partly without
b. Mere Cases of Buy and Sell (No Production)
Place of market rule (place of sale) applies.
Exception: If the personal property sold is shares of stocks of DOMESTIC corporation the
income is purely within even if the seller sells it abroad. (irrespective of place of sale)

Taxable Income
General Rule From the items of gross income specified above, there shall be deducted the
expenses, interests, losses and other deductions properly allocated thereto and a ratable part of
expenses, interests, losses and other deductions effectively connected with the business or trade
conducted exclusively within the Philippines which cannot definitely be allocated to some items or
class of gross income. The remainder, if any, shall be treated in full as taxable income from
sources within the Philippines.

Exception: No deductions for interest paid or abroad shall be allowed from the gross income
from sources within the Philippines unless the indebtedness was actually incurred to provide
funds or use in connection with the conduct or operation of trade or business in the Philippines.
(ii) Gross Income and Taxable Income from Sources without The Philippines
Gross Income from sources without
1. Interest other than those derived from sources within the Philippines;
2. Dividends other than those derived from sources within the Philippines;
3. Compensation for labor or personal service performed without the Philippines;
4. Rentals or royalties from property located without the Philippines or from any interest in such
property including rentals or royalties for the use of or for the privilege of using without the
Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade
brands, franchises and other like properties; and
5. Gains, profits and income from the sale of real property located without the Philippines.

Taxable Income from sources without form the items of gross income specified in Subsection
(C) of this Section there shall be deducted the expenses losses, and other deductions
properly apportioned or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of gross income. The
remainder, if shall be treated in full as taxable income from sources without the Philippines.

(iii) Income Partly Within or Partly Without the Philippines


From the income partly within and partly without, income purely within is derived as follows:
Value of property within
Value of property without x Net income = Pxxx
ADD:
Sales with
Gross Sales within & without x Net Income = xxx
INCOME PURELY WITHIN

Pxxx

e) Sources of income subject to tax


(i) Compensation Income
All remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the Tax Code.
Test: Whether or not the income is derived from the employer-employee relationship
Note: Gross compensation income does not include compensation for services rendered by an
independent contractor since income is not derived from employer-employee relationship.
Requisites for compensation to be taxable
There must be personal services actually rendered
There must be payment for such services rendered
The payment made is reasonable
Forms of Compensation
1. Cash tax base is the amount of money received.
2. Property tax base is the Fair Market Value

Doctrine of Cash equivalent provides that any economic benefit to the employee whatever
may have been the mode by which it is affected is compensation income.
3. Promissory notes or other evidence of indebtedness
If not discounted: tax base is the fair market value;
If discounted:
(a) Year of receipt tax base if the discounted value;
(b) Maturity date difference between the face value and the fair market value
4. Cancellation of Remission of Debt tax base is the amount of debt cancelled.
Compensation Income exempt from tax
(a) Convenience of the Employer Rule it grants exemption to benefits which are given for the
exclusive benefit of the employer
(b) De minimis benefits Facilities or privileges furnished or offered by an employer to his
employees relatively small in value provided for merely as a means of promoting of health,
goodwill, contentment or efficiency of his employees
(ii) Fringe Benefits
Nature of Fringe Benefit Tax (FBT) it is a tax imposed on fringe benefits which are granted or
are paid by an employer to an employee occupying a managerial or supervisory position.
Purpose of Fringe Benefit Tax is to enhance the progressiveness and fairness of the tax system
Supervisory employees are those who recommend managerial actions if the exercise of such
authority is not merely routinary or clerical in nature but requires the use of independent
judgment.
Managerial employees those who are given 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.
Rank and file employees are those employees who are neither managerial nor supervisory
employees. Rank and file employees are not subject to Fringe Benefit Tax.
(a) Special Treatment of Fringe Benefits
FBT is paid by the employer but he is allowed by law to deduct FBT as a business expense in
determining his taxable income.
(b) Definition
Any goods, services or benefits furnished or granted in cash or in kind by an employer to an
individual employee, in addition to basic salaries, except a rank and file employee. (Sec 2.33
(B), RR (3.98)
(c) Taxable and Non-Taxable Fringe Benefits
Fringe benefits subject to fringe benefit tax:
1. Housing
2. Expense account
Revenue Regulation 3-98
Expenses incurred by the managerial worker were it was reimbursed by the
management.
3. Vehicle of any kind.

4. Household personnel (maid or driver)


5. Interest on loans at less than market rate to the extent of the difference between the market
rate and the 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. Holiday and vacation expenses
8. Expenses of foreign travel: The foreign travel must not be in line with the trader or business.
9. Educational assistance to the employee or his dependants.
10. Life or health insurance and other non-life insurance premiums.
Fringe benefits not taxable under Sec. 33:
1. Fringe Benefits which are authorized and exempted under special laws, such as the 13 th
month Pay and Other Benefits with the ceiling of P30,000.
2. Contributions of the employer for the benefit of the employee to 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. De minimis benefits those facilities or privilege furnished to employees that are of relatively
small value and are offered or furnished merely as a means of promoting health, goodwill,
contentment or efficiency of employees, such as but not limited to the following (RR Nos. 82012,5-2011 and 5-2008):

a. Monetized unused vacation leave credits of PRIVATE employees not exceeding (10)
days during the year and the monetized value of leave credits paid to government
officials and employees;
b. Medical cash allowance to dependents of employees not exceeding P750 per semester
or P125 per month;
c. Uniform and clothing allowance not exceeding P5,000 per annum;
d. Actual yearly medical benefits not exceeding P10,000 per annum;
e. Rice subsidy of P1,500.00 or one (1) sack of 50kg. rice per month amounting to not more
than P1,500.00;
f. Laundry allowance not exceeding P300per month;
g. Flowers, fruits, books or similar items given under special circumstances such as on
account of illness, marriage, etc;
h. Employee achievement awards which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not exceeding 1/2 month
of the basic salary of the employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees;
i. Christmas and major anniversary celebration for employees and their guests not
exceeding P5,000 per employee per annum.
j. Company picnics and sports tournaments in the Philippines and participated exclusively
by the employees.
5. Fringe benefits not considered as gross income: if it is required/ necessary to the business of
the employer or for the convenience or advantage of the employer.
6. FBT not taxable under NIRC (Sec. 32(B))
(iii) Professional Income
Fees derived from engaging in an endeavor requiring special training as a professional as a
means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers,
engineers and the like.
(iv) Income from Business
Gains or profits derived from rendering services, selling merchandise, manufacturing
products, farming and long term construction contracts.
(v) Income from Dealings in Property

(a) Types of Properties


(1) Ordinary assets (SOUR)
a. Stock in trade of the taxpayer or other properties of a kind which would properly be included
in the inventory of the taxpayer;
b. Property held by the taxpayer primarily for sale to customers in the ordinary course of
business;
c. Personal Property used in trade or business and subject to depreciation; and
d. Real property used in trade or business.
(2) Capital assets
Includes all property held by the taxpayer whether or not connected in trade or business but not
including those enumerated above (#1) as ordinary assets
(b) Types of Gains from Dealings in Property
(1) Ordinary income vis--vis capital gain
Ordinary income includes any gain from sale or exchange of property which is not a capital
asset or property.
Capital gain The gain derived from the sale or exchange of capital assets.
(2) Actual gain vis--vis presumed gain
Actual Income or gain The actual gain from the sale of real property classified as an ordinary
asset by an individual or corporation is subject to income tax at the graduated income tax rates
(in the case of individuals), or at 30% of its net taxable income (in arrived at by deducting the cost
or adjusted bases of the property sold from the amount realized (i.e., amount of cash and/or fair
market value of property received). As a general rule, the income tax imposes the tax only when
there is actual income, gain or profit.
Presumed income or gain where an individual or a corporation sold real property (land and/or
building) classified as a capital asset, the law presumes that there was a capital gain realized,
and the capital gains tax is computed at 6% of the actual consideration or the fair market value at
the time of sale of the real property, whichever is higher. In other words, regardless of whether or
not the seller makes a profit or incurs a loss from the transaction, the capital gains tax must be
paid thereon by the seller. However, no donors tax is due on the transfer of said real property for
less than its full and adequate consideration and the fair market value. This is an exception to the
general rule that there must be actual income, gain or profit realized by the taxpayer in order that
income tax may be imposed thereon.
The rule described above on the presumed income or gain in the sale of real property classified
as capital asset and located in the Philippines is not applicable, however, to the sale of shares of
stock of a domestic corporation.
(3) Long term capital gain vis--vis short term capital gain
Long Term Capital Gain if the asset sold or exchanged is held for more than 12 months
Short Term Gain if the asset sold or exchanged is held for 12 months or less
(4) Net capital gain, net capital loss
Net Capital Gain The excess of the gains from sales/exchanges of capital assets over the
losses from such sales/exchanges.

Net Capital Loss The excess of the losses from sales or exchanges of capital assets over the
gains from such sales or exchanges.
(5) Computation of the amount of gain or loss
(a)

Cost or basis of the property sold


By purchase the cost thereof.
By inheritance fair market price or value as of the date of acquisition.
By gift the basis shall be the same as if it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except that if such basis is greater than
the fair market value of the property at the time of the gift then, for the purpose of determining
loss, the basis shall be such fair market value.
For less than an adequate consideration in money or moneys worth the amount paid by the
transferee for the property.

(b) Cost or basis of the property exchanged in corporate readjustment


(1) Merger/Consolidation/transfer to a controlled corporation (tax-free exchanges)
The basis of the stock or securities received by the transferor upon the exchange in a
corporate readjustment shall be the same as the basis of the property, stock or securities
exchanged,
Decreased by:
The money received, and
The fair market value of the other property received.
Increased by:
The amount treated as dividend of the shareholder and
The amount of any that was recognized on the exchange:
a. The property received as boot shall have as basis its fair market value:
b. If as part of the consideration to the transferor or acquires from the latter property subject
to a liability, such assumption or acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money received by the transferor on the
exchange;
c. If the transferor receives several kinds of stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several classes of stock or securities.
Boot, defined
Any cash or property given in addition to the shares of stock received by a transferor in a tax-free
exchange. The amount of boot is taxable.
The basis of the property transferred in the hands of the transferee shall be the same as it would
be in the hands for the transferor increased by the amount of the gain recognized to the transferor
on the transfer.
Tax Free Exchanges
Sales or exchanges resulting in non-recognition of gains or losses:
1. Exchange solely in kind in legitimate mergers and consolidation; includes:
a. Between the corporations which are parties to the merger or consolidation (property for
stocks);
b. Between a stockholder of a corporation party to a merger or consolidation and the other
party corporation (stock for stock);
c. Between a security holder of a corporation party to a merger or consolidation and the
other party corporation (securities for securities).

2. Transfer to a controlled corporation exchange of property for stocks resulting in acquisition


of corporate control by a person, alone or together with others not exceeding four.
(c) Recognition of gain or loss in exchange of property
(1) General Rule
Upon the sale or exchange of property, the entire gain or loss, as the case may be, shall be
recognized (Sec. 40 C1).
(a) Where no gain or loss shall be recognized
Exchange of property solely in kind in pursuance of mergers and consolidations.
Exchange by a person of his property for stocks in a corporation as a result of which said
person, along or together with others not exceeding four (4) persons, gains, control of said
corporation.
(2) Exceptions
(a) Meaning of merger, consolidation, control securities
Merger or consolidation means the ordinary merger or consolidation or the acquisition by one
corporation of all or substantially all the properties of another corporation solely for stock
undertaken for a bonafide business purpose and not solely for the purpose of escaping the
burden of taxation.
Control securities means ownership of stocks in a corporation amounting to at least 51% of
the total voting power of all classes of stocks entitled to vote.
(b) Transfer of a controlled corporation
No gain or loss shall be recognized if property is transferred to a corporation by a person in
exchange for stock or unit of participation in such 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 other, 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) Income tax treatment of capital loss
(a) Capital Loss Limitation Rule (Applicable to Both Corporations and Individuals)
General Rule: Capital losses are allowed only to the extent of capital gains; hence the net capital
loss is NOT deductible.
Exception: If a domestic bank or trust company, a substantial part of whose business is the
receipt of deposits, sells any bond, debenture, note or certificate or other evidence of
indebtedness issued by any corporation (including one issued by a government or political
subdivision), any loss shall not be included in determining the applicability of the limitation.
(b) Net Loss Carry-Over Rule (Applicable Only to Individuals)
If any taxpayer, other than a corporation, sustains in any taxable year a net capital loss, such
loss (in an amount not in excess of the net income for such year) shall be treated in the
succeeding taxable year as a loss from the sale or exchange of a capital asset held for not
more than 12 months.
The rule on net capital loss carry-over for the next succeeding year applies only to
individuals.

(7) Dealings in real property situated in the Philippines


In the case of an individual, if the property is capital asset located within the Philippines it is
not included in the income tax return because it is subject to final income tax.
For domestic corporations, the gains from the disposition of capital assets are subject to a
capital gains tax (which is a Final Withholding Tax) even if the property is located abroad.
(8) Dealings in shares of stock of Philippine corporations
(a) Shares Listed and Traded in the Stock Exchange
Stock transaction tax of of 1% of the gross selling price of the stock.
Exceptions to the Tax
Gains derived by dealers in securities.
All other gains which are specifically exempt from income tax under existing investment
incentives and other special laws.
(b) Shares not Listed and Traded in the Stock Exchange
Net capital gains derived during the taxable year from sale, exchange, or transfer shall be
taxed as follows (on a per transaction basis):
Not over P 100,000 -5%
Over
P 100,000

-10%

(9) Sale of principal residence


Exemption of certain individual from the capital gains tax on the sale or disposition of a
Principal Residence.
Conditions
1. Sale or disposition of the old principal residence;
2. By natural persons citizen or resident alien individual 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) calendar 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 sold, exchanged or
disposed 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.

In case a real property is sold in installment (initial payment not exceeding 25% of the
contract price) wherein the initial payment was paid in cash and the balance in the form of
interest bearing promissory notes and the seller discounted the promissory notes in the year
of sale, the entire gain on the sale must be reported in the year of sale (Baas vs. Court of
Appeals, G.R. No. 102967, February 10, 2000).

Thus, where an installment obligation is discounted at a bank or finance company, a taxable


disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of the property in case of default. Although the

proceeds of a promissory note is not considered initial payment, still it must be included as
taxable income in the year it was converted into cash.
(vi) Passive Investment Income
(a) Interest Income
Interest derived from sources within the Philippines, and interests on bonds, notes or other
interest-bearing obligations of residents, corporate or otherwise.
(b) Dividend Income
(1) Cash dividends
Individual Taxpayer
From Domestic Corporations
RC,NRC,RA
NRAETB
NRANETB

10% (Sec.24A)
20% (Sec.25A2)
25% on gross income
(Sec.25B)

From Foreign Corporations


RC, NRC, RA,
NRANETB
NRANETB

5-32% (Sec.24A,
25A1) NIT
25% on gross income
(Sec.25B)

Corporate Taxpayer
a. Foreign to Domestic Corporations 30% (Sec. 32A)
b. Domestic to Domestic Corporations Exempt; Inter-corporate dividends (Section 27,D)
c. Domestic to Foreign Corporation:

Resident Foreign Corporations - Exempt (Section 28(A)(7)(D)


Non-resident Foreign Corporations 15% subject to the condition stated in Sec. 28B5.
Otherwise, it shall be taxed at 30% (CIR vs. Procter and Gamble, 204 SCRA 377). Unless, exempt
based on a treaty.

(2) Stock dividend


General Rule: Not subject to tax because it does not constitute income; it represents transfer of
surplus to capital account. (Sec. 73B, 1997 NIRC)
Exceptions:
1. Section 73B, 1997 NIRC
a. There is redemption or cancellation of shares of stock.
b. The transaction involves stock dividends, and
c. The time and manner of the transaction makes it essentially equivalent to a distribution of
taxable dividends (CIR vs. CA, CTA & ANSCOR, G.R. No. 108576, January 30, 1999).
2. The recipient is other than the shareholder (Brachrach vs. Seifert, 87 Phil. 438, 1950).
3. Change in the stockholders equity results by virtue of the stock dividend issuance.
(3) Property dividend
Subject to final tax annually or constructively received by an individual (Sec. 24 [B][2])
(4) Liquidating dividend

When a corporation distributes all of its assets in complete liquidation or dissolution, the gain
realized or loss sustained by the stockholder, whether individual or corporation, is taxable
income or deductable loss, as the case may be (Section 73[A], NIRC).
A liquidating dividend is not a dividend income. The transaction is considered a sale or
exchange of property between the corporation and the stockholder.
(c) Royalty Income
It is the payment for the use and exhaustion of property such as earnings from copyrights,
patents, trademarks, formulas and natural resources under lease.
Included in the gross income if derived from sources outside the Philippines because those
from sources within are subject to final withholding tax.
If the recipient of the royalty paid by a DC is either a NRA-NETB or NRFC, a lower tax rate
may be allowed under an existing treaty.
(d) Rental Income
(1) Lease of personal property
Amount or compensation paid for the use or enjoyment of a personal property.
(2) Lease of real property
Amount or compensation paid for the use or enjoyment or real property.
(3) Tax treatment of:
(a) Leasehold Improvements by Lessee
Method of reporting the value of permanent improvements introduced by the lessee:

Outright method recognized as income to lessor at the time when such buildings
improvements are completed at fair market value.
Spread-out method the lessor spread over the life (or remaining period) of the lease, the
estimated depreciated value of such buildings or improvements at the termination of the lease
and report as an income for each year of the lease, an aliquot part thereof.

(b) VAT Added to Rental/Paid by the Lessee


The amount of the VAT in a VATable lease which the lessor passed on to the lessee does form
part of the rental income of the lessor, since such amount is to be paid by the lessor as output
VAT on the sale of leasing services to the BIR.
(c) Advance Rental/Long Term Lease
Prepaid or advance rental is taxable income to the lessor in the year received, if so received
under a claim of right and without restriction as to its use, and regardless of method of
accounting employed.
Security deposit applied to the rental of the terminal month or period of contract must be
recognized as income at the time it is applied.
If security deposit is to ensure contract compliance, it is not income to the lessor until the
lessee violates any provision of the contract.
(vii)Annuities, Proceeds from Life Insurance or Other Types of Insurance
Refer to annuity policies sold by insurance companies, which provide installment payments
for life, or for a guaranteed fixed period of time whichever is longer.

(viii)

Prizes and Awards


Refer to amount of money in cash or in kind received by chance or through luck and are
generally taxable except if specifically mentioned under the exclusions from the computation
of gross income under Section 32 B, NIRC.

(ix) Pensions, Retirement Benefit, or Separation Pay


Refers to amount of money received in lump sum or on staggered basis in consideration of
services rendered given after an individual reaches the age of retirement.

(x) Income From Any Source Whatever


(a) Forgiveness of Indebtedness
Taxable income if the creditor cancels the debt as a consideration of the services performed
by the debtor to the creditor.
A gift if the creditor cancels the debt without any consideration.
A capital transaction if the corporation forgives the debt of its stockholder, it has the effect of
payment of an indirect dividend.
(b) Recovery of Accounts Previously Written Off
The recovery of bad debts previously allowed as deduction in the preceding year or years
shall be included as part of the taxpayers gross income in the year of such recovery to the
extent of the income tax benefit of the said deduction.
(c) Receipt of Tax Refunds or Credit
If a taxpayer received a tax credit certificate or refund for erroneously paid tax which was
claimed as deduction from his gross income that resulted in a lower net taxable income or a
higher net operating loss that was carried over to the succeeding taxable year, he realizes
taxable income and must be included in his income tax return in the year of receipt. This
principles does not apply to tax credits or refunds of erroneously paid income tax, estate tax,
donors tax, and special assessments since they are not deductible form gross income.
(d) Income From Any Source Whatever
Embraces all income not expressly exempted within the class of taxable income under the
law, irrespective of the voluntary of involuntary action of the taxpayer in producing the gains,
and whether derived from legal or illegal source.
(e) Sources Rules in Determining Income from Within and Without
(1) Interests
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax. (FIT)
(2) Dividends
Must be issued by a foreign corporation. When it is issued by a domestic corporation, it
becomes passive income and subject to FIT, unless otherwise exempt from tax.
(3) Services
Compensation For Services; the following income earners are liable to pay by way of FIT and
is not included in Section 32 (A)(I) of the NIRC:
Alien Individual Employed by
1. Multinational Companies
2. Offshore banking units

3. Petroleum Service Contractor or Subcontractor.


Revenue Regulation 12-2002:
Filipinos employed in managerial or technical position in multinational companies which is either
regional area headquarters or regional operating headquarters have an option to pay by way of
the net or the final income tax. But for Filipinos working in offshore banks and in the petroleum
services, they have no option.
(4) Rentals
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax.
(5) Royalties
If sourced from without, net income tax apply. If sourced from within, it is passive income
subject to final income tax.
(6) Sale of real property
Gain must be from ordinary asset or capital asset located abroad.
In the case of an individual, if the property is capital asset located within the Philippines it is
not included in the income tax return because it is subject to final income tax.
For domestic corporations, the gains from the disposition of capital assets are subject to a
capital gains tax (which is a Final Withholding Tax) even if the property is located abroad.
(7) Sale of personal property
Personal property produced by the taxpayer within the Philippines and sold without the
Philippines or produced by the taxpayer without and sold within the Philippines any gain,
profit or income shall be treated as derived partly from sources within and partly from sources
without the Philippines.
Purchase of personal property within and its sale without the Philippines, or purchase of
personal property without and its sale within the Philippines any gain, profit or income shall
be treated as derived entirely from sources within the country in which sold.
(8) Shares of stock of domestic corporation
The disposition of shares of stock in a domestic corporations not traded through the local
stock exchange is always subject to CGT (Final tax). If the shares of stock are not in a
domestic corporation, apply first the source rule under Section 42 (consider the taxpayer). If
taxable, it is subject to regular corporate income tax. However, if the shares of stock are listed
and traded in the local stock exchange, it is subject to percentage tax under Section 127 of
the NIRC.

Sec 7 of Rev. Regs 6-2013, covers sale or exchange of shares of domestic corporations not
traded through a local stock exchange. The fair market value of the shares of stock sold shall
be the value at the time of sale. In determining the value of the shares, the Adjusted Net
Assets Method shall be used, whereby all assets and liabilities are adjusted to FMV.
For purpose of this Sec. the appraised value of real property at the time of sale shall be (1)
FMV as determined by CIR; (2) FMV as shown in the schedule of values fixed by Assesor; or
(3) FMV as determined by a dependent appraiser, whichever is higher (Rev Regs 6-2013, April
2013).

(f) Situs of Income Taxation


(See discussion on under Inherent Limitations - Territorial)
(g) Exclusions from Gross Income

(1)

Rationale for the exclusions


They represent return of capital or are not income, gain or profit.
They are subject to another kind of internal revenue tax.
They are income, gain or profits that are expressly exempt from income tax under the
Constitution, tax treaty, tax code, or a general or special law.

(2)
1.
2.
3.
4.
5.

Taxpayers who may avail of the exclusions


Resident Citizens
Resident Aliens
Non-Resident Aliens Engaged in Trade of Business
Domestic Corporations
Resident Foreign Corporations

(3) Exclusions distinguished from deductions and tax credit


EXCLUSIONS
(SEC. 32B)
Refer to flow of wealth which are not treated
as part of gross income due to; (1)
exempted by the fundamental law; (2)
exempted by statute; (3) not come within the
definition of income.
Pertain to the computation of gross income.
Something earned or received by the
taxpayer which do not form part of gross
income.

DEDUCTIONS
(SEC. 34)
Refer to the amounts which the law allows to be
subtracted from gross income in order to arrive at net
income.
Pertain to the computation of the net income.
Something spent or pain in earning of gross income.

(4) Under the Constitution:


(a) Income Derived by the Government or its Political Subdivisions from the Exercise of
any Essential Governmental Function
Income derived by the Philippine Government or to any political subdivision from any:
a. Public utility
b. Exercise of any government function are also exclusions:

Thus income by the government from sources other than those mentioned above are subject
to tax. Except: GSIS, SSS, PHIC and PCSO.
A political subdivision however may partly earn income from (a) and (b) and partly from other
sources. The political subdivision is still liable to pay tax for the latter income earned.
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 [Sec.
4(3), Art. XIV, Constitution].

(5) Under the Tax Code


(a) Proceeds of Life Insurance Policies
Policy are excluded if payable upon death of the insured whether in lump sum or monthly
except an agreement to pay interest between the insured and the insurer, which shall be
included in the income tax return.
The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or installment, except if such amounts are held by the
insurer under an agreement to pay interest thereon, the interest payments shall be included
in gross income.
Reason: Indemnity rather as gain or profit.
(b) Return of Premium Paid

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.
No death occurs in this case only a maturity of the term.
Only the amount of premium paid is excluded.

Ex. Insurance contracts earned one million pesos out of the total premium paid which is
P100,000. Only the P100,000 is excluded, the P900,000 is liable to tax under Net.
Reason: Return of capital
(c) Amounts Received under Life Insurance, Endowment or Annuity Contracts
1. Amounts received through accident or health insurance or under workmens
compensation acts, as compensation for personal injuries or sickness, plus the amounts
of any damages received, whether by suit or agreement, on account of such injuries or
sickness.
2. Compensations for damages to personal or family rights, damages for slander and libel,
award for loss of life, damages for injuries to the goodwill of a taxpayers business unless
they exceeded its cost are not taxable.
3. Damages received for patent infringement, breach of contract or fiduciary duty and
recoveries (except punitive damages) under the clayton act for antitrust violations are
excluded from the gross income to the extent that the losses to which the damages relate
did not give rise to a tax benefit either in recovery year or earlier tax years.
(d) Value of Property Acquired by Gift, Bequest, Devise or Descent
Gifts, Bequests, and Devises are donations because it is given gratuitously. The income
received by the donee from the said items is subject to income tax:
Reason: Not product of capital or industry
(e) Amount Received Through Accident or Health Insurance Compensation for Injuries or
Sickness Refers to:
a. Any amount received by reason of compensation for personal injury or sickness through
Accident or Health Insurance or under Workmens Compensation Acts.
b. Plus the amount of any damages received, whether by suit or agreement, on account of
such injuries or sickness.
c. The injury or sickness must arise from an employee employer relationship.
Reason: Compensatory, not gain/profit.
(f) Income Exempt Under Tax Treaty
Premised on adherence to the generally accepted principles of International Law.
Income exempt under tax treaty with foreign countries.
Note: Not all countries have tax treaty with the Philippines.
(g) Retirement Benefits, Pensions, Gratuities, Etc.
1. Retirement benefits under R.A. 4917 where:
a. Retiree employed by the same employer for at least 10 years
b. Retiree at least 50 years old
c. Avails of the benefit only once
d. BIR approved private benefit plan
2. Retirement benefits under R.A. 7641 where:
a. No private retirement plan

b. Must have served the company for at least 5 years


c. Retiree at least 60 years old but not more than 65 years of age at the time of retirement.
3. Monetized value of retirees accumulated vacation leave and sick leave subject to the
following rules:
a. For compulsory retirement (60 years for private corp.; 65 years for government; 70 years
for judiciary) ALL
b. For optional retirement (10 years of service and 50 years of age) up to 10 days only while
the excess of VL and SL is taxable
4. Separation pays due to circumstances beyond the control of the employee.
5. Social security benefits, retirement gratuities, pensions and other similar benefits received by
citizens and aliens who come to reside permanently here from foreign government agencies
and other institution, private or public.
6. Benefits due to residents under the laws of the U.S. administered by the U.S. Veterans
Administration.
7. SSS and GSIS benefits.
(h) Winnings, Prizes, and Awards, Including Those in Sports Competition
1. Those made primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if the recipient:
a. Was selected without any action on his part to enter the contest or proceeding; and
b. Is not required to render any substantial future service as a condition to receiving the
prize or award.
2. Those granted to athletes in local and international sports competitions and tournaments
whether held in the Philippines or abroad provided sanctioned by their national sports
associations.
(6) Under Special Law
a. Under R.A. No. 7916 (Philippine Export Zone Authority Law), PEZA registered enterprises
are given income tax holidays of six or four years from the date of commercial operation,
depending on whether their activities are considered as pioneer or non-pioneer; after enjoying
income tax holidays, they are subject to the 5% gross income tax on their gross income
earned, in lieu of all national and local taxes.
b. Under R.A. No. 6657 (Comprehensive Agrarian Reform Package Law), gain arising from the
transfer of the agricultural property covered under the law shall be exempt from capital gains
tax for ten (10) years.
c. Under R.A. No. 7653 (New Central Bank Act), the Bangko Sentral ng Pilipinas is exempt from
all national, provincial, municipal and city taxes for five (5) years.
d. Under R.A. No. 7279 (Urban Development Housing Act of 1992), the National Housing
Authority is exempt from all fees and charges of any kind, whether local or national, such as
income and realty taxes.
(a) Personal Equity and Retirement Account
Refers to the voluntary retirement account established by and for the exclusive use and
benefit of the contributor for the purpose of being invested solely in the Personal Equity and
Retirement Account investment products in the Philippines (R.A. 9505, Personal Equity and
Retirement Account Act of 2008).

(i) Deductions from Gross Income


(1) General rules
(a) Deductions Must Be Paid or Incurred in Connection with the Taxpayers Trade,
Business or Profession

Requisites to be Deductible:
1. It must be ordinary and necessary Expenses.
Ordinary Expenses normal or usual in the line of business.
Necessary Expenses appropriate and helpful in the development of taxpayers business.
2. Paid or incurred within the taxable year.
3. Paid or incurred in carrying on a trade or business.
4. Directly attributable to the development, management, operation and/or conduct of business
or exercise of profession, including the following reasonable allowance:
5. Substantiated with sufficient evidence, such as official receipts or other adequate records.
6. If subject to withholding taxes, proof of payment to BIR
(b) Deductions Must Be Supported by Adequate Receipts or Invoices (Except Standard
Deduction)
The lack of supporting vouchers, receipts and other documentary proof, however, may be
excused under Section 337 (now Section 235) of the Tax Code. This provision requires the
preservation of the books of accounts and other accounting records for a period of 3 years
from the date of last entry.
(c) Additional Requirement Relating to Withholding
Sufficient evidence such as official receipts must be presented in order to validly withhold
expenses. Otherwise, those not withhold cannot be included in deduction of expenses in
income.
(2) Return of capital (cost of sales or services)
(a) Sale of Inventory of Goods by Manufacturers and Dealers of Properties
Manufacturing:
Cost of Sales = All cost of production of finished goods, such as
1. Raw material used;
2. Direct labor;
3. Manufacturing overhead;
4. Freight cost;
5. Insurance premiums;
6. Other costs incurred to bring the raw materials to the factory or warehouse.
(b) Sale of Stock in Trade by a Real Estate Dealer and Dealer in Securities
Where a corporation engages the services of stock transfer agents, both domestic and
foreign, the fees paid for such services are deductible because they are both ordinary and
necessary expenses. The shares of stocks are listed in domestic as well as foreign stock
exchanges.
(c) Sale of Services
Cost of Services = All direct costs and expenses necessarily incurred to provide the services
required by the customers and clients including:
a. Salaries and employee benefits of personnel, consultants and specialists directly rendering
the service;
b. Cost of facilities directly utilized in providing the service. It shall not include interest expense
except for banks and other financial institutions.
Gross income excludes passive income subject to final tax.
Other income and Extraordinary Income are included since RR 9-98 provides that gross
sales include sales contributory to income taxable under the regular corporate tax.
Allowable Deductions

Items or amount that the law authorizes to be deducted to the operating income to arrive at the
net income
Basic Principles
The taxpayer must point to some specific provisions of law authorizing such deductions
The taxpayer must be able to prove that he is entitled to deductions
Cohan Rule
If there is a showing that expenses have been incurred but the exact amount cannot be
ascertained due to lack of documentary evidence, it is the duty of the BIR to make an estimate of
deduction that may be allowed [RMC 23-2000].
Deductions vs. Exclusions
DEDUCTIONS
Amounts deducted from
gross income to arrive at
net income

EXCLUSIONS
Amounts exempt from
tax

Deductions vs. Personal Exemption


DEDUCTIONS
Applies to both individual
and corporate taxpayers
Business expenses over
the cost of doing business

PERSONAL
EXEMPTION
Applies only to
individuals
Cover personal, living or
family expenses

Deductions vs. Tax Credit


DEDUCTIONS
Reduces taxable Income

(3)
(a)
(1)
(a)

a.
b.
c.
d.

TAX CREDIT
Reduces tax liability

Itemized deductions
Expenses
Requisites for Deductibility
Nature: ordinary and necessary
Ordinary when it is normal in relation to the business of the taxpayer and the surrounding
circumstances
Necessary it is intended to realize a profit or to minimize a loss
It must be incurred in trade or business carried on by the taxpayer
There must be proof
It must be reasonable
Not contrary against law, public policy or public morals

(b) Paid and incurred during taxable year


i. Cash Basis Method deducts expenses in the year in which they are paid
ii. Accrual Basis Method recognizes expenses in the year they accrue
(2) 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.
It includes:
Salaries, wages, commissions, professional fees, vacation leave pay, retirement pay and
other compensation.
Bonus are deductible expenses if paid in good faith as additional compensation for services
rendered and subjected to withholding tax

In Aguinaldo vs. CIR (112 SCRA 136), the bonus given to corporate officers was disallowed as
a deduction.

Pensions and compensations for injuries, if not compensated for by insurance or otherwise
Grossed-up monetary value of fringe benefit provided for, as long as the final tax imposed
has been paid.

(3) Traveling/Transportation expenses


For travel here and abroad while away from home in the pursuit of trade, business or
profession.
(4) Cost of materials
Deductible only to the amount actually consumed or used in operation during the year.
(5)

Rentals and/or other payments for use or possession of property


Requisites of deductibility:
Made as a condition to the continued use or possession of property.
Taxpayer has not taken or is not taking title to the property or has no equity other than that of
a lessee, user or possessor.
Property must be used in trade or business.
Subjected to withholding tax of 5% otherwise it shall be disallowed as a deduction.

(6) Repairs and maintenance


Minor or ordinary repairs are deductible from gross income because it keeps the assets in its
ordinary working conditions.
Major or extraordinary repairs are not deductible since major repairs tend to prolong the life of the
asset (these are capitalized or added to the cost of the asset subjected to repair)
(7) Expenses under lease agreements
It is not the cost of the leasehold improvements but only its annual depreciation that is
considered as rental expense.
(8) Expenses for professionals
A professional may claim as deductions the cause of supplies used by him in the practice of
his profession, expenses paid in the operation and repair of transportation equipment used in
making professional calls, dues in professional societies and subscription to professional
journals, the rent paid for office rooms, the expenses of the fuels, light, water, telephone, etc.,
used in such offices, and the hire of office assistant. Amounts currently expended for books,
furniture, and professional instruments and equipments, the useful of which is short, maybe
deducted but the amounts expended for books, furniture and professional instruments and
equipments of a permanent character are not allowable as deduction (Sec. 69, RR No. 2).
(9) Entertainment/ Representation expenses
For entertainment or recreation connected to the trade, business or profession or directly
related to or in furtherance of the conduct of the business, PROVIDED however that expense
incurred contrary to law, morals, public policy or public order shall not be deductible.
(10)Political campaign expenses

Amounts expended for political campaign purposes or payments to campaign funds are not
deductible either as business expenses or contributions (Montenegro Inc. vs. CIR, CTA Case
695, April 30, 1969).

Note: Under the Omnibus Election Code, the contributions to political parties registered with the
COMELEC are deductible

(11)Training expenses
Constitute ordinary and necessary expenses of a taxpayer.
(b)
(1)
1.
2.
3.
4.
5.
6.
7.

Interest
Requisites for deductibility
There must be indebtedness
Taxpayer is the debtor.
Interest expense was paid or incurred upon such indebtedness
Debt must be related to the business or profession of the taxpayer.
Interest is stipulated
Interest should be legally due.
Interest paid or accrued during the taxable year.

(2) Non-deductible interest expense


Interest expense not allowed as deduction:
1. Individual taxpayer on the cash basis paying interest in advance through discount or
otherwise. But interest is allowed as deduction in the year the indebtedness is paid; if payable
in amortization then an aliquot portion of the interest corresponding to the ratio of the principal
paid is allowed as deduction.
2. Interests on loans between related parties referred in Section 36 (B).
3. Interest on indebtedness incurred to finance petroleum exploration.
(3) Interest subject to special rules
(a) Interest paid in advance
Individual taxpayer on the cash basis paying interest in advance through discount or otherwise.
But interest is allowed as deduction in the year the indebtedness is paid; if payable in
amortization then an aliquot portion of the interest corresponding to the ratio of the principal paid
is allowed as deduction.
(b) Interest periodically amortized
Generally, the interest period commences at the date of the indebtedness arises.
Except with respect to business out of sales, lease or supply or goods and services which are
considered as trace accounts or receivables or payables.
(c) Interest expense incurred to acquire property for use in trade, business or exercise or
a profession.
It may be allowed as a deduction or treated as a capital expenditure.
(d) Reduction of interest expense/ interest arbitrage
Requisites
a. There must be an indebtedness
b. There should be an interest expense paid or incurred upon such indebtedness;
c. Indebtedness must be that of the taxpayer
d. Indebtedness must be connected with the taxpayers trade, business or exercise of profession
e. Interest expense must have been paid or incurred during the taxable year;
f. The interest must have been stipulated in writing
g. Interest must be due;
h. Interest payment arrangement must not be between related taxpayers under Sec. 34 (B)(2)
(b) in relation to Sec. 36 (B) of NIRC
i. Interest must not be incurred to finance petroleum operations; and
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 (Rev. Reg 13-2000)

(c)
(1)
i.
ii.
iii.

Taxes
Requisites for deductibility
Related to the business of the taxpayer.
Imposed by law on, and payable by, taxpayer.
Paid or accrued during the taxable year.

(2) Non-deductible taxes


i. Income tax.
ii. Income tax paid or incurred to any foreign country, if the taxpayer is claiming a tax credit for
such foreign tax.
iii. Estate or donors tax.
iv. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (special assessment).
(3) Treatments of surcharges/interests/fines for delinquency
The interest on deficiency donors tax is deductible. The SC explained that taxes here are
considered obligation or indebtedness. And it ruled that we have to relax the distinction
between tax and ordinary obligation in this respect.
Interest on deficiency income tax can also be claimed as deductible interest expense
because taxes here are considered ordinary obligations.
(4) Treatment of special assessment
Special assessment or the tax imposed on the improvement of a parcel of land is non-deductible.
(5)

(d)
(1)
i.
ii.
iii.
iv.
v.
vi.

Tax credit vis--vis deduction


Taxes as deductions maybe claimed as deductions from gross income.
Tax credit is a deduction from final income tax.
Tax as deduction includes those taxes which are paid or incurred in connection with the trade,
business or profession of the taxpayer. However, the sources of a tax credit is foreign income
tax paid, war profit tax, excess profit tax paid to the foreign country.
The foreign income tax paid to the foreign country is not always the amount that may be
claimed as tax credit because under the limitations provided under the Tax Code, it must not
be more than the ratio of foreign income to the total income multiplied by the Phil. income tax.
Losses
Requisites for deductibility
Must be actual; nature of the loss must be sudden;
Sustained in a close and completed transaction;
Not be compensated for by insurance or otherwise;
Must be liquidated and charged-off during the taxable year.
Not claimed as a deduction for estate tax purposes; and
If due to casualty, robbery, theft or embezzlement, must be reported to the BIR within 45 days
from date of discovery.

(2) Other types of losses


(a) Capital losses
Capital loss can never be deducted from an ordinary gain. Capital loss can only be deducted
from capital gain in accordance Section 39 (c) of the NIRC.
1. Losses from sale or exchange of capital assets
2. Losses resulting from securities becoming worthless and which are capital assets
3. Losses from short sales of property
4. Losses due to failure to exercise privilege or option to buy or sell property.
(b) Securities becoming worthless

If the stock of the corporation becomes worthless (not mere fluctuations), the cost or other
basis may be deducted by the owner in the taxable year in which the stock becomes
worthless.
(c) Losses on wash sales of stocks or securities
Wash sales, defined
It is a sale or disposition of stock or securities where substantially identical securities are acquired
or purchased within 61-day period beginning 30 days before the sale and ending 30 days after
the sale.
Wash sales are NOT deductible because these are considered to be artificial loss.
(d) Wagering losses
Deductible only to the extent of gain or winnings; deemed to apply only to individuals. A
wager is made when the outcome depends upon the CHANCE.
(e) Net Operating Loss Carry-over (NOLCO)
The net operating loss of the business or enterprise for any taxable year immediately
preceding the current taxable year, which has not yet been previously offset as deduction
from gross income shall be carried over as a deduction from gross income for the next three
consecutive taxable years immediately following the year of such loss
Net operating loss means the excess of allowable deduction over gross income of the business
in a taxable year.
Said deduction, however, is subject to some limitations, to wit:
1. It is necessary that the loss had not been previously offset as deduction from gross income;
2. Any net loss incurred in a taxable year during which the taxpayer was exempt from income
tax (as in the case of tax honeymoon) shall not be allowed as a deduction;
3. A NOLCO shall be allowed only if there had been no substantial change in the ownership of
the business or enterprise.
a. Can be carried over to the next 3 years after the year the net operating loss was
sustained.
b. No substantial change in ownership of the business or enterprise (75% interest
retention rule) to avoid peddling of losses purely for tax benefit purposes.

NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who
sustained and accumulated the net operating losses regardless of the change in its
ownership. This rule shall also apply in the case of merger where the taxpayer, which
incurred the losses, is the surviving entity. Any individual (including estates and trusts)
engaged in trade or business or in the exercise of his profession, and 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) on their taxable income shall be entitled to deduct from
his/its gross income for the current year his/its accumulated net operating losses for the
immediately preceding three (3) consecutive taxable years (Section 4, Revenue Regulations No.
14-2001).

The following shall not be entitled to claim deduction of NOLCO:


a. Offshore Banking Unit (OBU) of a foreign banking corporation, and Foreign Currency Deposit
Unit (FCDU) of a domestic or foreign banking corporation, duly authorized as such by the
Banko Sentral ng Pilipinas (BSP);
b. An enterprise registered with the Board of Investments (BOI) with respect to its BOIregistered activity enjoying the income Tax Holiday incentive. Its accumulated net operating
losses incurred or sustained during the period of such income Tax Holiday shall not qualify for
purposes of the NOLCO;

c.

An enterprise registered with the Philippine Economic Zone Authority (PEZA), pursuant to
R.A. No. 7916, as amended, with respect to its PEZA-registered business activity. Its
accumulated net operating losses incurred or sustained during the period of its PEZA
registration shall not qualify for purposes of the NOLCO;
d. An enterprise registered under R.A. No. 7227, otherwise known as the Bases Conversion and
Development Act of 1992, e.g., SBMA-registered enterprises, with respect to its registered
business activity. Its accumulated net operating losses incurred or sustained during the period
of its said registered operation shall not qualify for purposes of the NOLCO;
e. Foreign corporations engaged in international shipping or air carriage business in the
Philippines; and
f. In general, any person, natural or juridical, [who is] enjoying exemption from income tax,
pursuant to the provisions of the Code or any special law, with respect to its operation during
the period for which the aforesaid exemption is applicable. Its accumulated net operating
losses incurred or sustained during the said period shall not qualify for purposes of the
NOLCO (Section 4, Revenue Regulations No. 14-2001).

A corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT in any
taxable year. The running of the three-year period for the expiry of NOLCO is not interrupted by
the fact that such corporation is subject to MCIT in any taxable year during such three-year period
(Section 6.5, Revenue Regulations No. 14-2001).

(e) Bad Debts


(1) Requisites for deductibility
(1) There must be an existing indebtedness due to the taxpayer which must be valid and legally
demandable;
(2) The same must be connected with the taxpayers trade, business or practice of profession;
(3) The same must not be sustained in a transaction entered into between related parties
enumerated under Sec. 36(B) of the Tax Code of 1997;
(4) The same must be actually charged off the books of accounts of the taxpayer as of the end of
the taxable year; and
(5) The same must be actually ascertained to be worthless and uncollectible as of the end of the
taxable year (Sec. 3, R.R. No. 5-1999 as amended by R.R. 25-2002).
For debts to be considered as worthless, and thereby qualify as bad debts making them
deductible, the taxpayer should show that:
(1) There is a valid and subsisting debt.
(2) The debt must be actually ascertained to be worthless and uncollectible during the taxable
year;
(3) The debt must be charged off during the taxable year; and
(4) The debt must arise from the business or trade of the taxpayer. Additionally, before a debt
can be considered worthless, the taxpayer must also show that it is indeed uncollectible even
in the future (PRC vs. CA, 256 SCRA 667).
(2) Effect of recovery of bad debts
The recovery of bad debts previously allowed as deduction in the preceding years shall be
included as part of the taxpayers gross income in the year of such recovery to the extent of the
income tax benefit of said deduction. The total bad debts recovered will not necessarily form part
of the taxpayers income but only to the extent that he was benefitted.
(f)
(1)
i.
ii.
iii.

Depreciation
Requisites for deductibility
Must be reasonable;
Must be on property used in the conduct of the business; and
Must be treated as expenditure for the taxable year.

(2) Methods of computing depreciation allowance


(a) Straight-line method
The depreciation expense deductible in each of the years of the propertys estimated useful
life is constant.
(b) Declining-balance method
Depreciation allowance per year varies. It is largest in the first year and decreases towards
the end of the useful life of the property.
(c) Sum-of-the-years-digit method
Annual depreciation is computed by applying a changing fraction to the depreciable cost
(original cost less salvage value) of the property.
(g) Charitable and Other Contributions
(1) Requisites for deductibility
1. The contribution must actually be paid, or made payable to the Philippine government or any
political subdivision thereof, or any domestic corporation or association specified by the
NIRC.
2. No part of the net income of the beneficiary must inure to the benefit of any private
stockholder or individual.
3. It must be made within the taxable year.
4. It must not exceed 10% in case of an individual, and 5% in case of a corporation, of the
taxpayers taxable income (except when the donation is deductible in full) to be determined
without the benefit of the contribution.
5. It must be evidenced by adequate records or receipts.
(2) Amount that may be deducted
Subject to such terms and conditions as may be prescribed by the Secretary of Finance, the
term utilization means:
i. Any amount in cash or in kind (including administrative expenses) paid or utilized to
accomplish one or more purposes for which the accredited non-government organization
was created or organized.
ii. Any amount paid to acquire an asset used (or held for use) directly in carrying out one or
more purposes for which the accredited nongovernment organization was created or
organized.
An amount set aside for a specific project which comes within one or more purposes of the
accredited nongovernment organization may be treated as a utilization, but only if at the time
such amount is set aside, the accredited nongovernment organization has established to the
satisfaction of the Commissioner that the amount will be paid to be prescribed in rules and
regulations to be promulgated by the Secretary of Finance, upon recommendation of the
Commissioner, but not to exceed five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by immediate payment of funds.
Partial Deduction:
10% (individual) or 5% (corporation) of the taxable income of the donor, if made to the following
donees:
a. To Government of the RP or any of its agencies / political subdivision thereof exclusively for
public purposes, or
b. Accredited domestic corporations or associations organized and operated exclusively for
religious, charitable, scientific, youth
c. And sports development, cultural or educational purposes or for the rehabilitation of veterans,
or to social welfare institutions, or to non-governmental organizations.

No part of the net income of which inure to the benefit of any private stockholder or individual.
Full Deduction:
If made to the following:
1. Donations to the Government of the Philippines and any of its agencies/political subdivisions
fully-owned government corporation.
The donation must be exclusively to finance undertaking priority activities in accordance
with the national priority plan determined by the NEDA in the following fields:
Science
Education
Youth and Sport Development
Culture
Economic Development
Human Settlement
2. Donations to Certain Foreign Institutions or International Organizations.
3. Donations to Accredited Nongovernmental Organizations whose purpose are exclusively for:
a. Scientific
b. Educational
c. Character building and Youth and Sports Development
d. Cultural
e. Health
f. Research
g. Social Welfare
h. Charitable and
i. Any combination of the above.
(h) Contributions to Pension Trusts
(1) Requisites for deductibility
1. The employer must have established a pension or retirement plan to provide for the payment
of reasonable pensions to his employees.
2. The pension plan is reasonable and sound.
3. It must be funded by the employer.
4. The amount contributed must no longer be subject to the control or dispositions of the
employer.
5. The payment has not been allowed as deduction.
6. The deduction is apportioned in equal parts over a period of ten (10) consecutive years
beginning with the year in which the transfer or payment was made.

(i) Deductions under Special Laws


The following are institutions governed by special laws that allow full deductions on donations:
National Museum, Library and Archives (P.D. 373)
Development Academy of the Philippines (P.D. 205)
Intramuros Administration (P.D. 1616)
The Cultural enter of the Philippines
Internationa Rice Research Institute
Ministry of Youth & Sports Commission
Museum of Philippine Costumes
University of the Philippines and other state colleges and universities
The Integrated Bar of the Philippines (P.D. 81)
(4) Optional standard deduction
(a) Individuals, Except Non-Resident Aliens

Individual Taxpayers Entitled


(1) Resident Citizen
(2) Non-Resident Citizen
(3) Resident Alien
Individual Taxpayers Not Entitled
Non-Resident Alien engaged in trade or business
Non-Resident Alien not engaged in trade or business
1. An individual subject to income tax, other than a nonresident alien, may elect a standard
deduction in an amount NOT Exceeding 40% Of His Gross sales or gross receipt, as the
case may be.
2. Optional standard deduction is in lieu of all other itemized deduction (RA 9504)
3. Unless the taxpayer signifies in his return his intention to elect the optional standard
deduction, he shall be considered as having availed himself of the deductions allowed under
Section 34.
4. This option is now applicable to corporations. The OSD is computed at 40% of its gross
income.

Once OSD is elected, it is irrevocable for the taxable year for which the return is made.

(b) Corporations, Except Non-Resident Foreign Corporations


Corporate Taxpayers Entitled
Domestic Corporation
Resident Foreign Corporation
In the case of corporation subject to tax under Section 27 (A) and 28 (A) (1) of NIRC, it may elect
a standard deduction in an amount not exceeding forty percent (40%) of gross income.
(c) Partnership see above discussion - Corporations
(5) Personal and additional exemption (Republic Act 9504 Minimum Wage Earner Law)
(a) Basic Personal Exemptions
Personal exemptions are arbitrary amounts allowed, in the nature of a deduction from taxable
income, for personal, living or family expenses of an individual taxpayer.
There shall be allowed a basic personal exemption of P 50,000 for each individual taxpayer
(R.A 9504).
(b) Additional Exemptions for Taxpayer with Dependents
There shall be allowed an additional exemption of P 25,000 for each dependent child not
exceeding four (4).
The additional exemption for dependents shall be claimed by only one of the spouses in the
case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the
spouse who has custody of the child or children.
Qualified Dependents
Parents does not include step parents and parents-in-law

Brothers and sisters full or half-blood


Children whether legitimate or illegitimate
Senior Citizen
Benefactor any person whether or not related to the senior citizen who takes care of the
later as dependent

Premium payments on Health and/or Hospitalization Insurance


Requisites
The claimant must be the spouse claiming the additional exemption for dependents
The amount allowed is P2,400 per annum or P200 a month
The family gross income must not be more that P250,000 for the taxable year.
(c) Status-at-the-End-of-the-Year Rule
If the taxpayer marries or should have additional dependent(s) as defined above during the
taxable year, the taxpayer may claim the corresponding additional exemption, as the case
may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and
additional exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes
twenty-one (21) years old or becomes gainfully employed during the taxable year, the
taxpayer may still claim the same exemptions as if the spouse or any of the dependents died,
or as if such dependents married, became twenty-one (21) years old or became gainfully
employed at the close of such year.
(d) Exemptions Claimed by Non-Resident Aliens
Taxes paid or incurred within the taxable year in connection with the taxpayers profession,
trade or business, shall be allowed only if and to the extent that they are connected with the
income from sources within the Philippines (Sec. 34 [c][2])
(6) Items not deductible
(a) General Rules
In computing net income, no deduction shall in any case be allowed.
(b) Personal, Living or Family Expenses
These are personal expenses and not related to conduct of trade or business.
(c) Amount Paid for New Buildings or for Permanent Improvements (Capital Expenditures)
These are capital expenditures added to the cost of the property and the periodic
depreciation is the amount that is considered as deductible expense.
(d) Amount Expended in Restoring Property (Major Repairs)
These are capital expenditures added to the cost of the property and the periodic
depreciation is the amount that is considered as deductible expense.
(e) Premiums Paid on Life Insurance Policy Covering Life or Any Other Officer or
Employee Financially Interested
These are items not normally subject to income tax and therefore not deductible.
A person is said to be financially interested in the taxpayers business, if he is a stockholder
thereof or he is to receive as his compensation a share of the profits of the business.
(f) Interest Expense, Bad Debts, and Losses From Sales of Property Between Related
Parties

Provisions between related parties will apply.


1. Between members of a family (which shall include only his brothers and sisters, spouse,
ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual except in the case of
distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of which
is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust [Section 36(B), NIRC].
(g) Losses From Sales or Exchange or Property
Provisions between related parties will apply.
1. Between members of a family (which shall include only his brothers and sisters, spouse,
ancestors and lineal descendants)
2. Between an individual and a corporation more than 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual except in the case of
distributions in liquidation
3. Between two corporations more than 50% in value of the outstanding stock of each of which
is owned, directly or indirectly by or for the same individual
4. Between the grantor and the fiduciary of a trust
5. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a
grantor with respect to each trust
6. Between the fiduciary of a trust and a beneficiary of such trust [Sections 36(B), NIRC]
(h) Non-Deductible Interest
1. Individual taxpayer on the cash basis paying interest in the advance through discount or
otherwise. But interest is allowed as deduction in the year the indebtedness is paid; if payable
in amortization then an aliquot portion of the interest corresponding to the ratio of the principal
paid is allowed as deduction.
2. Interest on loans between related parties referred in Sec. 36 (B).
3. Interest on indebtedness incurred to finance petroleum exploration.
(i) Non-Deductible Taxes
1. Income tax.
2. Income tax paid or incurred to any foreign country, if the taxpayer is claiming a tax credit for
such foreign tax.
3. Estate or donors tax.
4. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (special assessment).
(j) Non-Deductible Losses
1. Not connected with profession, trade or business, and
2. Sustained in a transaction entered into between parties mentioned under Section 36(B) of
this Code.
(k) Losses From Wash Sales of Stock or Securities
NOT deductible because these are considered to be artificial loss.
(7) Exempt corporations
1. General professional partnerships;
2. Joint venture or consortium formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.

(a) Propriety Educational Institutions and Hospitals


Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, that if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational institutions or
hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on
the entire taxable income. For purposes of this Subsection, the term unrelated trade,
business or other activity means any trade, business or other activity, the conduct of which is
not substantially related to the exercise or performance by such educational institution or
hospital of its primary purpose or function. A Proprietary educational institution is any private
school maintained and administered by private individuals or groups with an issued permit to
operate from the Department of Education, Culture and Sports (DECS), or the Commission
on Higher Education (CHED), or the Technical Education and Skills Development Authority
(TESDA), as the case may be, in accordance with existing laws and regulations. (Sec. 27 [B])

(b) Government Owned or Controlled Corporations


In General Except as otherwise provided in this Code, an income tax of thirty-five percent
(35%) is hereby imposed upon the taxable income derived during each taxable year from all
sources within and without the Philippines by every corporation, as defined in Section 22(B)
of this Code and taxable under this Title as a corporation, organized in, or existing under the
laws of the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall
be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent
(33%); and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent
(32%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.

The reduced corporate income tax rates shall be applied on the amount computed by multiplying
the number of months covered by the new rates within the fiscal year by the taxable income of
the corporation for the period, divided by twelve.
Provided, further, That the President, upon the recommendation of the Secretary of Finance, may
effective January 1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of
gross income as defined herein, after the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

(3) A VAT tax effort of four percent (4%) of GNP; and


(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to
GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost
of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
For purposes of this Section, the term gross income derived from business shall be equivalent to
gross sales less sales returns, discounts and allowances and cost of goods sold. Cost of goods
sold shall include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

For a trading or merchandising concern, cost of goods sold shall include the invoice cost of the
goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold, including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold shall include all costs of
production of finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to
the factory or warehouse.

In the case of taxpayers engaged in the sale of service, gross income means gross receipts less
sales returns, allowances and discounts.

10. Taxation of Resident Citizens, Non-Resident Citizens, and Resident Aliens


a) General Rule that Resident citizens are Taxable on income from all sources within and
without the Philippines
(i) Non-Resident Citizens
Taxable on all income derived from sources with the Philippines.
b) Taxation on Compensation Income

(i) Inclusions
(a) Monetary Compensation
(1) Regular salary/wage
All remuneration for services performed by an employee for his employer under an employeremployee relationship unless specifically excluded by the Code
(2) Separation pay/retirement benefit not otherwise exempt
Pension forms part of gross income if the same is NOT EXEMPT.
(3) Bonuses, 13th month pay, and other benefits not exempt
13th month pay and other benefits in excess of the P 30,000 threshold.
(4) Directors fees
If there is an employer-employee relationship between the director and the corporation, the
directors fees would fall under compensation income.
(b)
(1)

Non-Monetary Compensation
Fringe benefit not subject to tax
Required or necessary to the business of employer, or
For the convenience or advantage of employer.

(ii) Exclusions
(a) Fringe Benefit Subject to Tax
A final income tax of 32% is imposed on the grossed-up monetary value of the fringe benefit
(FB) granted by an employer (individual or corporation) to supervisory and managerial
employees, except:
1. Where such FB is required by the nature of, OR necessary to the trade, business or
profession of the employee, or
2. When the FB is for the convenience OR advantage of the employer.
(b) De Minimis Benefits
De minimis benefits those facilities or privileges furnished to employees that are of relatively
small value and are offered or furnished merely as a means of promoting heath, goodwill,
contentment or efficiency of employees, such as but not limited to the following:
1. Monetized unused vacation leave credits of PRIVATE employees not exceeding (10)
days during the year and the monetized value of leave credits paid to government
officials and employees;
2. Medical cash allowance to dependents of employees not exceeding P750 per semester
or P125 per month;
3. Uniform and clothing allowance not exceeding P5.000 per annum;
4. Actual yearly medical benefits not exceeding P10,000 per annum;
5. Rice subsidy of P1,500.00 or one (1) sack of 50kg. rice per month amounting to not more
than P1,500.00;
6. Laundry allowance not exceeding P300 per month;
7. Flowers, fruits, books or similar items given under special circumstances such as on
account of illness, marriage, etc;
8. Employee achievement awards which must be in the form of a tangible personal property
other than cash or gift certificate with an annual monetary value not exceeding 1/2 month
of the basic salary of the employee receiving the award under an established written plan
which does not discriminate in favor of highly paid employees;
9. Christmas and major anniversary celebration for employees and their guests;
10. Company picnics and sports tournaments in the Philippines and participated exclusively
by the employees.

(c) 13th Month Pay and Other Benefits and Payments Specifically Excluded From Taxable
Compensation Income
13th month Pay and Other Benefits with the ceiling of P30,000.
(iii) Deductions
(a) Personal Exemptions and Additional Exemptions
Personal Exemptions the theoretical personal, living and family expenses of an individual
taxpayer. These are arbitrary amounts which have been calculated by ouur lawmakers to be
roughly equivalent to the minimum of subsistence, taking into account the personal status
and additional qualified dependents of the taxpayer.
Additional exemption there shall be allowed an additional exemption of P 25,000 for each
dependent child not exceeding four (4).
(b) Health and Hospitalization Insurance
It is an amount of premium on health and/or hospitalization paid by an individual taxpayer
(head of family or married), for himself and members of his family during the taxable year.
Requisites to be Deductible
1. Not to exceed P2,400 per family or P200 a month paid during the taxable year for health
and/or hospitalization insurance taken by the taxpayer for himself, including his family;
2. Said family has a gross income of not more that P250,000 for the taxable year.
3. In the case of married taxpayers, only the spouse claiming the additional exemption for
dependents shall be entitled to this deduction.
(c) Taxation of Compensation Income of a Minimum Wage Earner
(1) Definition of statutory minimum wage
This refers to the rate fixed by the Regional Tripartite Wage and Productivity Board, as
defined by the Bureau of Labor and Employment Statistic (BLES) of the Department of Labor
and Employment.
(2) Definition of minimum wage earner
Worker in the private sector paid by the statutory minimum wage or an employee in the public
sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned. (RA 9504)
(3) Income also subject to tax exemption: holiday pay, overtime pay, night shift
differential, and hazard pay.
MWEs shall be exempt from the payment of income tax on their taxable income. 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) Taxation of Business Income/Income from Practice of Profession
Business income are the gains or profits derived from rendering services, selling
merchandise, manufacturing products, farming and long-term construction contracts.
Formula: Gross Business Income Less Itemized deductions or Optional standard deductions.
Professional income are fees derived from engaging in an endeavor requiring special training as
a professional as a means of livelihood, which included, but is not limited to the fees of CPAs,
doctors, lawyers, engineers and the like.
Formula: Professional income Less Itemized deductions or Optional standard deductions.
d) Taxation of Passive Income

(i) Passive Income Subject to Final Tax


(a) Interest Income
From any currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements.
Exception: if the loan is granted by a foreign government, or an international or regional
financing institution established by governments, the interest income of the lender shall not be
subject to the final withholding tax.
Rates:
RC, NRC, RA, NRA-ETB is 20% NRA-NETB is 25%
(i) Treatment of income from long term deposits
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.
Rates:
RC, NTC, RA, NRA-ETB held for 5 years or more is exempt
4 years to less than 5 years is 5%
3 years to less than 4 years is 12%
Less than 3 years is 20%
NRA-ETB is 25%
(b) Royalties
Royalties payments for use of property, includes earnings from copyrights, patents, trademarks
and natural resources under lease.
Royalties derived from sources outside the Philippines do not constitute passive income
Royalties from sources within Philippines are passive; subject to 20% Final Income Tax
Royalties on books, as well as literary works and musical composition from sources within
Philippines subject to 10% Final Income Tax in case of individual taxpayer.
(c) Dividends from Domestic Corporation
Cash and Property Dividends when received by an individual citizen (RC, NRC, OCW) and a
resident alien from a domestic corporation, constitute passive income and are subject to final
income tax.
Rates:
RC, NRC, RA is 10%
NRA-ETB is 20%
NRA-NETB is 25%
(d) Prizes and Other Winnings
Prizes derived from contests or promotions derived from sources within the Philippines over
P10,000.
Winnings derived from gambling.
For a winning to be passive it is sufficient that it is derived from sources within the Philippines.
Exception: If the winning is obtained from PCSO or Lotto, it shall be exempt from FIT
(ii) Passive income not subject to final tax

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.
Rates:
RC, NRC, RA, NRA-ETB held for 5 years or more is exempt.
Prizes and winnings not exceeding P10,000.
Stock dividends
e) Taxation of Capital Gains
(i) Income From Sale of Shares of Stock of a Philippine Corporation
(a) Shares Traded and Listed in The Stock Exchange
If the stock is traded in the stock exchange, it is NOT subject to capital gains tax but to stock
transaction tax of of 1% on its gross selling price.
(b) Share Not Listed and Traded in The Stock Exchange
It will be subject to capital gains tax; 5% for the first P 100,000 and 10% for the amount in
excess of P 100,000.
(ii) Income From the Sale of Real Property Situated in the Philippines
It involves the sale or other disposition of real property classified as capital asset located in
the Philippines. They are non-dealer in real estate, and subject to CGT.
Tax Base: The higher between:
1. The gross selling price; and
2. Prescribed zonal value of the real properties as determined by the CIR or the fair market
value as shown in the schedule of values of the Provincial and City assessors whichever is
higher.
Tax rate: 6%
(iii) Income From the Sale, Exchange, or Other Disposition of Other Capital Assets
It involves sale or exchange or one considered as equivalent to a sale or exchange of
property classified as capital asset except:
a. Shares of a domestic corporation;
b. Real property in the Philippines held as capital asset.
11. Taxation of Non-Resident Aliens Engaged in Trade or Business
a) General rules
A nonresident alien individual engaged in trade or business in the Philippines shall be subject
to an income tax in the same manner as an individual citizen and a resident alien individual,
on taxable income received from all sources within the Philippines. A nonresident alien
individual who shall come to the Philippines and stay therein for an aggregate period of more
than one hundred eighty (180) days during any calendar year shall be deemed a nonresident
alien doing business in the Philippines.
Any calendar year meaning
when an expatriate stays in the Philippines for more than 180 days in any calendar year, he she
should already be taxed not only in the year that his stay exceeds the 180-day period but also in
the other years of assignment even if his stay during those other years did not exceed 180 days
(BIR Ruling 057-05, Feb 2005).
b) Cash and/or property dividends
Same as to resident citizen by only on income from sources within.
c) Capital gains
Same as to resident citizen but only on income from sources within.

Exclude: Non-resident Aliens Not Engaged in Trade or Business


12. Individual Taxpayers Exempt from Income Tax
a) Senior citizens
Under Section 4 (c) of the Senior Citizen Law (RA 9257), senior citizens are exempt from
payment of individual income taxes, provided that their annual taxable income does not
exceed the poverty level as determined by the NEDA for that year.
b) Minimum Wage Earners
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.
Minimum wage earners is exempt from the payment of income tax on their taxable income:
provided that the holiday pay, overtime pay, night shift differential pay and hazard pay
received by the minimum wage earners shall be exempt from income tax (Sections 1 and 2, RA
No. 9504)

c) Exemptions granted under international agreements


The residence tax (or community tax) which is a personal tax is not imposed on diplomatic
and consular representatives as well as transient visitors when their stay in the Philippines
does not exceed three (3) months (Sec. 159, LGC)
13. Taxation of Domestic Corporations
a) Tax payable
(i) Regular Tax
Corporation liable: DC and RFC
Tax rates: 30% effective January 1, 2009
Tax Base: Net taxable income
(ii) Minimum Corporate Income Tax (MCIT)
(a) Imposition of MCIT
MCIT is imposed on domestic and resident foreign corporations whenever:
a. Such corporation has zero or negative taxable income; or
b. The amount of MCIT is greater than the normal income tax due from such corporation
determined under Sec. 27[A].
Tax Rate: 2%
This scenario is possible if the corporation obtained too much deductions.
Applicable to RFC and DC covered with NCIT.
(b) Carry Forward of Excess Minimum Tax
Any excess of MCIT over the normal income tax can be carried forward on an annual basis.
The excess can be credited against the normal income tax due in the next 3 immediately
succeeding taxable years.
Any amount of the excess MCIT which cannot be credited against the normal income tax due
in the next 3-year period shall be forfeited.
Possible only if NCIT is greater than MCIT.
(c) Relief From the MCIT under Certain Conditions
The Secretary of Finance is authorized to suspend the imposition of the MCIT on any
corporation which suffers losses because of:
a. Prolonged labor dispute;

b. Force majeure; or
c. Legitimate business reverses
(d) Corporations Exempt from the MCIT
1. Those operating as proprietary educational institutions subject to preferential tax of 10% on
their taxable income; (Domestic)
2. Those engaged in hospital operations which are non-profit subject to tax at 10% on their
taxable income; (Domestic)
3. Those engaged in business as depository banks under the expanded foreign currency
deposit system subject to final income tax at 10% of such income; (Domestic)
4. Firms that are taxed under a special income tax regime such as those in accordance with RA
7916 and 7227 (The PEZA law and the Bases Conversion Development Act, respectively).
5. Resident foreign international carrier
6. Resident foreign offshore banking units
7. Resident foreign ROHQ
(e) Applicability of the MCIT Where a Corporation is Governed Both Under the Regular
System Tax System and a Special Income Tax
For Domestic Corporations whose operations are partly covered by the regular tax system
and partly covered under a special income tax system, the MCIT shall apply on operations
covered by the regular tax system.
b) Allowable deductions
(i) Itemized Deductions
ITEMIZED DEDUCTIONS
1. Expenses;
2. Interest;
3. Taxes;
4. Losses;
5. Bad Debts;
6. Depreciation;
7. Depletion of Oil and Gas Wells and Mines;
8. Charitable and Other Contributions;
9. Research and Development;
10. Pension Trust; and
11. Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer.
The above mentioned itemized deductions are available to ALL taxpayers who are subject to NIT.
EXCEPT:
1. NRFC
2. NRANETB
(ii) Optional Standard Deduction
Optional standard deduction is in lieu of all other itemized deduction (RA 9504)
This option is now applicable to RFC and DC. corporations. The OSD is computed at 40% of
its gross income.

Once OSD is elected, it is irrevocable for the taxable year for which the return is made.

c) Taxation of passive income


(i) Passive Income Subject to Tax

(a) Interest From Deposits and Yield or Any Other Monetary Benefit From Deposit
Substitutes and From Trust Funds and Similar Arrangements and Royalties (same rules
as those imposed on individuals)
(b) Capital Gains From the Sale of Shares of Stock Not Traded in The Stock Exchange
(same rules as those imposed on individuals)
(c) Income Derived Under the Expanded Foreign Currency Deposit System (same rules as
those imposed on individuals)
(d) Intercorporate Dividends
Received by a domestic corporation:
1. From another domestic corporation Exempt
2. From a foreign corporation 30% tax
(e) Capital Gains Realized From the Sale, Exchange, or Disposition of Lands and/or
Buildings (Same rules as those imposed on individuals)
(ii) Passive Income Not Subject to Tax (same rules as those imposed on individuals)
d) Taxation of capital gains
(i) Income From Sale of Shares of Stock (same rules as those imposed on individuals)
(ii) Income From the Sale of Real Property Situated in the Philippine (same rules as those
imposed on individuals)
(iii) Income From the Sale, Exchange, or Other Disposition of Other Capital Assets (same
rules as those imposed on individuals)
e) Tax on propriety educational institutions and hospitals
General Rule: Tax rate is 10%
Exceptions:
a. 30% if the gross income from unrelated trade, business or other activity exceeds 50% of the
total gross income derived from all sources.
b. Exempt if a non-stock, non-profit educational institution.
f)

Tax on government-owned or controlled corporations, agencies or instrumentalities


General Rule: The rules governing domestic corporations engaged in similar business,
industry or activity shall apply.
Exceptions:
a. Government Service Insurance System
b. Social Security System
c. Philippine Health Insurance Corporation
d. Philippine Charity Sweepstakes Office

14. Taxation of resident foreign corporations


a) General rule
A corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five
percent (35%) of the taxable income derived in the preceding taxable year from all sources within

the Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
b) With respect to their income from sources within the Philippines
A corporation which is not domestic and engaged in trade or business is liable for income
from sources within.

c) Minimum corporate income tax


(Same rules imposed on domestic corporation but only for the gross income from sources
within the Philippines shall be considered)
d) Tax on certain income
(i) Interest From Deposits and Yield or Any Other Monetary Benefit From Deposit
Substitutes, Trust Funds and Similar Arrangements and Royalties (Same rules imposed
on domestic corporation but only for the gross income from sources within the Philippines
shall be considered)
(ii) Income Derived Under the Expanded Foreign Currency Deposit System (Same rules
imposed on domestic corporation but only for the gross income from sources within the
Philippines shall be considered)
(iii) Capital Gain From Sale of Shares of Stock Not Traded in the Stock Exchange (Same
rules imposed on domestic corporation but only for the gross income from sources within the
Philippines shall be considered)
(iv) Inter-Corporate Dividends
Received by a Resident Foreign Corporation:
a. From a domestic corporation Exempt
b. From a foreign corporation: If from sources within 30% If from sources without exempt.
Received by a NRFC Corporation:
It is subject to final tax of 15% as long as the country in which the NRFC is domiciled allows a tax
credit for taxes deemed paid in the Philippines equivalent to 15% or does not impose tax on
dividends. It will be subject to 30% if the country in which the NRFC is domiciled does not allow a
tax credit.
EXCLUDE:
(i) International carrier
(ii) Offshore banking units
(iii) Branch profits remittances
(iv) Regional or area headquarters and Regional operating headquarters of multinational
companies
15. Taxation of Non-resident Foreign Corporations
a) General rule
A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five percent (35%) of the gross income received during each taxable year from all
sources within the Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other fixed or

determinable annual, periodic or casual gains, profits and income, and capital gains, except
capital gains subject to tax under subparagraph 5(c): Provided, that effective January 1,
2009, the rate of income tax shall be thirty percent (30%).
b) Tax on certain income
(i) Interest on Foreign Loans (Same as to Domestic Corporation)
(ii) Intercorporate Dividends
Received from a domestic corporation:
15% as long as the country in which the NRFC is domiciled allows a tax credit for taxes
deemed paid in the Philippines equivalent to 15% or does not impose tax on dividends. It
will be subject to 30% if the country within which the NRFVC is domiciled does not allow a tax
credit.
(iii) Capital gains from sale of shares of stock not traded in the stock exchange (Exempt
from CGT if proud under a Tax Treaty in case of sale between NRFC)
EXCLUDE:
(i) Non-resident cinematographic film owner, lessor or distributor
(ii) Non-resident owner or lessor of vessels chartered by Philippine nationals
(iii) Non-resident owner or lessor of aircraft machineries and other equipment
16. Improperly Accumulated Earnings of Corporations (IAET)
Rate: 10% of the Improperly Accumulated Taxable Income (in addition to other taxes).
The tax which is essentially a penalty tax is imposed for each taxable year in addition to the other
income taxes imposed on corporations. The purpose of the 10% IAET is to prevent individual
taxpayers from avoiding the progressive rates of income tax by employing the corporate form for
the accumulation of table income.

With the additional tax, corporations will be compelled to distribute corporate gains or
earnings not necessary in the business to stockholders in the form of dividends which are
now taxable.
IAET shall not apply in cases where the corporation is entitled to a preferential tax rate. The
retained earnings of a domestic corporation with the Subic Bay Metropolitan Authority
(SBMA) from its gross income earned from registered activities which were already subjected
to 5% preferential tax rate are not subject to IAET (BIR Ruling DA-587-09, Oct 2009).
The tax shall not apply to the three kinds of corporation enumerated in Sec 29 B-2 and also
the following:
a. Taxable partnerships
b. GPP
c. Non-taxable joint ventures
d. Enterprises duly registered under the Philippine Economic Zone Authority under R.A.
7916
e. Enterprises registered pursuant to the Bases Conversion and Development Act of 1992
under R.A. 7227
f. Other enterprises duly registered under special economic zones declared by law which
enjoy payment of special tax rate on their registered operations or activities (Sec 4, Rev
Regs No. 2-2001).

g.
h.
i.
j.

Banks and other non-banks financial intermediaries


Publicly-held corporations
Insurance companies
Foreign corporations

Income derived by a subcontractor of a petroleum service contractor of the Government from


petroleum subcontracting operations is exempt from the IAET. However, the exemption shall
be limited only to income derived from petroleum subcontracting under P.D. 1354. Income
from other sources shall be subject to normal income tax rate or MCIT, as the case may be
(BIR Ruling 302-04, June 2004).

Presumptions of Improper Accumulation


There is prima facie evidence of a purpose to avoid the tax upon its shareholders where:
(2) The corporation is a mere holding company;
(3) The corporation is an investment company and at any time during the taxable year more than
50% in value of its outstanding stocks is owned, directly or indirectly, by one person; and
(4) The corporation permits its earnings or profits to be accumulated beyond the reasonable
needs of the business.
For purposes of Rev. Regs 2-2001, the term holding or investment company, shall refer to a
corporation having practically no activities except holding property, and collecting the income
therefrom or investing the same
The touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. If there is a determination that a corporation has
accumulated income beyond the reasonable needs of the business, IAET shall be imposed.
To determine reasonable needs, Immediacy Test shall be applied. The accumulated profits
must be used within a reasonable time after the close of the taxable year. The taxpayer must
establish by clear and convincing evidence that such accumulation was for the immediate
needs of the business.
The tax is imposed for each taxable year on the improperly accumulated taxable income
equal to 10% of such income. Thus, year to year basis.
Once the profit has been subject to IAET, the same shall no longer be subject to it even if not
declared as dividends. Notwithstanding, once finally declared, the dividends shall still be
subject to tax on dividends under NIRC.
17. Exemption From Tax on Corporation

The tax exemption of a non-stock corporation under Sec 30 covers only income tax for which
it is directly liable (BIR Ruling No. DA-099, June 2010). The exemption of corporations from tax
does not extend to the shareholders or members (Manila Gas Corp. v. Coll. 62 Phil 895).

An exemption from taxation is a personal privilege. It cannot be assigned or transferred by


the grantee without the consent of the legislature which may be given either in the original act
granting the exemption or in a subsequent law.
The income derived by a charitable organization from any of its charitable operations is
exempt but the rentals from leasing of its building are subject to income tax.

Condominium dues received from the unit owners, which are merely held in trust and which
are used by the Condominium Corporation solely for administrative expenses, utilities, and
maintenance of the common areas for the benefit of the unit owners and from which the
Condominium Corporation could not realize any gain or profit are not subject to income and
consequently, to withholding tax (BIR Ruling No. DA- 336-08, Oct 23, 2008).

a. Agricultural and Horticultural Organizations


Requisites:
(1) Have no net income inuring to the benefit of any member;
(2) Are educational or instructive in character;
(3) Have as their objects the betterment of the conditions of those engaged in such pursuits,
the improvement of the grade of their products and the development of a higher degree
of efficiency in their respective occupations.

b. Mutual Savings Bank


It must appear that it is an organization which has no capital stock represented by shares and
whose earnings less only the expenses of operation, are distributable whole among the
depositors. If it appears that the organization has shareholders who participate in the profits, the
organization will not be exempt.
c. Beneficiary Society
Only if operated for the exclusive benefit of the members such as a fraternal organization
operating under the lodge system. It is necessary that the fraternal organization should have an
established system for payment to its members of life, sick, accident, or other benefits.
d. Cemetery Company
It must be owned by and operated exclusively for the benefit of its lot owners or if it is not
operated for profit.
e. Religious, Charitable, Scientific, Athletic or Cultural Corporation or Corporation for the
Rehabilitation of Veterans
(1) It must be a non-stock and organized and operated for one or more specified purposes;
and
(2) No part of its net income or asset shall belong to or inure to the benefit of any member.
f. Charitable Institutions
Charity may be fully defined as a gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the
influence of education or religion, by assisting them to establish themselves in life or otherwise
lessening the burden of government.
Charitable institutions does not lose its character as such because it derives income from paying
patients so long as the money received is devoted or used altogether to the charitable object
which it is intended to achieve.

If tax exempt charitable institution conducts any activity for profit, regardless of the disposition
made of such income, such activity is not tax exempt even as its not-for-profit activities
remain exempt from income tax.

g. Business League
An association of persons having some common business interest, which limits its activities to
work for such common interest and does not engage in a regular business of a kind ordinarily
carried on for profit.
h. Civic League
Those not organized for profit but operated exclusively for purposes beneficial to the community
as a whole. For the promotion of social welfare covers activities that advance the common good
and the general welfare of the people of the community.
i. Government educational institution
May include associations whose sole purpose is the instruction of the public. Associations formed
to disseminate controversial or partisan propaganda are not educational with the meaning of the
law (Sec 30, Rev. Regs No. 25).
Sec 30 pertains to various non-stock, non-profit organization whose income received as such are
exempt from tax imposed under Title II o the Tax Code. On the other hand, Par. 3 Sec 4, Article
XIV of the Constitution categorically exempts from taxes and duties all revenues and assets of
non-stock, non-profit educational institutions.

The tax exemption granted under Sec. 30 covers only income taxes for which is directly liable.
Such exemption does not cover indirect taxes such as VAT.
18. Taxation for Partnerships:
a) General Professional Partnerships
b) Joint venture on consortium formed for the purpose of:
1) Undertaking construction projects or
2) Engaged in petroleum, coal, geothermal and other energy operations
19. Taxation of General Professional Partnerships
The income tax is imposed on the partners themselves in their separate and individual
capacity on their separate and respective distributive shares of the net income of the
partnership computed in the same manner as corporation.
Unlike an ordinary business partnership which is treated as a corporation for income tax
purposes and, therefore, subject to corporate income tax, a general professional
partnership is not in itself an income taxpayer.
A General Professional Partnership, provided that no part of its income is derived from
engaging in any other trade or business, is exempt from corporate income tax.
If it derives income from other sources, the GPP nonetheless remains to be exempt from
the payment of corporate income tax if the income from other sources has been
subjected to final income tax.
They are required to file tax returns for the purpose of furnishing information as to the
share in the nait gains or profits which each partner shall include in his individual return.
A partners share in the net profits of DPP is not compensation income (BIR Ruling No.
008, Jan. 1989). Payments made to individual partners are subject to 15% withholding tax
pursuant to Sec. 2.57.2 H, Rev. Regs. No. 2-98, as amended.
Requisites for Exemption:
a. Formed by persons for the sole purpose of exercising their common profession.
b. No part of its income is derived from engaging in any trade or business.

A General Professional Partnership, provided that no part of its income is derived from
engaging in any other trade or business, is exempt from corporate income tax.
If it complies with the above mentioned conditions, then each persons engaging in business
as partners in a general professional partnership are liable for the payment of income tax in
their separate and individual capacity.
If the conditions set by law are not met, the exemption from corporate income tax is
withdrawn and the partnership is subjected to tax as an ordinary corporation (Tan vs. Del
Rosario, G.R. No. 109289, October 3, 1994).

20. Withholding Tax


a) Concept
The concept of a withholding tax on income obviously and necessarily implies that the amount of
the tax withheld comes from the income earned by the taxpayer. Since the amount of the tax
withheld constitutes income earned by the taxpayer, then that amount manifestly forms part the
taxpayers gross receipt. Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability. The amount withheld indubitably
comes from income of the taxpayer, and thus forms part of his gross receipts (China Banking
Corporation v. CA, 403 SCRA 634, 2003).

A withholding tax on income is not a new kind of tax but simply a manner or system by which
income taxes may be collected when the income is paid or received. It is in the nature of
advance tax payment by a taxpayer on the annual tax which may be due at the end of the
taxable year.
Primary reasons for the withholding tax system was devised for three primary reasons:
1. To provide the taxpayer a convenient manner to meet his probable income tax liability;
2. To ensure the collection of income tax which can otherwise be lost or substantially
reduced through failure to file the corresponding returns; and
3. To improve the governments cash flow.

b) Kinds
1) Withholding tax at source (Secs. 34K, 57-59);
i) Withholding tax on quarterly corporate income (Secs 75-76);
ii) Withholding tax on quarterly individual income (Secs 74);
2) Withholding tax on employers compensation or wages (Secs. 78-83);
3) Withholding of value-added tax (Sec 114c); and
4) Withholding of percentage tax (Secs 116-128).
(i) Withholding of Final Tax of Certain Incomes
The amount of income tax withheld by the withholding agent is constituted as a full and final
payment of the income tax due from the payee on the said income. The liability for payment
of the tax rests primarily on the payor as a withholding agent.
(ii) Withholding of Creditable Tax at Source
Taxes withheld on certain income payments are intended to equal or at least approximate the
tax due from the payee on said income. The income recipient is still required to file an income
tax return, as prescribed in Sec. 51 and 52, to report the income and/or pay the difference
between the tax withheld and the tax due on the income.
Final Withholding Tax (FWT) and Creditable Withholding Tax (CWT) distinguished
1. In FWT, the amount of income tax withheld by the withholding agent is constituted as a full
and final payment of the income tax due from the payee on the said income. In CWT, the
taxes withheld on certain income payments are intended to equal or at least approximate the
tax due of the payee on said income.
2. In FWT, the liability for payment of the tax rests primarily on the payor as a withholding agent.
In CWT, Payee of income is required to report the income and/or pay the difference between
the tax withheld and the tax due on the income. The payee also has the right to ask for a
refund if the tax withheld is more than the tax due.
3. In FWT, the payee is not required to file an income tax return for the particular income. In
CWT, the income recipient is still required to file an income tax return, as prescribed in Secs.
51 and 52.

FWT is imposed on the sale of capital assets. CWT is imposed on the sale of ordinary assets.
(Chamber of Real Estate and Builders Assocs., Inc v. Romulo, 614 SCRA 605, 2010).

Persons Constituted as Withholding Agent (Sec. 3 of Revenue Regulation No. 14-2002)


1. Any juridical person whether or not engaged in trade or business;
2. Any individual, with respect to payments made in connection with this trade or business.
However, insofar as taxable sale, exchange or transfer of real property is concerned,
individual buyers who are not engaged in trade or business are also constituted as
withholding agents; and
3. All government offices including GOCC, as well as provincial, city and municipal governments
and barangays.
c) Withholding of VAT
(See VAT discussions)

d) Filing of return and payment of taxes withheld


(i) Return and Payment in Case of Government Employees
If the employer is the Government of the Philippines or any political subdivision, agency or
instrumentality thereof, the return of the amount deducted and withheld upon any wage shall
be made by the officer or employee having control of the payment of such wage, or by any
officer or employee duly designated for the purpose (Section 81, NIRC).
(ii) Statements and Returns
Requirements Every employer required to deduct and withhold a tax shall furnish to each
such employee in respect of his employment during the calendar year, on or before January
thirty-first (31st) of the succeeding year, or if his employment is terminated before the close of
such calendar year, on the same day of which the last payment of wages is made, a written
statement confirming the wages paid by the employer to such employee during the calendar
year, and the amount of tax deducted and withheld under this Chapter in respect of such
wages. The statement required to be furnished by this Section in respect of any wage shall
contain such other information, and shall be furnished at such other time and in such form as
the Secretary of Finance, upon the recommendation of the Commissioner, may by rules and
regulation, prescribe.
Annual Information Returns Every employer required to deduct and withhold the taxes in
respect of the wages of his employees shall, on or before January thirty-first (31 st) 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. This return, if
made and filed in accordance with rules and regulations promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect of such wages.
Extension of time. The Commissioner, under such rules and regulations as may be promulgated
by the Secretary of Finance, may grant to any employer a reasonable extension of time to furnish
and submit the statements and returns required under the Section (Section 83, NIRC).
e) Final withholding tax at source
Withholding taxes are deducted by the withholding agents (who have control, custody, or
receipt of the funds) when the income payments are paid or payable, they are described as
withholding taxes at source. In order words the income tax of the recipient of income is
withheld and deducted at the source and at the time at deducted at the source and at the time
at the accrual or payment of the expense by the withholding agent payor of income.

f)

In case of failure to withhold the tax or in case of under withholding, the deficiency tax shall
be collected from the payor/withholding agent.
The finality of the withholding tax is limited only to the payees liability on the particular
income. It does not extend to payees other tax liability on said income, such as when the
said income is further subject to a percentage tax.
Creditable withholding tax
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. Taxes withheld on income payments covered by the expanded withholding tax and
compensation income are creditable in nature.

(i) Expanded withholding tax

Essential Requisites
a. An expense is paid or payable by a taxpayer, which is income to the recipient thereof subject
to income tax
b. The income is fixed or determinable at the time of payment
c. The income is one of the income payments listed in the regulation that is subject to
withholding tax
d. The income recipient is a resident of the Philippines liable to income tax
e. The payor-withholding agent is also a resident of the Philippines
(ii) Withholding Tax on Compensation
A method of collecting that income tax at source upon receipt of income. It applies to all
employed individual whether citizens or aliens, deriving income from compensation for
services rendered in the Philippines, and the employer is constituted as the withholding
agents (Revenue Regulation 2-79, amending Section 9-10, 19-23 of Regulation V-8 and Revenue
Regulation 2-98).

Withholding on wages
(i)
a.
b.
c.

Requirement for withholding


Employer-employee relationship
Constructive or actual payment of compensation or wages for services rendered
Payroll period

(ii) Tax paid by recipient


The income recipient is the person liable to pay the income tax, yet to improve the collection of
compensation income of employees, the State requires the employer to withhold the tax upon
payment of the compensation income.
(iii) Refunds or credits
a. Employer when there has been an overpayment of tax under this Section, refund or credit
shall be made to the employer only to the extent that the amount of such overpayment was
not deducted and withheld hereunder by the employer.
b. Employees the amount deducted and withheld under the Code during any calendar year
shall be allowed as a credit to the recipient of such income against the tax imposed under
Section 24(A) of this Title. Refunds and credits in cases of excessive withholding shall be
granted under rules and regulations promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
Any excess of the taxes withheld over the tax due from the taxpayer shall be returned or credited
within three (3) months from the fifteenth (15 th) day of April. Refunds or credits made after such
time shall earn interest at the rate of six percent (6%) per annum, starting after the lapse of the
three-month period to the date the refund of credit is made.
Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of counter-signature by the Chairman, Commission on Audit
or the latters duly authorized representative as an exception to the requirement prescribed by
Section 49, Chapter 8, Subtitle B, Title 1 of Book V of the Administrative Code of 1987.
(iv) Year-end adjustment
Every withholding agent required to deduct and withhold taxes shall submit to the CIR an annual
information return containing the list of employees and income payments, amount of taxes due
and amount of taxes withheld from each employees.
(v) Liability for tax
Employer The employer shall be liable for the withholding and remittance of the correct amount
of tax required to be deducted and withheld under this Chapter. If the employer fails to withhold
and remit the correct amount of tax as required to be withheld under the provision of this Chapter,

such tax shall be collected from the employer together with the penalties or additions to the tax
otherwise applicable in respect to such failure to withhold and remit.
Employee Where an employee fails or refuses to file the withholding exemption certificate or
willfully supplies false or inaccurate information thereunder, the tax otherwise required to be
withheld by the employer shall be collected from him including penalties or additions to the tax
from the due date of remittance until the date of payment. On the other hand, excess taxes
withheld made by the employer due to:
(1) Failure or refusal to file the withholding exemption certificate; or
(2) False and inaccurate information shall not be refunded to the employee but shall be forfeited
in favor of the Government.
Fringe benefit tax
Fringe Benefit Tax tax imposed on fringe benefits which are granted or are paid by an employer
to an employee occupying a managerial or supervisory position. It is a measure to ensure that an
income tax is paid on fringe benefit.
It is collected from the employer even if the employer is a tax exempt corporation, or an
instrumentality of the Philippine Government.
g) Timing of withholding
(Sec. 4, Revenue Regulation No. 12-2001)

The obligation of the payor to deduct and withhold tax at source arises at the time an income
payment is paid or payable, or the income payment is accrued or recorded as an expense or
asset, whichever comes first. Provided, however, where the income is not yet paid or
payable but the same has been recorded as an expense or asset in the payors books, the
obligation to withhold shall arise in the last month of the return period in which the same is
claimed as an expense or amortized for tax purpose.
The term payable refers to the date the obligation becomes due, demandable, or legally
enforceable.
Under the accrual basis method of accounting, income is reportable when all the events have
occurred that fix the taxpayers right to receive the income and the amount can be
determined with reasonable accuracy.

B. ESTATE TAX
1. Basic Principles
Taxes levied on the transmission of properties of the decedent to his heirs.
The transfer of the net estate of every decedent, whether resident or non-resident, is subject
to estate tax. (Sec. 84, NIRC)

Estate tax is tax imposed upon the basis of net estate considered as a unit, regardless of the
number of shares into which it may be divided or the relationship of the beneficiaries. It is
paid by the estate represented by the administrator or executor. (Report of the Tax Commission
of the National Internal Revenue Law, Vol. II, p. 113)

It is different from inheritance tax, which is an imposition on the privilege to receive property
and paid by the recipients of the property from the estate. (Lorenzo vs Posadas, G.R. No. L43082, June 18, 1937)

Transfer taxes- taxes imposed upon the privilege of passing ownership of the property without
any valuable consideration.
Kinds of Transfer taxes:
1. Estate tax
2. Donors tax

Difference between Donors tax and Estate tax:


DONORS TAX
ESTATE TAX
Nature of transfer
During the lifetime of the
donor
May take place between
natural
and
juridical
persons

After death of decedent


Transfer takes place only
between natural persons

Amount exempt
P100,000

P200,000
Rate of tax

2-15% or 30% if donee is


a stranger

5-20%

Grant of exemption
Sec. 101, NIRC

Yes. Sec .87, NIRC


Grant of deductions

None

Yes. Sec 86, NIRC


Notice requirement

General Rule:
Notice of donation is not
required

Notice of death required


in the following cases:

Exceptions:
1. Transaction subject to
1. Donations to NGO estate tax
2. Transaction exempt
worth at least P50,
000. Provided, not more from estate tax but
than 30% of which will be exceeds P20,000.
used for administration
purposes.
2. Donation to any
candidate, political party,
or coalition of parties
Notice, when filed
Within 2 months after the
decedents death or after
qualifying as executor or
administrator
Filing of return
All transfers by gift
except those which under

1. A transfer subject to
estate tax

Sec. 101 of the NIRC


which are exempt from
tax (Sec. 103, NIRC)

2. Exempt from tax but


the gross estate exceeds
P200,000
3. Estate consists of
registered or registrable
property, regardless of
value of gross estate

Contents of return
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.
Such
further
information as may be
required by rules and
regulations
made
pursuant to law

1. Value of the gross


estate
2. Deductions under Sec.
86, NIRC
3.
Other
pertinent
information
4.
If
Gross
estate
exceeds P2M, certified
by a CPA as to assets,
deductions, tax due,
whether paid or not

Time of filing Return


Within 30 days after
donation was made

Within 6 months from


death of decedent

Extension for filing return


None

30 days in meritorious
cases
Payment of tax due

Pay as you file

Pay as you file


Extension of payment

None

General Rule:
Extension of payment is
not allowed
Exception:
When it would impose
undue hardship upon the
estate or any of the heirs,
extension
may
be
allowed but not to exceed
5 years in case of judicial

settlement or 2years in
case of extra judicial
settlement.
Exception
exception:

to

the

When taxpayer is guilty


of:
1. Negligence
2. Intentional disregard of
rules and regulations
3. Fraud

2. Definition
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.
It is a tax imposed on the right to transfer property by death. Thus, an estate tax is levied on
decedents estate and not on the heir receiving the property. (Blacks Law Dictionary, 6th ed. p.
550)

3. Nature
It is a progressive tax which imposes a heavier burden on those who have more ability to pay. It is
a graduated tax imposed upon the privilege of the decedent to transmit property at death and is
based on the entire net estate. It is not a direct tax on the property transmitted or transferred
although its amount is based thereon.
A transfer tax imposed upon the gratuitous disposition of private property.
They are excise taxes, not property taxes. They are not property taxes because their
imposition does not rest upon general ownership but rather they are privilege tax since they
are imposed on the act of passing ownership of property.
4.
a.
b.
c.

Purpose or Object
To generate additional revenue for the government;
To reduce the concentration of wealth and provide for an equal distribution of wealth;
To compensate the government for the protection given to the decedent that enabled him to
prosper and accumulate wealth.
d. It is the most appropriate method for taxing the privilege which the decedent enjoys of
controlling the disposition at death of property accumulated during the lifetime of the
decedent.
e. It is the only method of collecting the share which is properly due to the State as a partner in
the accumulation of property which was made possible on account of the protection given by
the State.
Generally, the purpose of the estate tax is to tax the shifting of economic benefits and enjoyment
of property from the dead to the living.
5. Time and Transfer of Properties
The properties and rights are transferred to the successors at the time of death. (Art. 777, Civil
Code)

The estate tax accrues as of the death of the decedent. The accrual of the tax is distinct from the
obligation to pay the same which is 6 months after the death of the decedent.

Upon the death of the decedent, succession takes place and the right of the State to tax the
privilege to transmit the estate vests instantly upon death. Thus:
1. The notice of death of the decedent must be made within two months after the death or within
two months after qualifying as such executor or administrator. (Sec 89, NIRC)
2. The properties comprising the gross estate shall be valued based on their fair market value
as of the time of the death of the decedent. (Sec. 5,RR No. 2-2003); and
3. The return must be filed within 6 months from the decedents death. (Sec. 90[B] NIRC)
6. Classification of Decedent
Taxpayers liable to pay estate tax
TAXPAYER
Resident Citizen
Non-Resident Citizen
Resident Alien
Non-Resident Alien

SCOPE
All properties of the decedent within and without
the Philippines
Properties located within the Philippines.
Provided that, intangible personal property is
subject to the rule of reciprocity provided for under
Section 104 of the NIRC. (Section 85, NIRC)

Note: Only individuals are liable to pay estate tax. Domestic and foreign corporations are subject
only to donors tax and not to estate tax because it is not capable of death but may enter into a
contract of donation.
In a nutshell, the Estate Tax is computed as follows:
ET = TA + [(GE AD) x TR] TC

NE
Where:
ET = Estate tax
GE = Gross Estate
AD = Allowable deductions
TA = Tax applicable
TR = Tax rate, when applicable
TC = Tax Credit
NE = Net estate (GE AD)
Briefly,
ET The estate tax is always based on the net estate. The net estate is the difference between
the gross estate and the allowable deductions. In other words, it is the value of the estate after
the allowable deductions have been subtracted from the gross estate.
GE The gross estate is determined by four factors: (1) Identity of the decedent being a resident
alien, citizen, or a non-resident alien, (2) situs of the property, (3) Inclusions under Sec. 85, and
(4) Exclusions under Sec. 87. The inclusions identify everything that shall be added to the gross
estate. The exclusions identify those that are not to be considered at all when the gross estate is
computed.

AD The allowable deductions are generally determined by one factor: the identity of the
decedent. If the decedent is a resident alien or a citizen of the Philippines, deductions that apply
are those listed under Sec. 86 (A). If the decedent is a non-resident alien or a citizen of the
Philippines, deductions that apply are those listed under Sec. 86 (B).
TA The tax applicable is the fixed amount in the third column of the schedule in Sec. 84. It is
determined by the bracket to where the value of the net estate belongs.
TR The Tax rate is determined by two factors:
(1) The bracket to where the net estate belongs, and
(2) Minimum amount specified in such bracket (last column in the schedule specified in Sec. 84).
It is multiplied ONLY WHEN there is an excess over the amount specified in (2) above, by a factor
depending on the bracket to where the net estate belongs.
TC The tax credit is governed by Sec. 86(E) of the NIRC.
7. Gross Estate vis--vis Net Estate
Gross Estate. The value of the gross estate of the decedent shall be determined by including
the value at the time of his death of all property, real or personal, tangible or intangible, wherever
situated. Provided, however, That in the case of a nonresident decedent who at the time of his
death was not a citizen of the Philippines, only that part of the entire gross estate which is
situated in the Philippines shall be included in his taxable estate.
Net Estate. For the purpose of the tax imposed in this Chapter, the value of the net estate shall
be determined after taking into consideration the following:
8. Determination of Gross Estate and Net Estate
The value of the gross estate of the decedent shall be determined by including the value at the
time of his death of all property, real or personal, tangible or intangible, wherever situated;
PROVIDED, however, That in the case of a nonresident alien decedent who at the time of his
death was not a citizen of the Philippines, only that part of the entire gross estate which is
situated OR deemed situated (Sec 104) in the Philippines shall be included in his taxable estate.
(Section 85).

9. Composition of gross estate


Basis for the valuation of gross estate:
Properties comprising the gross estate shall be valued based on their fair market value as of the
time of death. (Sec. 5, RR 2-03)
PROPERTY VALUATION
(Sec. 5, RR 2-03, Promulgated December 16, 2002)
As to real property
Whichever is higher between the fair market value:

As to personal property
As to shares of stock

1. as determined by the Commissioner (zonal value) or


2. as shown in the schedule of values fixed by the
provincial and city assessors
*if there is no zonal value, use the FMV in the latest tax
declaration.
Whether tangible or intangible, appraised at FMV.
Sentimental value is practically disregarded.
1. Unlisted
a. unlisted common - book value
b. unlisted preferred - par value

2. Listed
Arithmetic mean between the highest and lowest
quotation at a date nearest the date of death, if none is
available on the date of death itself.
As to right to usufruct, use or habitation, as well as
that of annuity

If the decedent is a
resident citizen, nonresident citizen, or
resident alien
Value at the time of
death of all:
1.
Real
property
wherever situated
2. Personal property,
tangible or intangible,
wherever situated
3. To the extent of the
interest therein of the
decedent at the time of
his death.

Shall be taken into account the probable life of the


beneficiary in accordance with the latest basic standard
mortality table, to be approved by the Secretary of
Finance, upon recommendation of the
Insurance Commissioner.

If the decedent is anonresident alien


Value at the time of death
of all:
1. real property situated
in the Philippines
2.Tangible
personal
property situated in the
Philippines
3. Intangible personal
property with situs in the
Philippines
unless
exempted on the basis of
reciprocity

However, for taxation purposes, Sec. 104 of the NIRC enumerates intangible personal properties
of a non-resident alien decedent which have a situs in the Philippines, hence treated as part of
the gross estate:
i. Franchise which must be exercised in the Philippines;
ii. Shares, obligations or bonds issued by any corporation or sociedad anonima organized or
constituted in the Philippines in accordance with its laws;
iii. Shares, obligations or bonds by any foreign corporation eighty-five percent (85%) of the
business of which is located in the Philippines;
iv. Shares, obligations or bonds issued by any foreign corporation if such shares, obligations or
bonds have acquired a business situs in the Philippines;
v. Shares or rights in any partnership, business or industry established in the Philippines, shall
be considered as situated in the Philippines
Rule on Reciprocity
With respect to intangible personal property, its inclusion in the gross estate is subject to the rule
of reciprocity provided for under Section 104 of the NIRC (Sec. 104 / Sec. 4 of R.R. No. 2-03).
Requisites:
The property involved is intangible personal property and the situs of the properties is in the
Philippines. The decedent or donor at the time of death or donation was a citizen and resident
of a foreign country.
That the foreign country did not impose a transfer tax of any character in respect of intangible
personal property owned by a Filipino citizen not residing in said foreign country, or
The laws of the foreign country allow a similar exemption from transfer taxes or death taxes
of every character or description in respect of intangible personal property owned by citizens
of the Philippines not residing in that foreign country (Sec. 104 [b] of the NIRC).

Reciprocity must be total. If any of the two states collects or imposes or does not exempt any
transfer, death, legacy or succession tax of any character, the reciprocity does not work (CIR
vs. Fisher, 1 SCRA 93).

No deductions shall be allowed in the case of a non-resident decedent not a citizen of the
Philippines, unless the executor, administrator or any one of the heirs, as the case may be,
includes in the return required to be filed under Section 90 of the Code the value at the time
of decedents death of that part of his gross estate not situated in the Philippines (Sec. 7 of
R.R. No. 2-03).

10. Items to be Included in Gross Estate


General Rule: Only properties, as to the extent of his interest therein, existing at the time of
death are included in the gross estate.
Pursuant to this general rule, it follows that properties NOT EXISTING at the time of death are
NOT INCLUDED in the decedents estate. Examples of these are the following:
1. Proceeds of life insurance issued by the employer of the decedent on the life of the latter.
2. A bona fide sale for an adequate and full consideration in money or moneys worth, and
3. In general, all other transfers of property effective before the death of the decedent, where all
attributes of ownership are transferred from the decedent to the transferee. Commonly known
as transfers where there are no strings attached.
I.

Exception:
Properties NOT EXISTING at the time of death but are nonetheless INCLUDED in the
estate, these are [GRIDI]:
1. Properties transferred in contemplation of death (Sec. 85(B), NIRC).
2. Properties whose transfer can be revoked (revocable transfer) (Sec. 85(C), NIRC).
3. Properties that passed under the general power of appointment (Sec. 85(D), NIRC).
4. Proceeds of life insurance taken out by the decedent upon his life (Sec. 85(E), NIRC).
5. Properties that were transferred for insufficient consideration (Sec. 85(G), NIRC).

II. Properties, though EXISTING at the time of death are NOT INCLUDED in the estate, these
are:
1. Properties that passed under the special power of appointment
2. Capital of the surviving spouse (Sec. 85(H), NIRC)
ITEMS OF GROSS ESTATE:
1. Decedent's interest at the time of his death
2. Transfer in contemplation of death
3. Revocable transfer
4. Property passing under general power of appointment
5. Proceeds of life insurance
6. Prior interests
7. Transfers of insufficient consideration
Note: Nos. 2, 3, 4 and 7- properties not physically in the estate (these have already been
transferred during the lifetime of the decedent but are still subject to payment of estate tax) - are
transfers inter-vivos which are considered part of gross estate.
Decedent's Interest (Sec. 85(A), NIRC)
It includes any interest having value or capable of being valued, transferred by the decedent at
his death. The interest in this provision refers to two things in general: (a) property actually
owned, and (b) interest in the property by the decedent. This includes real or personal property,
tangible or intangible.

Transfer In Contemplation Of Death (Sec. 85(B), NIRC)


The provision contemplates three situations where transfer is considered made in contemplation
of death, i.e. when the transfer was either:
1. Made explicitly in contemplation of death, or
2. Intended to take effect in possession or enjoyment at or after death, or
3. Made in such a way that he has retained for his life 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 person who
shall possess or enjoy the property or the income therefrom.

The concept of transfer in contemplation of death has a technical meaning. This does not
constitute any transfers made by a dying person. It is not the mere transfer that constitutes a
transfer in contemplation of death but the retention of some type of control over the property
transferred. In effect, there is no full transfer of all interests in the property inter vivos.

Revocable Transfer (Sec. 85(C), NIRC)


A revocable transfer is a transfer by trust or otherwise, where the enjoyment thereof was subject
at the date of the decedents death to any change, alteration, revocation, or termination, through
the exercise of power by:
1. Decedent alone;
2. By 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
3. Where any such power is relinquished in contemplation of the decedents death. (Sec. 85(C)
(1), NIRC)

This power to alter, amend or revoke shall be considered to exist on date of decedents 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
for the exercise of the power, whether or not on or before the date of the decedents death
notice has been given or the power has been exercised.

In such cases, proper adjustment shall be made representing the interest which would have
been excluded from the power if the decedent had lived, and for such purpose if notice has
not been given or the power has not been exercised on or 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. (Sec. 85(C)(2), NIRC)
Revocable transfer is part of the gross estate of the decedent because the transferor can
revoke the transfer any time, such person has the power such that he can revoke the transfer
as if none was actually made.
When is a transfer not revocable, thereby not subject to estate tax:
a. If the decedents power could only be exercised with the consent of all parties having an
interest in the transferred property and if the power adds nothing to the rights the parties
possess under local law. (Lober v. United States, 346 US 335)
b. When the decedent has been completely divested of the power at the time of his death
(ibid.)

c.

Where the exercise of the power by the decedent was subject to a contingency beyond
the decedents control which did not occur before his death. (Hurd v.Commissioner 160F
(2)610)

d. The mere right to name trustees. Neither is the grantors limited power to appoint himself
as trustee under conditions which did not exist at his death. (24 Am Jur. 2d, p 790)
Property Passing Under General Power of Appointment (Sec. 85(D), NIRC)

It is the right to designate the person who will succeed to the property of the prior decedent, in
favor of anybody, including himself, his estate, his creditors, or the creditors of his estate. If the
donation contains a provision of reversion to the donor, this is similar to a revocable transfer
A power is not general (specific) if it can be exercised only in favor of one or more designated
person or classes of persons exclusive of the decedent, his estate, his creditors and creditors of
his estate, or if it expressly not exercisable in favor of the decedent, his estate, his creditors, or
creditors of his estate.
For property transferred under a general power of appointment to be considered part of the
estate, it must be exercised by the decedent himself either:
1. By will; or
2. By deed executed
a. in contemplation of, or
b. 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 possess or enjoy the property or the income therefrom . (Sec. 85[D], NIRC)
Properties passing under GPA are not included as part of a decedents gross estate:
Those properties transferred (a) under a bona fide sale, and (b) for an adequate and full
consideration in money or moneys worth (Ibid.)
Note: (2) and (3) above contains words that are similar to the wordings of transfer in
contemplation of death. Just as in that case, apparent in this case that the decedent practically
did not part with his property until his death, for the general power of appointment exercised is
equivalent to ownership. In both cases, there was a transfer with retention or reservation of
certain rights.

General Power of Appointment


Property passed through this mode is included in
the Gross Estate of the transferor.
The donee has full dominion over the property as if
he owned it.
All attributes of ownership are transferred at the
time of death
The donee may appoint anyone, including his own
estate or his creditors.

Special Power of Appointment


Property passed through this mode is excluded in
the Gross Estate of the transferor.
The donee may appoint only amongst a restricted
or designated class of persons other than himself
Transferee is like a pass-through who has a
restricted dominion of such property
The donee may appoint only amongst a restricted
or designated class of persons other than himself.

Proceeds of Life Insurance (Sec. 85(E), NIRC)


The proceeds of the life insurance are taxable when ALL the following requisites concur:
1. It is taken out by the decedent himself
2. The life insurance is taken upon his own (decedents) life
3. The beneficiary is either:
a. The estate of the deceased, irrespective of whether or not the insured retained the power
of revocation, or
b. Any other beneficiary designated in the policy of insurance, when designated as
revocable. (Sec. 85(D), NIRC)
Proceeds of life insurance would NOT be taxable when any of the following requisites is missing,
or when provided by the special laws, as in the ff:

1. Proceeds of life insurance issued by the employer of the decedent on the life of the latter.
Since in this case the insurance policy is NOT taken out by the decedent himself, requisite #1
above would be lacking.
2. Beneficiaries other than the estate of the deceased, when designated as irrevocable. In this
case, requisite #3 mentioned above would be lacking.
3. Insurance policies exempt under special laws:
a. GSIS (P.D. 1146)
b. SSS (R.A. 1161)
c. Military personnel (R.A. 360)

Prior Interest (Sec. 85(F), NIRC)


All transfers, trusts, estates, interests, rights, powers and relinquishment of powers made,
created, arising existing, exercised or relinquished before or after the effectivity of the Tax Code.
(Sec. 85, NIRC)

Transfers for Insufficient Consideration (Sec. 85(G), NIRC)


There is transfer for an insufficient consideration if the consideration of the transfer is no made for
consideration in money or moneys worth, or when there is an inadequate consideration.

Only the excess of the fair market value of the property at the time of the decedents death
over the consideration received or the property to the extent of the decedents interest therein
shall be included in the gross estate.

This is applicable to:


1. Transfers in contemplation of death
2. Revocable transfers
3. Transfers under general power of appointment which are not bona fide sale for an adequate
and full consideration in money and moneys worth.

It is subject to donors tax if there is no reference to revocable transfer, transfers in


contemplation of death, or general power of appointment. It is subject to estate tax if the 3
instances mentioned are present. (Sec. 100 in relation to Sec 85[B], NIRC).

11. Deductions From Estate


Deductions from the Gross Estate (Sec. 86)
If the decedent is a resident citizen, non-resident
citizen, or resident alien

If the decedent is a non-resident alien

1. Expenses, losses,
indebtedness, and taxes
(ELIT):
a. Actual Funeral expenses
b. Judicial expenses for testamentary or intestate
proceedings
c. Claims against the estate
d. Claims against insolvent persons included in the
gross estate
e. Unpaid mortgages or indebtedness upon the
property
f. Losses incurred during the settlement of the estate
g. Unpaid taxes

1. Expenses, losses,
indebtedness, and taxes
(ELIT):
a. Actual Funeral expenses
b. Judicial expenses for testamentary or intestate
proceedings
c. Claims against the estate
d. Claims against insolvent persons included in the
gross estate
e. Unpaid mortgages or indebtedness upon the
property
f. Losses incurred during the settlement of the estate
g. Unpaid taxes

2.
3.
4.
5.
6.
7.
8.

Property previously taxed


Transfers for public use
The Family home
Standard deduction (1 Million)
Medical expenses
Amount received by heirs under R.A. No. 4917
(Retirement Benefits of Employees of Private Firms)
Net share of the surviving spouse in the conjugal
property

2.
3.
4.

Transfers for public use


Vanishing deductions for property in the Philippines
Net share of the surviving spouse in the conjugal
property

Limitation to the Non-resident Alien (Sec. 7 RR No. 2-03)


While only the gross-estate of the non-resident alien covers only income from within the
Philippines, his/her world-wide gross estate should likewise be declared for purposes of availing
the deductions based on Expenses, Losses, Indebtedness, and Taxes (Sec. 86(B)[1], NIRC).
Sec. 7 RR No. 2-03 provides for the manner of computation:
Phil. Gross Estate X ELIT =
World Gross Estate

Allowable
Deduction

1. Ordinary Deductions (ELIT)


a. Funeral Expenses
It includes:
1. Mourning apparel of the surviving spouse and unmarried minor children of the deceased,
bought and used in the occasion of the burial.
2. Expenses of the wake preceding the burial including food and drinks.
3. Publication charges for death notices.
4. Telecommunication expenses in informing relatives of the deceased.
5. Cost of burial plot. Tombstone monument or mausoleum but not their upkeep. In case
deceased owns a family estate or several burial lots, only the value corresponding to the plot
where he is buried a deductible.
6. Internment fees and charges.
7. All other expenses incurred for the performance of the ritual and ceremonies incident to the
internment (R.R. No. 2-03, promulgated December 16, 2002).
The amount deductible shall be the actual funeral expenses or 5% of the gross estate, whichever
is lower, and must not exceed P200,000.
Limitation
Any amount of funeral expenses in excess of the P200,000 threshold, whether the same had
actually been paid or still payable, shall not be allowed as a deduction (Sec 86(A)(1)[a]).
Items not deductible
Expenses incurred after the internment, such as for prayers, masses, entertainment, or the
like are not deductible.
Any portion of the funeral and burial expenses borne or defrayed by relatives and friends of
the deceased are not deductible.
Medical expenses as of the last illness will not form part of funeral expenses but should be
claimed as medical expenses under subsection (6) of this Section (Sec. 6(A)(1), R.R. No. 22003).

The expenses must be duly supported by receipts or invoices or other evidence to show that
they were actually incurred (RR-2-2003).
Medical expenses are allowed only if incurred by the decedent within one year prior to his
death. (Sec. 86[A][6], NIRC).

b. Judicial Expenses of the Testamentary or intestate proceedings


Expenses allowed as deduction under this category are those:
Incurred in the inventory-taking of assets comprising the gross estate,
Administration,
Payment of debts of the estate, as well as the distribution of the estate among the heirs.
In short, these deductible items are expenses but not beyond the last day prescribed by law, or
the extension thereof, for the filing of the estate tax return (Sec. 6 (A)(2), R.R. No. 2-03, promulgated
December 16, 2002).

Judicial expenses may include:


a. Fees of executor or administrator;
b. Attorneys fees;
c. Court fees;
d. Accountants fees;
e. Appraisers fees;
f. Clerk hire;
g. Costs of preserving and distributing the estate;
h. Costs of storing or maintaining property of the estate; and
i. Brokerage fees for selling property of the estate. (Sec. 6(A)(2), RR 2-2003)

Although tax code specifies judicial expenses of the testamentary or intestate proceedings,
there is no reason why expenses incurred in the administration and settlement of an estate in
extrajudicial proceedings should not be allowed. However, deduction is limited to such
administration expenses as are actually and necessarily incurred in the collection of the
assets of the estate, payment of debts, and distribution of the remainder among those entitled
thereto (CIR vs. CA and Pajonar, G.R. No. 123206, March 22, 2000).
Attorneys fees in order to be deductible from the gross estate must be essential to the
collection of assets, payment of debts or the distribution of property to the person entitled to
it. The services for which the fees are charged must relate to the proper settlement of the
estate. (CIR vs. CA and Pajonar, G.R. No. 123206, March 22, 2000).]

However, the following are not allowed:


Expenditures incurred for the individual benefit of the heirs, devisees or legatees are not
deductible (CIR vs. CA and Pajonar, GR No. 123206, March 22, 2000).
Compensation paid to a trustee of the decedents estate when it appeared that such trustee
was appointed for the purpose of managing the decedents real estate for the benefit of the
testamentary heir (Lorenzo vs. Posadas, 64 Phil 353, cited in Pajonar).
Premiums paid on the bond filed by the administrator as an expense of administration since
the giving of bonds is in the nature of a qualification for the office, and not necessary in the
settlement of the estate (Sison vs. Teodoro, 100 Phil. 1055, cited in Pajonar).
Neither may attorneys fees incident to litigation incurred by the heirs in asserting their
respective rights be claimed as a deduction from the gross estate. (Johannes vs Imperial, 43
Phil 597 (1922))

c. Claims against the estate


The word claim is generally construed to mean debts or demands of a pecuniary nature which
could have been enforced against the deceased in his lifetime and could have been reduced to
simple money judgments.
Claims against the estate or indebtedness in respect of property may arise out of:
1. Contract;
2. Tort; or
3. Operation of Law. (Sec. 6 (A)[3], R.R. No. 2-2003)

Date-of-death Valuation Rule where a lien claimed against the estate was certain and
enforceable on the date of the decedents death, the fact that the claimant subsequently
settled for lesser amount did not preclude the estate from deducting the entire amount of the
claim for estate tax purposes. These pronouncements essentially confirm the general
principle that post-death developments are not material in determining the amount of the
deduction (Dizon vs. CTA, G.R. No. 140944, April 30, 2008).
The appropriate deduction is the value that the claim had at the decedents death. (Smith vs
CIR, 82 TCM 909, 2001 US case)

The claims against the estate which the law allows as deduction from the gross estate are
existing claims against the estate. An indebtedness that has been condoned is in legal effect
no indebtedness at all. If there is no more indebtedness by reason of the condonation, there
is no more claim against the estate which may be allowed as a deduction. (Dizon, et. al v. CA,
G.R. No.140944, Apr. 30, 2008)

Requisites for deductibility:


1. 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;
2. The liability was contracted in good faith and for adequate and full consideration in money or
moneys worth;
3. The claim must be a debt or claim which is valid in law and enforceable in court;
4. The indebtedness must not have been condoned by the creditor or the action to collect from
the decedent must not have prescribed (Sec. 6(A)[3], R.R. No. 2-2003).
d. Claims against insolvent person
Requisites:
The amount thereof has been initially included as part of his gross estate.

The incapacity of the debtors to pay their obligation is proven and not merely alleged.
(Monserat vs. Collector, CTA Case No. 11, December 28, 1955, as cited in Mamalateo, Reviewer in
Taxation, at p. 291)

Judicial declaration of insolvency is not necessary. It is enough that the debtors liabilities
exceeded his assets.
e. Unpaid mortgages
Requisites for deductibility:
1. In all instances:
a. The value of the property, undiminished by such mortgage or indebtedness is included in
the gross estate; and
b. The mortgage indebtedness was contracted in good faith and for an adequate and full
consideration in money or moneys worth;
2. In case unpaid mortgage payable is being claimed by the estate, verification must be made
as to who was the beneficiary of the loan proceeds;
3. If the loan is found to be merely an accommodation loan where the loan proceeds went to
another person, the value of the unpaid loan must be included as a receivable of the estate;
and
4. If there is a legal impediment to recognize the same as receivable of the estate, said unpaid
obligation/ mortgage payable shall not be allowed as a deduction from the gross estate.
(Section 86(A)(1))(e),NIRC)

5. In all instances, the mortgaged property, to the extent of the decedents interest therein,
should always form part of the gross taxable estate. (Sec. 6(A)[5], R.R. 2-03)
f. Taxes
Taxes which have accrued as of the death of the decedent which were unpaid as of the time of
death. This deduction will not include the following taxes Sec. 6(A)(5), RR 2-2003:
a. Income tax upon income received after death, or
b. Property taxes not accrued before his death, or the
c. Estate tax due from the transmission of his estate.
The following are not deductible:
Income tax on income received after death
property taxes not accrued before death
estate tax (Sec. 6(A)[5], R.R. 2-03)
g. Casualty Losses
There shall also be deducted losses incurred during the settlement of the estate arising from fires,
storms, shipwreck, or other casualties, or from robbery, theft or embezzlement, when such losses
are not compensated for by insurance or otherwise, and if at the time of the filing of the return
such losses have not been claimed as a deduction for income tax purposes in an income tax
return, and provided that such losses were incurred not later than the last day for the payment of
the estate tax as prescribed in Subsections (A) and (B) of Section 91. Sec. 6(A)(5), RR 2-2003
Requisites:
It should arise from fire, storm, shipwreck, or other casualty, robbery, theft or embezzlement;
Not compensated by insurance or otherwise;
Not claimed as deduction in an income tax return of the taxable estate;
Incurred during the settlement of the estate; and
Occurred before the last day for the payment of the estate tax (last day to pay: six months
after the decedents death) (Sec. 6(A)[5], R.R. 2-03).
Casualty loss can be allowed as deduction in one instance only, either for income tax purposes or
estate tax purposes.
2. Special Deductions
a. Property Previously Taxed (PPT) Vanishing Deduction
For property previously taxed to be deductible under this section, the following requisites must
concur:
1. The decedent must have previously acquired the property either by:
a. Donation, or
b. Succession
2. The time interval between the:
a. Death of the previous decedent, OR the donation, and the
b. Death of the current decedent, must be at most five (5) years.
3. The property must be situated in the Philippines.
4. The previous Estate tax or Donors tax must have been previously paid
5. There was no previous vanishing deduction on the property
The provision is commonly called the vanishing deduction because as time goes by, the amount
of deductible tax that was previously paid also diminishes, based on the table below:
PERIOD

DEDUCTION

Within 1 year or less

100%

More than 1 year but not more than 2 years


More than 2 years but not more than 3 years
More than 3 years but not more than 4 years
More than 4 years but not more than 5 years

80%
60%
40%
20%

The purpose of vanishing deduction is to lessen the harsh effects of double taxation.
In property previously taxed, there are two (2) transfers of property. Within a period of 5
years, the same property has been transferred from the first to the second decedent or from a
donor to the decedent. In such case, the first transfer has been subject to a transfer tax. The
second transfer would now be subject to a vanishing deduction as provided in the code.

b. Transfer for Public Use


Requisites:
1) The disposition is in a last will and testament
2) To take effect after death
3) For the use of the government of the Philippines, or any political subdivision thereof
4) For exclusive public purposes (Sec. 86 (A) (32), NIRC)
Note: This provision should be construed with Sec. 87(D), providing for an exclusion of all
bequests, devices, or transfers to social welfare, cultural and charitable institutions, where not
more than 30% of said bequests, devises, legacies or transfers were be used by such institutions
for administration purposes. In Sec. 87 (D), the primary determining factor is the recipient, while
it is the use in Sec. 86 (A) (3).
Sec. 86(A)(3)
It contemplates transfers
by a citizen or resident of
the Philippines in favor of
the Government of the
Philippines
or
any
political
subdivision
thereof,
for
public
purpose
which
is
deducted from the gross
estate.

Sec. 87(D)
It contemplates transfers
to social welfare, cultural
and charitable institutions
which are exempted from
estate tax.

c. Family Home
Family home is the dwelling house, including the land where it is situated where the married
person or an unmarried head of the family and his family resides.
Family home is deemed constituted on the house and lot from the time that it is constituted as
a family residence and is considered as such so long as any of the beneficiaries actually
resides therein.
Requisites for deductibility:
1. The family home must be the actual residential home of the decedent and his family at the
time of his death, as certified by the Barangay Captain of the locality where the family home
is situated;
2. The total value of the family home must be included as part of the gross estate of the
decedent; and
3. Allowable deduction must be in the amount equivalent to:
a. the current FMV of the family home as declared or included in the gross estate, or
b. the extent of the decedents interest (whether conjugal/community or exclusive property),
whichever is lower, but not exceeding P1,000,000.
The family home must be part of the properties of either:

1. The absolute community or of the conjugal partnership, or of


2. The exclusive properties of either spouse depending upon the classification of the property
(family home) and the property relations prevailing on the properties of the husband and wife,
or
3. An unmarried head of a family on his or her own property. (Sec. 6(D)(a), RR 2-2003)
Note: in case it falls within number (1) above, only half not to exceed P1 Million, may be allowed
as a deduction. This is because in reality only that half forms part of the estate of the decedentspouse.
Actual occupancy of the house or house and lot as the family residence shall not be
considered interrupted or abandoned in such cases as the temporary absence from the
constituted family home due to travel or studies or work abroad, etc. (Sec. 6(D)(a), RR 2-2003).
Thus, while an overseas foreign worker (OFW) is considered a non-resident citizen of the
Philippines, in his estate may be deducted the family home.
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)(a), R.R. No. 22003).

For purposes of availing of a family home deduction to the extent allowable, a person may
constitute only one family home.
The estates of non-resident decedents are not allowed to avail the family home deduction
because they do not have a family home in the Philippines since they are non residents.

d. Standard Deduction
A deduction in the amount of One Million Pesos (P1,000,000) shall be allowed as an additional
deduction without need of substantiation. The full amount of P1,000,000 shall be allowed as
deduction for the benefit of the decedent (Sec. 86 (A)[5]).
Nonresident alien-decedent are not entitled to standard deduction because it is not among those
enumerated under Sec. 86 (b) of the NIRC.
e. Medical Expenses
All medical expenses (cost of medicines, hospital bills, doctors fees, etc.) incurred (whether paid
or unpaid) with one (1) year before the death of the decedent shall be allowed as a deduction
provided:
a. that the same are duly substantiated with official receipts for services rendered by the
decedents attending physicians, invoices, statements of account duly certified by the
hospital, and such other documents in support thereof
b. the total amount thereof, whether paid or unpaid, does not exceed Five Hundred Thousand
Pesos (P500,000).
Limitation
Any amount of medical expenses incurred within one year from death in excess of Five Hundred
Thousand Pesos (P500,000) shall no longer be allowed as a deduction under this subsection.
Neither can any unpaid amount for medical expenses incurred prior to the one-year period from
date of death be allowed to be deducted from the gross estate as claim against the estate (Sec.
6(f), R.R. No. 2-2003).
f. Amounts Received by Heirs under RA 4917
Any amount received by the heirs from the decedents employer as a consequence of the death
of the decedent-employee in accordance with Republic Act No. 4917 is allowed as a deduction
provided that the amount of the separation benefit is included as part of the gross estate of the
decedent (Sec. 6(G), RR 2-2003).
It is an Act providing that the retirement benefits of employees of private firms shall not be
subject to attachment, levy, execution, or any tax whatsoever.

It provides that retirement benefits received by officials and employees of private firms,
whether individual or corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall not be liable to
attachment, garnishment, levy or seizure by or under any legal or equitable process
whatsoever except to pay a debt of the official or employee concerned to the private benefit
plan or that arising from liability imposed in a criminal action.

Requisites for deductibility:


1. Amounts received by the heirs from the decedents employer;
2. Received as a consequence of the death of the decedent-employee; and
3. Amount is included in the gross estate of the decedent. (Sec. 86[A][7], NIRC)
4.
12. Exclusions from Estate
In deductions, the deductible items should have been first included in the gross estate of the
decedent before actually subtracted. Exclusions, as distinguished from deductions, are not
included at all in the gross estate.
The following are excluded from the Gross Estate
a) The capital (exclusive property of the surviving spouse)
b) GSIS proceeds/benefits
c) Accrual from SSS
d) Proceeds of life insurance where the beneficiary is irrevocably appointed
e) War damage payments
f) Transfer by way of boba fide sales
g) Properties held in trust by the decedent
h) Acquisition and/or transfer expressly declared as not taxable
Properties excluded under Special Laws:
1. Benefits received by members from the Government Service Insurance System (PD 1146)
and the Social Security System (RA 1161, as amended) by reason of death.
2. Amounts received from the Philippine and United States governments for damages suffered
during the last war (RA 227).
3. Benefits received by beneficiaries residing in the Philippines under laws administered by the
U.S. Veterans Administration (RA 360).
4. Bequests, legacies or donations mortis causa to social welfare, cultural, or charitable
organizations (PD 307); but bequests to religious and educational institutions are not exempt .
(BIR Ruling 75-001, Jan. 15, 1975).
5.

Grants and donations to the Intramuros Administration (PD 1616). (Mamalateo, Reviewer in
Taxation, 2008 pp. 288-289).

13. Tax Credit for Estate Taxes Paid in a Foreign Country


TAX CREDIT- Estate tax paid to a foreign country
Formula:
Gross Estate
Deductions
Taxable Net Estate
x Tax Rate
Estate Tax Due
Tax Credit (if any)
NET TAX DUE

It is a remedy against international double taxation to minimize the onerous effect of taxing
the same property twice.

Only the estate of a citizen or a resident alien at the time of death can claim tax credit for any
estate taxes paid in a foreign country.

Limitations on estate tax credit:


1. 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 decedents net estate
situated within such country taxable under the NIRC bears to his entire net estate (per
country basis); and
2. The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which the decedents net estate situated outside the Philippines taxable
under the NIRC bears to his entire net estate (overall basis)
3.
14. Exemption of Certain Acquisitions and Transmissions
Under Sec. 87 of NIRC, the following are exempted from the gross estate of the decedent:
1. The merger or usufruct in the owner of the naked title.
2. Fideicommissary substitutions.
Provided that:
a. the substitution must not go beyond one degree from the heir originally instituted
b. the fiduciary or the first heir must be both living at the time of death of the testator.
Transmission in accordance with the predecessors desire.
3. Transfers for social welfare, cultural, and charitable institutions.
Provided that:
a. no part of the net income of which inures to the benefit of any individual; and
b. Not more than thirty percent (30%) of the said bequests, devises, legacies or transfers
shall be used by such institutions for administration purposes.
15. Filing of Notice of Death
Notice of death is required to be filed in all cases of transfer subject to tax or where, though
exempt from tax, the gross value of the estate exceeds P20,000.
Sec. 89 used the word, gross; meaning, the value of the estate before deductions were
made. It also added the phrase, though exempt from tax. Apparently, even the exclusions
are to be included in the value of the gross estate, but only for purposes of determining
whether or not there should be a notice of death.
Such notice is to be filed by the executor, administrator, or any of the legal heirs, within two
months after either:
1. The decedents death, or
2. After qualifying as such executor or administrator.
Such notice must be in writing and given to the Commissioner.

16. Estate Tax Return


An Estate Tax Return is required when either:
1. The gross value of the estate exceeds P200,000; or
2. Regardless of the gross value of the estate, where the estate consists of registered or
registrable property such as motor vehicle or shares of stock or other similar property for
which clearance from the BIR is required as a condition precedent for the transfer of
ownership thereof in the name of the transferee. (Sec. 90[A], NIRC)

The properties that need clearance from the BIR, called the certificate authorizing
registration, or CAR, before transfer includes but is not limited to the following (Sec. 97,
NIRC):

1. Real property, where registration is done with the register of deeds;


2. Motor vehicle, where registration is done with the Land Transportation Office (LTO);
3. Shares of stock, where the corporate secretary is not authorized to make changes without a
clearance from the BIR.
Time of Filing:
The estate tax return is required to be filed within 6 months from the decedents death (Sec.
90[B], NIRC). An extension to file an estate tax return is allowed in meritorious cases but not to
exceed 30 days. (Sec. 90[C], NIRC)
Who shall file the estate tax return:
1. Executor
2. Administrator
3. Any legal heir
Contents of estate tax return
Must be under oath and shall contain the following:
1. The value of the gross state of the decent at the time of his death or in case of a nonresident, not a citizen of the Philippines, the part of his gross estate situated in the
Philippines.
2. The deductions allowed from the gross estate in determining the estate.
3. Such part of the information as may at the time be ascertainable and such supplemental data
as may be necessary to establish the correct taxes. (Sec. 90[A], NIRC)
Requirements in case the gross estate exceeds P2,000,000:
The estate tax return shall be accompanied by a statement which is certified by an independent
CPA which shall contain the following:
1. Itemized assets of the decedent with its corresponding gross value at the time of resident, not
a citizen of the Phil, the part of his gross estate situated in the Philippines;
2. Itemized deduction from the gross estate; and
3. The amount of the tax due whether paid or still due and outstanding. (Sec. 90[A], NIRC)
20-200-2 million Rule:
For easier recall and correlation, the 20-200-2M summarizes the requirements for each threshold
amount of the estate, to wit:
1. Where the gross estate exceeds Php 20,000, a notice of death is required;
2. Where the gross estate exceeds Php 200,000, an estate tax return is required; and
3. Where the gross estate exceeds Php 2,000,000, such return shall be supported with a
statement duly certified to by a Certified Public Accountant (CPA).
Prohibition from withdrawing funds in the bank account of a deceased depositor:
General rule:
If the bank has knowledge of the death of the person who maintains a bank deposit alone or
jointly with another, it shall not allow any withdrawal from said deposit account unless the CIR has
certified that estate taxes have been paid. (Sec. 97, NIRC)
Exception:
The CIR may allow the administrator or anyone of the heirs to withdraw an amount not exceeding
20,000 without the certification that estate taxes have been paid.
Place of Filing:
1. If it is a resident decedent the administrator or executor 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 and pay with the authorized agent bank, RDO, Collection Officer, or
duly authorized Treasurer in the city or municipality where the decedent was domiciled at the
time of his death.
2. If it is a non-resident decedent the estate tax return shall be filed with and the TIN for the
estate shall be secured from the RDO where the executor or administrator is registered. In
case 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 jurisdiction over the
executor or administrators legal residence. Nonetheless, in case when the decedent has no
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 CIR through RDO 39. (Sec. 9[C], RR
2-2003)

Time of Payment
Pay as you file procedure, within 6 months from the decedents death; a reasonable
extension of 30 days for filing of the return may be granted by the Commissioner in
meritorious cases.
When the Commissioner of the BIR shall find that the payment on the due date will impose
undue hardship upon any heir, he may extend the time for payment up to a maximum of 5
years in case the estate is settled judicially or in 2 years in case the estate is settled extrajudicially.
If an extension is granted, the Commissioner may require the executor or administrator or
beneficiary to furnish a bond in such amount not exceeding double the amount of the tax and
with such sureties as the commissioner deems necessary. Also, the prescriptive period to
asses any deficiency tax under Sec. 203 of the Tax Code is suspended.
Where the taxes are assessed by reason of negligence, intentional disregard of rules and
regulations, or fraud on the part of the taxpayer, no extension will be granted by the
Commissioner.
Ground

Extension of time to file


Meritorious cases

Time limit

Not to exceed 30 days

Effect

Does not suspend

Extension of time to pay


When 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
Extension of time not to exceed
either:
5 yrs, in cases of judicial
settlement, or
2 yrs, in cases of extra-judicial
settlement.
Suspends
the
period
for
assessment

Who is liable to pay?


1. The executor or administrator, before delivery to any beneficiary of his distributive share.
2. The beneficiary, to the extent of his distributive share in the estate, shall be subsidiarily liable
for the payment of such portion of the estate tax as his distributive share bears to the value of the
total net estate. [Sec. 91 (C) NIRC]

When an estate is under administration, notice must be sent to the administrator of the
estate, since it is the said administrator, as representative of the estate, who has the legal
obligation to pay and discharge all debts of the estate and to perform all orders of the court
(Estate of Vda De Gabriel vs. CIR, G.R. No. 155541 dated January 27, 2004).
In the case of Republic vs. De le Rama (124 Phil. 1493), legal notice of the assessment was
sent to two heirs, neither one of whom had any authority to represent the estate.

The probate court is not the government agency to decide whether an estate is liable for
payment of estate of income taxes, and taxes charged against the estate of the decedent are
exempted from the application of the statute of non-claims. (Marcos II vs CA 273 SCRA 47)

C. Donors Tax
1

Basic principles
Donors tax shall be imposed upon the transfer by any person, Resident or Non-resident, of
any property by gift.
Tax shall apply whether the property is by trust by or otherwise and whether the gift is direct
or indirect and whether the property is real or personal, tangible or intangible.
The law in force at the same time of the perfection/completion of the donation shall govern
the imposition of the Donors Tax.
The Donors Tax is imposed on Donations inter vivos
Donations mortis causa partake of the nature of testamentary dispositions and are subject to
estate tax.

2 Definition
Donation is an act of liberality whereby a person (donor) disposes gratuitously of a thing or right
in favor of another (donee) who accepts it. (Art. 725, Civil Code)
Donors tax- An excise tax imposed on the privilege to transfer property by way of gift inter vivos
based on a pure act of liberality without any or less than adequate consideration and without any
legal compulsion to give.
The Tax Reform Act of 1997 does not provide a definition of donors tax. It simply subjects a gift
to donors tax. According to Article 725 of the Civil Code, a gift or donation is an act of liberality
whereby a person disposes gratuitously of a thing or right in favor of another who accepts it.
A gift that is incomplete because of reserved powers becomes complete when either:
1. the donor renounces the power; or
2. his right to exercise the reserved power ceases because of the happening of some event or
contingency or the fulfillment of some condition, other than because of the donors death.

Donors tax is not a property tax, but is a tax imposed on the transfer of property by way of
gift inter vivos (Sec. 11, Revenue Regulations 2-2003, promulgated December 16, 2002, citing Lladoc
vs. CIR, 14 SCRA 292, June 16, 1965).

3. Nature
It is an excise tax on the privilege of the donor to give or on the transfer of property by way of
gift inter vivos. It is not a property tax. (Sec. 11, RR No. 2-2003)

The fact that his services contributed in a large measure to the success of the company did
not give rise to a recoverable debt, and the conveyances made by the company to his heirs
remain a gift or a donation. The companys gratitude was the true consideration for the
donation, and not the services themselves. Thus, subject to donors and donees tax (Pirovano
vs. CIR, G.R. No. L- 19865, July 31, 1965).

A gift tax is not a property tax, but an exercise tax imposed on the transfer of property by way
of gift inter vivos, the imposition of which on property used exclusively for religious purposes,
does not constitute an impairment of Constitution. The phrase exempt from taxation as
employed in the Constitution should not be interpreted to mean exemption from all kinds of
taxes (Lladoc vs. CIR and CTA, G.R. No. L-19201, June 16, 1965).

4. Purposes or Object

a
b
c
d
e

To raise revenues;
To tax the wealthy and reduce certain excise taxes;
To discourage inter vivos transfers of property which could reduce the mortis causa transfer
on which a higher tax would be collected;
To reduce the incentive to make gifts in order that distribution of future income from the
donated property may be to a number of persons with the result that the taxes imposed tax
are avoided.
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 taxation.

5. Requisites of a Valid Donation


a Capacity of the donor
All persons who may contract and dispose of their property may make a donation (Art 735, NCC).
The donors capacity shall be determined as of the time of the making of the donation (Art. 737,
NCC)

b Donative intent
Donative intent is necessary only in cases of direct gift. If the gift is indirectly taking place by way
of sale, exchange or other transfer of property as contemplated in cases of transfers for less than
adequate and full consideration (Sec. 100, NIRC), not always essential to constitute a gift.
c Delivery, whether actual or constructive
There is delivery if the subject matter is within the control and dominion of the donee.
d Acceptance by the donee
The acceptance is necessary because nobody is obliged to receive a gift against his will. And
once the acceptance is made known to the donor, the will of the donor and donee concur, and the
donation, as a mode of transferring ownership, becomes perfect. (Osorio vs Osorio, G.R. No. L16544, March 30, 1921)

The donors tax shall not apply unless and until there is a completed gift. The transfer is perfected
from the moment the donor knows of the acceptance by the donee; it is completed by the
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 shall govern the imposition of the
donors tax.
e

Form prescribed by law

6. Transfers which may be Constituted as Donation


a

Sale/Exchange/Transfer of property for insufficient consideration

General Rule: The property is transferred for less than adequate and full consideration in money
or moneys worth, the amount by which the FMV exceeds the consideration shall be deemed a
gift and be included in computing the amount of gifts made during the year. It is as if the property
was donated but in order to avoid paying donors tax, the donor opted to transfer the property for
inadequate consideration.
Exception: Where property transferred is real property located in the Philippines considered as
capital asset, the donors tax is not applicable but the final income tax of 6% of the fair market
value or gross selling price, whichever is higher.

Rationale: the NIRC considers the transfer as a donation since what motivated the transferor in
transferring his property is his generosity.
Where the consideration is fictitious, the entire value of the property transferred shall be subject
donors tax. (De Leon and De Leon, Jr.,The National Internal Revenue Code, Vol. I, 2011 ed., p. 760)
b Condonation/Remission of debt
If the creditor condones the indebtedness of the debtor the following rules apply:
1. On account of debtors services to the creditor the same is in taxable income to the debtor.
2. If no services were rendered but the creditor simply condones the debt, it is taxable gift and
not a taxable income.
7. Transfer for Less than Adequate and Full Consideration (See discussion on
Sale/Exchange/Transfer of property for insufficiency consideration)

The element of donative intent is conclusively presumed in transfers of property for less than
an adequate or full consideration in money or moneys worth. In this case, the difference
between the fair market value of the gift or donation and the actual value received shall
constitute the gift. However, real property considered capital assets under the Tax Code are
excepted from this rule. (Section 100 in relation to Section 24(d))
Where property, other than a real property that has been subjected to the final capital gains
tax, is transferred for less than an adequate and full consideration in money or moneys
worth, then the amount by which the fair market value of the property at the time of the
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 No. 22003)

8. Classification of Donor
Who are taxpayers?
a Resident Citizen (RC),
b Non-resident Citizen (NRC),
c Resident Alien (RA),
d Non-resident Alien (NRA),
e Domestic Corporation (DC),
f
Foreign Corporation (FC).
Note: A corporation, whether domestic or foreign, is included since it is capable of entering into a
contract of donation, through a Board Resolution.
9. Determination of Gross Gift
All property, real or personal, tangible or intangible, that was given by the donor to the donee by
way of gift, without the benefit of any deduction. (Sec. 104, NIRC)
All gifts made directly or indirectly whether in trust or otherwise as long as there is no
consideration or the same is gratuitously made shall form part of a donation.
10. Composition of Gross Gift
The term gross gifts shall include the transfer by any person, resident or non-resident, of the
property by gift, regardless of whether:
1 Transfer of gift is in trust or otherwise,
2 The gift was given:
a Directly (e.g. donation) or

b Indirectly (e.g. transfer for Less Than Adequate & Full Consideration [Sec. 100])
The property subject of the gift is real or personal, tangible or intangible (The property subject
of donors tax depends on the identity of the donor, whether it be a citizen, resident alien, or
non-resident alien (Sec. 98 in relation to Sec. 104).

RESIDENT & NON-RESIDENT CITIZEN,


RESIDENT ALIEN DONOR
Real property not only within the Philippines
but also in foreign countries (wherever
situated)
Personal property, tangible or intangible,
not only within the Philippines but also in
foreign countries (wherever situated)

NON-RESIDENT ALIEN DONOR


Real property situated in the Philippines.
Personal property
Tangible property situated in the Philippines
Intangible personal property with a situs in the Philippines
unless there is reciprocity, in which case it is not
taxable. (Sec. 104 of the NIRC)

Tax Exempt Net Gift (Sec. 99)


NET GIFT shall mean the net economic benefit from the transfer that accrues to the donee.
Accordingly, if a mortgaged property is transferred as a gift, but imposing upon the donee the
obligation to pay the mortgage liability, then the net gift is measured by deducting from the fair
market value of the property the amount of mortgage assumed (Sec. 11, RR 2-2003).
Stranger vs. Relative (Sec. 99)
Stranger a person who is not a brother, sister (whether by whole or half-blood), spouse,
ancestor and lineal descendant, or of a relative by consanguinity in the collateral line within the 4 th
civil degree.
The relatives considered by the tax code are as follows:
1 Brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant; or
2 Relative by consanguinity in the collateral line within the fourth degree of relationship.
The degree of relationship (4th degree limit) is material only with respect to collateral relatives.
There is no limit with respect the number of degrees of relationship with respect to ancestor or
lineal descendants. A legally adopted child is entitled to all the rights and obligations provided by
law to legitimate children, and therefore, donation to him shall not be considered as donation
made to stranger. (Sec. 10(B), R.R. No. 2-2003) An obligation imposed by law, such as the support
given by the parent to a child, is not subject to donors tax.
Donation made between business organizations and those made between an individual and a
business organization shall be considered as donation made to a stranger (Sec. 10(B), R.R. No. 22003) Thus, the applicable tax rate would always be 30% of the net gifts, pursuant to Sec. 99(B) of
the NIRC.
11. Valuation of Gifts Made in Property
Personal property: FMV at the time of the donation.
Real property: FMV as determined by the Commissioner (zonal value) or the FMV in the latest
schedule of values of the provincial or city assessor (indicated in the latest tax declaration),
whichever is HIGHER.
12. Tax Credit for Donors Taxes Paid in a Foreign Country
The donors tax imposed upon a citizen or resident at the time of the donation shall be credited
with the amount of any donors tax, of any character and description, imposed by the authority of
a foreign country. (Sec. 101(C) NIRC)
Limitations on Tax Credit

The amount of 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 decedents net gifts
situated within such country taxable under the NIRC bears to his entire net gifts; and;
The total amount of the credit shall not exceed the same proportion of the tax against which
the decedents net gift situated outside the Philippines taxable under the NIRC bears to his
entire net gift.

Note: This tax credit is allowed only for residents and citizens of the Philippines for the donors
taxes they paid in a foreign country.
Formulas:
For donors taxes paid to one foreign country
Allowable final tax credit =
The lower amount between:
a Tax actually paid to be the foreign country
b The amount derived from this formula:
Net gifts, Foreign Country x Phil. Donors Tax
Net gifts, World
For donors taxes paid to 2 or more foreign countries, the lower amount between limitation A and
B.

a Limitation A (per country)


The lower amount between the actual foreign taxes paid to each country and the amount derived
from the formula below:
Net gifts, Foreign Country x Phil. Donors Tax
Net gifts, World
b Limitation B (by total):
The lower amount between the sum of the actual taxes paid to ALL foreign countries and the
answer to the formula below:
Net gifts, Foreign Country x Phil. Donors Tax
Net gifts, World
13. Exemptions of Gifts From Donors Tax
Exempt Transfers
a If the decedent at the time of his death or the donor at the time of the donation was a citizen
and resident of a foreign country which at the time of his death or donation did not impose a
transfer tax of any character, in respect of intangible personal property of citizens of the
Philippines not residing in that foreign country,
b If the laws of the foreign country of which the decedent or donor was a citizen and resident at
the time of his death or donation allows a similar exemption from transfer or death taxes of
every character or description in respect of intangible personal property owned by citizen of
the Philippines not residing in that foreign country.
Exempt Donations
1 Gifts Made By Resident

a
b
c
d
e

Dowries or gifts on account of marriage and before its celebration or within 1 year thereafter
by parent to each of their legitimate, recognized natural, or adopted children to the extent of
the first P10,000.
Gifts made to or for the use of national government or any entity created by its agency which
is not conducted for profit, or any political subdivision of the said government.
Gifts made in favor of educational and or charitable, religious, cultural, social welfare
institution, provided however not more than 30% of the said donation is devoted by the donee
for administrative purposes.
Athletes prizes and awards given to athletes in local and international tournaments and
competitions held in the Philippines or abroad; and sanctioned by their respective sport
association. (Sec. 1, R.A. 7549)
Exempted from donors tax under other special laws:

1. International Rice Research Institute (IRRI)


2. Ramon Magsaysay Award Foundation
3. Philippines Inventors Convention (PIC)
4. Integrated Bar of the Philippines (IBP)
5. the Development Academy of the Philippines
6. Aquaculture Department of the Southeast Asian Fisheries
7. Development Center of the Philippines
8. National Museum
9. National Library
10. National Social Action Council
11. Philippine American Cultural Foundation
12. Task Force on Human Settlement on the donation of equipment, materials, and services
13.
Gifts Made By Non-resident Alien
a Gifts made to or for the use of national government or any entity created by its agency which
is not conducted for profit, or any political subdivision of the said government.
b Gifts made in favor of educational and or charitable, religious, cultural, social welfare
institution, accredited NGO, trust or philanthropic organization for research institution,
provided however that not more than 30% of the said donation is devoted by the donee for
administrative purposes.
Exemption of Certain Gifts
The recognized natural children are illegitimate children. When the donation of property is made
by the spouses, both are entitled to a deduction of the first ten thousand pesos. The deduction
shall apply only to donations made to their child on account of marriage. With respect to the
childs spouse, he/she is considered as stranger and no deduction shall be allowed.
When the donation on account of marriage is done BEFORE its celebration, there is no time limit
as to when the donation should be made. When it is made AFTER its celebration, then such
donation must be made within one year thereafter.
Rule on Political Contributions (Sec. 99 (C))
Any contribution in cash or in kind to any candidate, political party, or coalition of parties for
campaign purposes, reported to COMELEC shall not be subject to payment of any gift tax (Sec.
99[C], NIRC; RR 2 2003)

The election law involved on the matter is Republic Act No. 7166, promulgated November 23,
1991, particularly Sec. 13 and 14.
Section 13. Authorized Expenses of Candidates and Political Parties. The agreement
amount that a candidate or registered political party may spend for election campaign shall be as
follows:

For candidates. Ten pesos (P10.00) for President and Vice-President; and for other
candidates Three Pesos (P3.00) for every voter currently registered in the constituency where
he filed his certificate of candidacy: Provided, That a candidate without any political party and
without support from any political party may be allowed to spend Five Pesos (P5.00) for every
such voter; and
For political parties. Five pesos (P5.00) for every voter currently registered in the
constituency or constituencies where it has official candidates.

Any provision of law to the contrary notwithstanding any contribution in cash or in kind to any
candidate or political party or coalition of parties for campaign purposes, duly reported to the
Commission shall not be subject to the payment of any gift tax.
Section 14. Statement of Contributions and Expenditures: Effect of Failure to File
Statement. Every candidate and treasurer of the political party shall, within thirty (30) days after
the day of the election, file in duplicate with the offices of the Commission the full, true and
itemized statement of all contributions and expenditures in connection with the election.
General Rule:
Campaign contributions are not included in the taxable income of the candidate to whom they
were given, the reason being that such contributions were given not for the personal expenditure/
enrichment of the concerned candidate, but for the purpose of utilizing such contributions for
his/her campaign. Thus, to be considered as exempt from income tax, these campaign
contributions must have been utilized to cover a candidates expenditures for his/her electoral
campaign (Sec. 2, RR No. 7-2011, February 16, 2011).
Exception:
Unutilized/excess campaign funds, that is, campaign contributions net of the candidates
campaign expenditures, shall be considered as subject to income tax, and as such, must be
included in the candidates taxable income as stated in his/her Income Tax Return (ITR) filed
for the subject taxable year (Sec. 2, RR No. 7-2011, February 16, 2011).
No corporation, domestic or foreign, shall give donations in aid of any political party or
candidate or for purposes of partisan political activity. (Sec. 36, Corporation Code)
Political contributions made prior to the passage pf RA 7166 on November 25, 19991 were
subject to donors tax. (Abello vs CIR, G.R. No. 129721, February 23, 2005)
Renunciation of share in the conjugal partnership/absolute community
Renunciation by the surviving spouse of his/her share in the conjugal partnership or absolute
community after the dissolution of the marriage in favor of the heirs of the deceased spouse or
any other person/s is subject to donors tax.
Whereas general renunciation by an heir, including the surviving spouse, of his/her share in the
hereditary estate left by the decedent is not subject to donors tax, unless specifically and
categorically done in favor of identified heir/s to the exclusion or disadvantage of the other coheirs in the hereditary estate (Sec. 11, Rev. Reg. 2-2003).
Donations between spouses
General Rule:
Donations during marriage is void. (Art. 87, NCC)
Void donations are not subject to donors tax. However, if it was already paid, taxpayer only have
two years from the date of payment to ask or file for a claim for refund, regardless of any
supervening event.
Exceptions:
a Donations mortis causa

Moderate gifts which the spouses may give each other on the occasion of any family
rejoicing.

Donations by one of the spouses


If what was donated is a conjugal or community property and only the husband signed the deed
of donation, there is only one donor for donors tax purposes, without prejudice to the right of the
wife to question the validity of the donation without her consent. (Sec. 12, RR No. 2-2003)
Husband and wife are considered separate and distinct taxpayers for purposes of donors tax.
14. Person Liable
Any person making a donation unless the donation is specifically exempted under NIRC or other
special laws, is required for every donation to accomplish under oath a donors tax return in
duplicate.
15. Tax Basis
Rate of Tax
Depends if donee or beneficiary is:
Not a Stranger
From 2% to a maximum of 15% of the net gift
(See rates under Sec. 99, NIRC)

Stranger
30% of the net gifts

Filing of Return and Payment of Tax


Requirements:
Any individual who makes any transfer by gift (except those which, under Section 101, are
exempt from the Donors tax) shall make a return under oath in duplicate. The return shall set
forth:
1 Each gift made during the calendar year which is to be included in computing net gifts;
2 The deductions claimed and allowable;
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; and
6 Such further information as may be required by rules and regulation made pursuant to law
(Sec. 103. [A]).

Time of Filing
Within thirty (30) days after the date the gift is made and the tax due thereon shall be paid at the
time of filing (Sec. 103. [B[).
Place of Filing
Except in cases where the Commissioner otherwise permits, the return shall be filed and the tax
paid to:
a. an authorized agent bank,
b. the Revenue District Officer,
c. Revenue Collection Officer or duly authorized Treasurer of the city or municipality where the
donor was domiciled at the time of the transfer, or
d. if there be no legal residence in the Philippines, with the Office of the Commissioner.
In the case of gifts made by a nonresident, the return may be filed with the Philippine
Embassy or Consulate in the country where he is domiciled at the time of the transfer, or
directly with the Office of the Commissioner. (Sec. 103. [B])
Payment of gift tax
The donors tax is paid upon filing of return. No extension is allowed as compared to estate tax.

Formula in computing taxable donation:


1. On the first donation of the year
Gross Gift
Less: deductions/exemption
-----------------------------------------Net gift
x Tax rate
-----------------------------------------Donors tax
2. On subsequent donation during the year
Gross gift
Less: Deductions/exemptions
------------------------------------------Net gift
Net gift
Add: Prior net gifts
----------------------Aggregate net gifts
x Applicable tax rate
-----------------------------Donors tax on aggregate gifts
Less: prior donors tax paid
-------------------------------------------Donors tax paid on this date
D. VALUE-ADDED TAX (VAT)
1. Concept
A tax which is imposed only on the increase in the worth, merit or importance of goods,
properties, or services being sold or rendered.

A tax levied on a wide range of goods and services. It is a tax on the value, added by every seller,
with aggregate annual sale of articles and/or services exceeding One million nine hundred and
nineteen thousand and five hundred pesos (P 1,919,500.00).
VAT is computed at the rate of 0% or 12% of the gross selling price of goods or gross receipts
realized from the sale of service. The VAT system of taxation is aimed at realizing the
services, simplifying tax administration and to make the tax system more equitable and to
enable the country to attain economic recovery (Kapatiran ng Naglilingkod sa Pamahalaan ng
Pilipinas vs. Tan etc., 163 SCRA 371).

2. Characteristics/ Elements of VAT-Taxable Transaction (Sec. 4. 105.-2 of RR No. 16-05)


SECTION 4.105.2. Nature and Characteristics of VAT. VAT is a tax on consumption levied on
the sale, barter, exchange or lease of goods or properties and services in the Philippines and on
importation of goods into the Philippines. 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. This rule shall likewise apply to existing contracts of

sale or lease off goods properties or service at the time of the effectivity of RA No. 9337.
However, in the case of importation, the importer is the one liable for the VAT.

VAT is ultimately a tax on consumption, even though it is assessed on many levels of


transactions on the basis of a fixed percentage. It is the end user of consumer goods or
services which ultimately shoulders the tax, as the liability there from is passed on to the end
users by the providers of these goods or services who in turn may credit their own VAT
liability (or input VAT) from the VAT payments they receive from the final consumer (or output
VAT).17 The final purchase by the end consumer represents the final link in a production chain
that itself involves several transactions and several acts of consumption. The VAT system
assures fiscal adequacy through the collection of taxes on every level of consumption, yet
assuages the manufacturers or providers of goods and services by enabling them to pass on
their respective VAT liabilities to the next link of the chain until finally the end consumer
shoulders the entire tax liability. (CIR vs. Magsaysay Lines, G.R. No. 146984, dated July 28, 2006).

VAT is a uniform tax of 0 percent or 12 percent levied on every importation of goods,


whether or not in the course of trade of business, or imposed on each sale, barter, exchange
or lease of goods or properties or on each rendition of services in the course of trade or
business.

It is an indirect tax that may be shifted or passed on to the buyer, transferee or lessee of the
goods, properties or services (CIR vs. Seagate Technology (Phils), G.R. No. 153866 dated February
11, 2005).

VAT is an indirect tax because the burden of


customers/consumers.

paying it

may be shifted to

Further, in indirect taxation, there is a need to distinguish between the liability for the tax
and the burden of the tax. In adding or including the VAT due to the selling price, the seller
remains the person primarily and legally liable for the payment of the tax. What is
shifted only to the intermediate buyer and ultimately to the final purchaser is the
burden of the tax. Stated differently, a seller who is directly and legally liable for payment of
an indirect tax, such as the VAT on goods or services is not necessarily the person who
ultimately bears the burden of the same tax. It is the final purchaser or consumer of such
goods or services who, although not directly and legally liable for the payment thereof,
ultimately bears the burden of the tax. (Contex vs. CIR, G.R. No. 151135, dated July 2,
2004).
3. Impact of Tax
The tax is limited only to the value added to goods, properties or services by the seller, transferor
or lessor. It should be understood not in the context of the person or entity that is primarily,
directly and legally liable for its payment, but in terms of its nature as a tax on consumption.
4. Incidence of Tax
Exempt from the tax are sales of farm and marine products, so that the costs of basic food and
other necessities, spared as they are from the incidence of the VAT, are expected to be relatively
lower and within the reach of the general public.
5. Tax Credit Method
Under the tax credit method, and entity can credit against or subtract from the VAT charged on its
sales or outputs the VAT paid on its purchases, inputs and imports. If at the end of a taxable
quarter the output taxes charged by a seller are equal to the input taxes passed on by the
suppliers, no payment is required. It is when the output taxes exceeded the input taxes that the
excess has to be paid. If, however, the input taxed exceeded the output taxes, the excess shall
be carried over to the succeeding quarter or quarters. Should the input taxes result from zero-

rated or effectively zero rated transactions or from acquisition of capital goods, any excess over
the output taxes shall instead be refunded to the taxpayer or credited against other internal
revenue taxes.
6. Destination Principle
No VAT shall be imposed to form part of the cost of goods destined for consumption OUTSIDE of
the territorial border of the taxing authority. Hence, actual export of goods and services from the
Philippines to a foreign country must be free from VAT. Conversely, those destined for use or
consumption WITHIN the Philippines shall be imposed with the 12% VAT.
7. Persons Liable
Any persons who, in the course of trade or business, sells, barters, exchanges or leases goods or
properties, or renders services and any other person who imports goods ([Section 105, NIRC of
1997]).

The value-added tax is an indirect tax and the amount of tax may be shifted or passed on to the
buyer, transferee or lessee of the goods, properties or services. This rule shall likewise apply to
existing contracts of sale or lease of goods, properties or services at the time of the effectivity of
Republic Act No. 7716.
In the course of trade or business The regular conduct or pursuit of a commercial or an
economic activity including transactions incidental thereto by any person regardless of
whether or not the person is engaged therein is a non-stock, non-profit private organization
[irrespective of the disposition of its net income and whether or not it sells exclusively to members
or their guests] or government entity.
The rule of regularity, to the contrary notwithstanding, services rendered in the Philippines by
nonresident foreign persons shall be considered as being in the course of trade or business. (Sec.
105, NIRC, Sec. 4 105-3 of RR No. 16-05)

The word, thereto in the phrase, including transactions incidental thereto refer to activities
(trade or business) subject to VAT. It therefore necessarily follows that all transactions incidental
to an exempt trade or business is likewise exempt from VAT.

The term carrying on business does not mean the performance of a single disconnected
act, but means conducting, prosecuting and continuing business by performing progressively
all the acts normally incident thereof; while doing business conveys the idea of business
being done, not from time to time, but all the time. Course of business is what is usually
done in the management of trade or business (CIR vs. Magsaysay Lines, G.R. No. 146984 dated
July 28, 2006).

General Rule: Rule on regularity (to be subject to VAT, the transaction must be made in the
ordinary or regular course of trade or business.)
Exception:
1. Importations (Sec. 107, NIRC), and
2. Services rendered by non-resident foreign persons in the Philippines (Sec. 105, NIRC)

The NIRC defined 3 classifications of transactions that are subject to VAT, to wit:
a. Barter, sale or exchange (BSE) of goods (Sec. 106)
b. Sale or exchange (SE) of services (Sec. 108)
c. Importation of goods (Sec. 107)

As long as the entity provides for a fee, remuneration or consideration, then the services
rendered is subject to VAT under Sec. 108 of the NIRC. It is immaterial whether the primary
purpose of a corporation indicates that it receives payments for services rendered to its
affiliates on a reimbursement-on-cost basis only without realizing profit, for purposes of

determining VAT liability on services rendered (CIR vs. CA and Commonwealth Services Co., G.R.
No. 125355, dated March 30, 2000).

Mandatory VAT Registration


Any person, who, in the course of trade or business, sells, barters or exchanges goods or
properties or engages in the sale or exchange of services shall be liable to register if (Sec. 9.2361 of RR No. 16-05, promulgated September 1, 2005):
i. His gross sales or receipts for the past twelve (12) months, other than those that are exempt
under Sec. 109 (1)(A) to (U) of the Tax Code, have exceeded One million nine hundred
nineteen thousand and five hundred pesos (P 1,919,500.00); or
ii. There are reasonable grounds to believe that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under Sec. 109 (1)(A) to (U) of the Tax Code,
will exceed One million nine hundred nineteen thousand and five hundred pesos (P
1,919,500.00);
iii. Moreover, franchise grantees of radio and television broadcasting, whose gross annual
receipt for the preceding calendar year exceeding ten million pesos (P 10,000,000.00), shall
register within thirty (30) days from the end of the calendar year.
Simply put, the first and second grounds for mandatory registration are based on the past and
the future gross sales or receipts. Under the first ground (past), the taxpayer should register
for the VAT on the succeeding taxable year following the realization of gross sales or receipts
in an amount exceeding One million nine hundred nineteen thousand and five hundred pesos
(P 1,919,500.00).
Effect of failure to register as a VAT person:
1. The taxpayer shall still be liable to pay VAT. (Sec. 236(G)(2), NIRC).
2. The taxpayer cannot avail of the benefit of input tax credits for the period in which he was not
properly registered (Sec. 236(G)(2), NIRC)
3. The taxpayer cannot pass on the burden of paying VAT to its buyer(s)/purchaser(s).
Optional VAT Registration
Sec. 9.236-1(c) of RR No. 16-05, implementing Sec. 236 of the NIRC, provides as follows:
1. Any person who is VAT-exempt and not required to register for VAT may elect to be VATregistered by registering with the RDO that has jurisdiction over the head office of that
person, and pay the annual registration fee for P 500.00 for every separate and distinct
establishment.
2. Any person who is VAT-registered but enters into transactions which are exempt from
VAT (mixed transactions) may opt that the VAT apply to his transactions which would have
been exempt under Section 109(1) of the Tax Code, as amended.
3. Franchise grantees of radio and/or television broadcasting whose annual gross receipt of
the preceding year do not exceed ten million pesos (P10,000,000.00) derived from
business covered by the law granting the franchise may opt for VAT registration. This option,
once exercised, shall be irrevocable (see Sec. 119, NIRC).
Any person who effects to register under (1) and (2) of the above shall not be allowed to cancel
his registration for the next three (3) years.
8. VAT on sale of goods or properties
(Sec. 106 [a][1], NIRC)

a) Requisites of taxability of sale of goods or properties


There shall be levied, assessed and collected on every sale, barter or exchange of goods or
properties, a VAT equivalent to twelve percent (12%) of the gross selling price or gross value in
money of the goods or properties sold, bartered or exchanged. Such tax to be paid by the seller
or transferor (Sec. 106 [a], NIRC)

The VAT base for goods or properties is the gross selling price or gross value in money of the
goods or properties sold, bartered or exchanged. The term gross selling price means
equivalent which the purchaser pays or is obligated to pay to the seller in consideration of the
sale, barter or exchange of goods or properties shall from part of the gross selling price (Last
paragraph, Sec. 106(A)(ii)(1), NIRC).

Rules on Sale of Real Property


In the case of sale of real properties on the installment plan, the real estate dealer shall be
subject to VAT on the installment payments, including interest and penalties, actually and/or
constructively received by the seller. The rule likewise applies to pre-selling of real estate
properties by real estate dealers (Sec. 4. 106-3, RR No. 16-05)
In case of sale of real properties on the deferred-payment basis, not on the installment plan,
the transaction shall be treated as cash sale which makes the entire selling price taxable in
month of sale. Output tax shall be recognized by the seller and input tax shall accrue to the
buyer at the time of the execution of the instrument of sale. Payments subsequent to initial
payments shall no longer be subject to output VAT, in the case of sale on a deferred payment
basis (Sec. 4.106-3 of RR No. No. 16-05).
Definition of terminologies used:
Real estate dealer includes any person engaged in the business of buying, developing, selling,
exchanging real properties as principal and holding himself out as full or part-time dealer in real
estate (Sec. 4.106-3 of RR No. 16-05).
Sale of real property on installment plan means sale of real property by a real estate dealer,
the initial payments of which in the year of sale do not exceed twenty-five percent (25%) of the
gross selling price (Sec. 4.106-3 of RR No. 16-05).
Initial payments means payment or payments which the seller receives before or upon
execution of the instrument of sale and payments which he expects or is scheduled to receive in
cash or property (other than evidence of indebtedness of the purchaser) during the year when the
sale or disposition of the real property was made. It covers any down payment made and includes
all payments actually or constructively received during the year of sale, the aggregate of which
determines the limit set by law. Initial payments do not include the amount of mortgage on the
real property sold except when such mortgage exceeds the cost or other basis of the property to
the seller, in which case, the excess shall be considered part of the initial payments. Also
excluded from initial payments are notes or other evidence of indebtedness issued by the
purchaser to the seller at the time of the sale (Sec. 4.106-3 of RR No. 16-05).
Automatic zero-rate vs. Effectively zero-rate

Although both are taxable and similar in effect, zero-rated transactions differ from effectively
zero-rated transactions as to their source (CIR vs. Seagate Technology (Phils), G.R. No. 153866,
dated February 11, 2005).

Zero-rated transactions generally refer to the export sale of goods and supply of services
(CIR vs. American Express, G.R. No. 152609, dated June 29, 2005. The tax rate is set at zero. (id,
citing Deoferio Jr. and Mamalateo, supra, p. 190) When applied to the tax base, such rate
obviously results in no tax chargeable against the purchaser. The seller of such transactions
charges no output tax, but can claim a refund of or a tax credit certificate for the VAT
previously charged by suppliers.
Effectively zero-rated transactions, however refer to the sale of goods (See Sec. 106(A)(2)(c)
of the Tax Code) or supply of services (See Sec. 108(B)(3) of the Tax Code) to persons or
entities whose exemption under special laws or international agreements to which the
Philippines is a signatory effectively subjects such transactions to a zero rate (CIR vs. Seagate
Technology (Phils.), G.R. No. 153866, dated February 11, 2005) . Again, as applied to the tax base,
such rate does not yield any tax chargeable against the purchaser. The seller who charges
zero output tax on such transactions can also claim a refund of or a tax credit certificate for
the VAT previously charged by suppliers.

Applying the destination principle to the exportation of goods, automatic zero rating is
primarily intended to be enjoyed by the seller who is directly and legally liable for the VAT,
making such seller internationally competitive by allowing the refund or credit of input taxes
that are attributable to export sales. Effective zero rating, on the contrary, is intended to
benefit the purchaser who, not being directly and legally liable for the payment of the VAT
will ultimately bear the burden of the tax shifted by the suppliers.

9. Zero-Rated Sales of Goods or Properties and Effectively Zero-Rated Sales of Goods or


Properties (Sec. 106[A] [2], NIRC)
The following sales by VAT-Registered persons shall be subject to zero percent (0%) rate:
1) Export sales
(a) Export Sales. The term export sales means:
(1) The sale and actual shipment of goods from the Philippines to foreign country, irrespective of
any shipping arrangement that may be agreed upon which may influence or determine the
transfer of ownership of the goods so exported and paid for in acceptable foreign currency or
its equivalent in goods or services, and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(2) Sale of raw materials or packaging materials to a nonresident buyer for delivery to a resident
local export-oriented enterprise to be used in manufacturing, processing, packing or
repacking in the Philippines of the said buyers goods and paid for in acceptable foreign
currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);
(3) Sale of raw materials or packaging materials to export-oriented enterprise whose export sales
exceed seventy percent (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and
(5) Those considered export sales under Executive Order No. 226, otherwise known as the
Omnibus Investment Code of 1987, and other special laws; and
(6) The sale of goods, suppliers, equipment and fuel to persons engaged in international
shipping or international air transport operations (added by RA 9337).
2) Foreign currency denominated sale
The phrase foreign currency denominated sale means sale to a nonresident of goods, except
those mentioned in Sections 149 and 150, assembled or manufactured in the Philippines for
delivery to a resident in the Philippines, paid for in acceptable foreign currency and accounted for
in accordance with the rules and regulations of the Bangko Sentral ng Pilipinas (BSP);
3) 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.
A zero-rated sale by a VAT-registered person is a taxable transaction for VAT purposes, but
shall not result in any output tax. However, the input tax on purchases of goods, properties or
services related to such zero-rated sale shall be available as tax credit or refund (RR 162005).
The term effectively zero-rated sale of goods and properties shall refer to the local sale of goods
and properties by a VAT-registered person to a person or entity who was granted indirect tax
exemption under special laws or international agreement.
Note: RR 4-2007 removed the distinction between automatic and effectively zero-rated
transactions found in prior Revenue Regulations (including RR 16-2005) with respect to prior
application. The following line in RR 16-2005 has been DELETED by RR 4-2007: Other cases of
zero-rated sales shall require prior application with the appropriate BIR office for effective zero-

rating. Without an approved application for effective zero-rating, the transaction otherwise entitled
to zero-rating shall be considered exempt. The foregoing rule notwithstanding, the Commissioner
may prescribe such rules to effectively implement the processing of applications for effective
zero-rating.
This is probably a consequence of the Supreme Court ruling in the case of (Commissioner of
Internal Revenue vs. Seagate Technology (Philippines), G.R. No. 153866, dated February 11, 2005).

Rationale for zero-rating of exports

The Philippine VAT system adheres to Cross Border Doctrine, according to which, no VAT
shall be imposed to form part of the cost of goods destined for consumption outside of the
territorial border of the taxing authority (Commissioner of Internal Revenue vs. Toshiba Information
Equipment (Phils.), Inc., G.R. No. 150154, dated August 9, 2005).

It is not enough that the recipient of the services be proven to be a foreign corporation; it must be
specifically proven to be a non-resident foreign corporation. There is no specific criterion as to
what constitutes doing or engaging in or transacting business. Each case must be judged
in the light of its peculiar environmental circumstances. 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
(Accenture, Inc. vs. Commissioner of Internal Revenue, G.R. No. 190102, July 11, 2012).

As a general rule, the value-added tax (VAT) system uses the destination principle.
However, our VAT law itself provides for a clear exception, under which the supply of service
shall be zero-rated when the following requirements are met: (1) the service is performed in
the Philippines; (2) the service fails under any of the categories provided in Section 102(b) of
the Tax Code; and (3) it is paid for in acceptable foreign currency that is accounted for in
accordance with the regulations of the Bangko Sentral ng Pilipinas. Since respondents
services meet the requirements, they are zero-rated. Petitioners Revenue Regulations that
alter or revoke the above requirements are ultra vires and invalid. As a general rule, the VAT
system uses the destination principle as a basis for the jurisdictional reach of the tax. Goods
and service are taxed only in the country where they are consumed. Thus, exports are zerorated, while imports are taxed (CIR vs. American Express, G.R. No. 152609, dated June 29, 2005).
Sales of goods, properties and services by a VAT-registered supplier form the Customs
Territory to an ECOZONE enterprise shall be treated as export sales. If such sales are made
by a VAT-registered supplier, they shall be subject to VAT a zero percent (0%). In zero-rated
transactions, the VAT-registered supplier shall not pass on any output VAT to the ECOZONE
enterprise, and at the same time, shall be entitled to claim tax credit/refund of its input VAT
attributable to such sales. Zero-rating of export sales primarily intends to benefit the exporter
(i.e., the supplier from the Customs Territory), who is directly and legally liable for the VAT,
making it internationally competitive by allowing it to credit/refund the input VAT attributable to
its export sales. Meanwhile, sales to an ECOZONE enterprise made by a non-VAT or
unregistered supplier would only be exempt from VAT and the supplier shall not be
able to claim credit/refund of its input VAT (CIR vs. Toshiba Information Equipment, G.R. No.

Destination principle and cross border doctrine


As a general rule, the VAT system uses the destination principle as a basis for the jurisdictional
reach of the tax. Goods and services are taxed consumed. The Cross Border Doctrine is also
known as the destination principle. Hence actual or constructive export of goods and services
from the Philippines to a foreign country must be zero-rated for VAT; while, those destined for use
or consumption within the Philippines shall be imposed the twelve percent (12%) VAT.

150154, dated August 9, 2005).

10. Transaction Deemed Sale


(Sec. 106 [B], NIRC)

For transaction deemed sale, the output tax shall be based on the market value of the goods
deemed sold as of the time of the occurrence of the transaction. However, in case of retirement or
cessation of business, the tax base shall be the acquisition cost or the current market price of the
goods or properties, whichever is LOWER.
a) Transfer, use or consumption not in the course of business of goods/properties
originally intended for sale or use in the course of business
When a VAT registered person withdraws goods from his business for his personal use
b) Distribution or transfers to shareholders, investors or creditors
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, which is applicable.
c) Consignment of goods if actual sale not made within 60 days from date of
consignment
Consigned goods returned by the consignee within the 60 day period are not deemed sold;
d) Retirement from or cessation of business with respect to inventories on hand
Retirement from or cessation of business with respect to all goods on hand, whether capital
goods, stock-in-trade, supplies or materials as of the date of such retirement or cessation,
whether or not the business is continued by the new owner or successor.
The following circumstances shall, among others, give rise to transactions deemed sale (Sec.
4.106-7(a) of RR No. 16-05):
i. Change of ownership of the business. There is a change in the ownership of the business
when a single proprietorship incorporates; or the proprietor of a single proprietorship sells his
entire business.
ii. Dissolution of a partnership and creation of a new partnership which takes over the business.

For transactions deemed sale, the output tax shall be based on the market value of the goods
deemed sold as of the time of the occurrence of the transactions. However, in the case of
retirement or cessation of business, the tax base shall be the acquisition cost or the current
market price of the goods or properties, whichever is lower (Sec. 4.106-7(b) of RR No. 1605).

Tax Base of Transactions Deemed Sale


The Commissioner of Internal Revenue shall determine the appropriate tax base in cases where
a transaction is deemed a sale, barter or exchange of goods or properties under Sec. 4.106-7
paragraph (a) hereof, or where the gross selling price is unreasonably lower than the actual
market value (GSP vs. AMV).
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.
For transactions deemed sale, the output tax shall be (generally) based on the market value of
the goods deemed sold as of the time of the occurrence of the transactions enumerated in
Sec. 4.106-7(a)(1),(2) and (3) of these Regulations.
However, in the case of retirement or cessation of business, the tax base shall be the (XPN)
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 (GSP vs. FMV).

11. Change or Cessation of Status as VAT-Registered Person (Sec. 106 [C], NIRC)
These are situations where although there is no sale, barter or exchange, the change or
cessation of status as VAT-registered person makes such person either liable to or exempt from
VAT.
a) Subject to VAT
The VAT provided for under Sec. 106(sale of goods or properties) of the Tax Code shall only
apply to goods or properties originally intended for sale or use in business, and capital goods
which are existing as of the occurrence of the following:
(i) Change of Business Activity From VAT Taxable Status to VAT-Exempt Status
As when a VAT-registered person engaged in a VAT-taxable activity like a wholesaler or retailer of
goods subject to VAT decides to discontinue such activity and engaged instead in a non-VAT
business activity.
(ii) Approval of Request for Cancellation of a Registration Due to Reversion to Exempt
Status
As when a person commenced a business with the expectation of gross sales or receipts
exceeding P1,919,500.00, but who failed to exceed this amount during the first 12 months of
operation.
(iii) Approval of Request For Cancellation of Registration Due to Desire to Revert to
Exempt Status After Lapse of 3 Consecutive Years
Approval of request for cancellation of registration of one with the expectation of gross
sales/receipts exceeding P1,919,500.00, but who failed to exceed this amount during the first
twelve (12) months of operation.
b) Not subject to VAT
(i) Change of Control of a Corporation
Change of control of a corporation by the acquisition of the controlling interest of such corporation
by another stockholder or group of stockholders.
Exception:
a) Exchange of property by corporation acquiring control for the stocks of the target corporation.
b) From the point of view of the person who joins the corporation, who exchanges his properties
held for sale or for lease for shares of stocks, whether resulting to corporate control or not.
(ii) Change in the Trade or Corporate Name
It is not part of the regular conduct or an economic activity or commonly known in the course of
trade or business.
(iii) Merger or Consolidation of Corporations
The unused input tax of the dissolved corporation, as of the date of merger or consolidation, shall
be absorbed by the surviving or new corporation.
12. VAT on Importation of Goods
VAT on Importation of Goods in general
There shall be levied, assessed and collected on every importation and collected on every
importation of goods a value-added tax (VAT) equivalent to twelve percent (12%) based on the
total value used by the Bureau of Customs in determining tariff and customs duties plus customs
duties, excise taxes, if any, and other charges, such tax to be paid by the importer prior to the
release of such goods from customs custody: Provided, that where the customs duties are
determined on the basis of the quantity or volume of the goods, the value-added tax shall be
based on the landed cost plus excise taxes, if any. (Sec. 107(A), NIRC)

c) Transfer of Goods by Tax-exempt Persons (Sec. 107 [B])


Importation of Tax-exempt persons is exempt from VAT. However, when such goods are
transferred to non-exempt persons or entities, then such transaction is subject to VAT. In such
case, the tax due on such importation shall constitute a lien on the goods superior to all charges
or liens on the goods, irrespective of the possessor thereof (Sec. 107[B]).
13. VAT on Sale of Service and Use or Lease of Properties (Sec. 108 [A], NIRC)
Section 108 defines sale or exchange of services

The listing of specific services [in Sec. 108] are intended to illustrate how pervasive and
broad is the VATs reach rather than establish concrete limits to its application. Thus, every
activity that can be imagined as form of service rendered for a fee should be deemed
included unless some provision of law especially excludes it (Diaz vs. Sec. of Finance, G.R. No.
193007, dated July 19, 2011).

VAT base for sale of services and use of lease of properties are the gross receipts derived
from the sale or exchange of services, including the use or lease of properties. Thus the term
gross receipts means the total amount of money or its equivalent representing the contract
prices, compensation, service fee, rental or royalty, including the amount charged for
materials supplied with the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services performed or to be
performed for another person, excluding value-added tax (Last paragraph, Sec. 108(A),
NIRC).

a) Requisites of taxability
1) There is a sale or exchange of service or lease or use of property enumerated in the law or
other similar services;
2) Service is performed or to be performed in the Philippines, and in case of lease, property
leased or used must be located in the Philippines
3) Service is in the course of the taxpayers trade or business or profession;
4) Service is for a valuable consideration actually or constructive received; and
5) Service is not exempt under the NIRC, special law or international agreement.
Note: Absence of any of these renders the transaction exempt from VAT but may subject to other
percentage tax under the NIRC.
14. Zero-Rated Sale of Services
(Sec. 108 [B], NIRC)
The following services performed in the Philippines by VAT-registered persons shall be subject to
zero percent (0%) rate:
(1) Processing, manufacturing, 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 rules and regulations of
the Bangko Sentral ng Pilipinas (BSP);
(2) Services other than those mentioned in the preceding paragraph, the consideration for which
is paid for in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the Bangko Sentral ng Pilipinas (BSP);
(3) Services rendered to persons or entities whose exemptions 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 vessels engaged exclusively in international shipping; and
(5) Services performed by subcontractors and/or contractors in processing. Converting, of
manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of
total annual production.

Under Sec. 108(B)(1), the supply of service shall be zero-rated when the following requirements
are met:
1. The service is performed in the Philippines;
2. The service falls under any of the categories provided in Section 108(B)(1) of the Tax Code;
and
3. It is paid for in acceptable foreign currency that is accounted for in accordance with the
regulations of the Bangko Sentral ng Pilipinas (CIR vs. American Express, G.R. No. 152609 date
June 29, 2005).

Under the second paragraph of the aforecited provision, services performed by VAT-registered
persons in the Philippines shall be VAT exempt when the following requisites concur:
1. Service does not involve the processing, manufacturing or repacking of goods for persons
doing business outside the Philippines (id);
2. It is paid in acceptable foreign currency and accounted for in accordance with the rules and
regulations of the BSP, are zero-rated; and
3. The recipient of such services is doing business outside the Philippines (CIR vs. Burmeister

and Wain, G.R. No. 153205 dated January 22, 2007).

PAGCOR IS EXEMPT FROM PAYMENT OF DIRECT AND INDIRECT TAXES. HENCE THE
SALE OF GOODS AND SERVICES TO PAGCOR IS SUBJECT TO 0% VAT. P.D. 1869 grants
PAGCOR exemption from the payment of taxes, direct or indirect. By extending the
exemption to entities or individuals dealing with PAGCOR, the legislature clearly granted
exemption also from indirect taxes. Sec. 108(B)(3) of R.A. 8424 subjects to 0% VAT the
services rendered to persons or entities whose exemption under special laws subjects the
supply of such services to (0%) rate. Hence, the lease of property and sale of food and
beverages to PAGCOR is subject to 0% VAT (CIR vs Acesite, G.R. NO. 147295 dated February
16, 2007).

The provision in Revenue Regulation (RR) No. 16-2005 subjecting PAGCOR to value-added
tax (VAT) is invalid for being contrary to Republic Act (RA) No. 9337. Nowhere in RA No.
9337 is it provided that PAGCOR can be subjected to VAT. RA No. 9337 is clear only as to the
removal of PAGCORs exemption from the payment of corporate income tax. RA No. 9337
itself exempts PAGCOR from VAT pursuant to Section 7 (k) thereof which provides among
the transaction exempt from VAT, transactions which are exempt under special laws
(PAGCOR vs. BIR, G.R. 172087 dated March 15, 2011).

Zero Rate Sales vs. Exempt Sales


While the zero rating and the exemption are computationally the same, they actually differ is
several aspects, to wit: (a) A zero-rated sale is a taxable transaction but does not result in an
output tax while an exempted transaction is not subject to the output tax; (b) The input tax on the
purchases of a VAT-registered person with zero-rated sales may be allowed as tax credits or
refunded while the seller in an exempt transaction is not entitled to any input tax on his purchases
despite the issuance of a VAT invoice or receipt (CIR. Vs. Cebu Toyo Corp., G.R. No. 149073 dated
February 16, 2005). (c) Persons engaged in transaction which are zero-rated, being subject to VAT,
are required to register while registration is optional for VAT exempt persons.
In both instance of zero rating, there is total relief for the purchaser for the burden of the
tax. But in an exemption there is only partial relief, because the purchaser is not allowed any tax
refund of or credit for input taxes paid. If at the end of a taxable quarter the output taxes charged
by a seller are equal to the input taxes passed on by the suppliers, no payment is required. It is
when the output taxes exceed the input taxes that the excess has to paid. If however, the input
taxes exceed the output taxes, the excess shall be carried over the succeeding quarter or
quarters. Should the input taxes result from zero-rated or effectively zero-rated transaction or
from the acquisition of capital goods, any excess over the output taxes shall instead be
refunded to the taxpayer or credited against other internal revenue taxes (CIR vs. Seagate
Technology (Philippines), G.R. No. 153866, dated February 11, 2005).

15. VAT Exempt Transactions


a)

VAT exempt transactions, in general


These refer to the sale of goods or properties and/or services and the use or lease of
properties that is NOT subject to VAT. The person making the exempt sale of goods,
properties or services shall not bill or pass on any output tax to his customers because the
said transaction is not subject to VAT. However, the seller is NOT allowed to credit the VAT
(input tax) passed to him on his purchases of taxable goods, properties or services, because
he has not output tax to deduct it from (Sec. 109, NIRC).
In other words, since the seller is not subject to output tax, it is likewise NOT allowed any tax
credit of input tax on purchases.
A VAT-registered person is given the option under Sec. 109 either to: (1) be VAT-exempt
under Sec. 109(1); or (2) be subject to VAT. But such election shall be irrevocable for a period
of three (3) years from the quarter the election was made.

b) Exempt transaction, enumerated

Exempt person vs. Exempt transaction


The object of exemption from the VAT may either be the transaction itself or any of the parties
to the transaction.
An exempt transaction, on the one hand, involves goods or services which, by their nature,
are specifically listed in and expressly exempted from the VAT under the Tax Code, without
regard to the tax status VAT exempt or not of the party to the transaction. Indeed, such
transaction is not subject to the VAT, but the seller is not allowed any tax refund of or credit
for any input taxes paid.
An exempt party, on the other hand, is a person or entity granted VAT exemption under the
Tax Code, a special law or an international agreement to which the Philippine is a signatory,
and by virtue of which its taxable transactions become exempt from the VAT. Such party is
also not subject to the VAT, but may be allowed a tax refund of or credit for input taxes paid,
depending on its registration as a VAT or non-VAT taxpayer. (CIR vs. Seagate Technology
(Phils), G.R. No. 153866 dated February 11, 2005).

Enumeration of Exempt Transactions (Sec. 109) Sec. 4.109-1 (B) of RR No. 16-05
a. Sale or importation 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.
Products classified under this paragraph shall be considered in their original state even if they
have undergone the simple process of preparation or preservation for the market, such as
freezing, drying, salting, broiling, roasting, smoking or stripping.
Polished and/or husked rice, corn grits, raw cane and molasses, ordinary salt, and copra shall
be considered in their original state.
b. Sale or importation of fertilizers; seeds, seedlings and fingerlings; fish, prawn, livestock and
poultry feeds, including ingredients, whether locally produced or imported, used in the
manufacture of finished feeds (except specialty feeds for race horses, fighting cocks,
aquarium fish, zoo considered as pets);
c. Importation of personal and household effects belonging to the residents of the Philippines
returning from abroad and non-resident citizens corning to resettle in the Philippines:
Provided, That such goods are exempt from customs duties under the Tariff and Customs
Code of the Philippines;
d. Importation of professional instruments and implements, wearing apparel, domestic animals,
and personal household effects (except any vehicle, vessel, aircraft, machinery, other goods

e.
f.
g.
h.

i.
j.

k.
l.

m.
n.

o.
p.

q.

r.
s.
t.
u.

for use in the manufacture and merchandise of any kind in commercial quantity) belonging to
persons coming to settle in the Philippines, for their own use and not for sale, barter or
exchange, accompanying such persons, or arriving within ninety (90) days before or after
their arrival, upon the production of evidence satisfactory to the Commissioner, that such
persons are actually coming to settle in the Philippines and that the change of residents is
bona fide;
Services subject to percentage tax under Title V;
Services by agricultural contract growers and milling for others of palay into rice, corn into
grits and sugar cane into raw sugar;
Medical, dental, hospital and veterinary services except those rendered by professionals;
Educational services rendered by private educational institutions, duly accredited by the
Department of Education (DEPED), the Commission on Higher Education (CHED), the
Technical Education And Skills Development Authority (TESDA) and those rendered by
government educational institutions;
Services rendered by individuals pursuant to an employer-employee relationship;
Services rendered by regional or area headquarters established in the Philippines by
multinational corporations which act as supervisory, communications and coordinating
centers for their affiliates, subsidiaries or branches in the Asia-Pacific Region and do not earn
or derive income from the Philippines;
Transactions which are exempt under international agreements to which the Philippines is a
signatory or under special laws, except those under Presidential Decree No. 529;
Sales by agricultural cooperatives duly registered with the Cooperative Development
Authority to their members as well as sale of their produce, whether in its original state or
processed form, to non-members; their importation of direct farm inputs, machineries and
equipment, including spare parts thereof, to be used directly and exclusively in the production
and/or processing of their produce;
Gross receipts from lending activities by credit or multi-purpose cooperatives duly registered
with the Cooperative Development Authority;
Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the
Cooperative Development Authority: Provided, That the share capital contribution of each
member does not exceed Fifteen thousand pesos (P15,000) and regardless of the aggregate
capital and net surplus ratably distributed among the members;
Export sales by persons who are not VAT-registered;
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) and below, house and lot, and other residential dwellings
valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That
not later than January 31, 2009 and every three (3) years thereafter, the amounts herein
stated shall be adjusted to their present values using the Consumer Price Index, as published
by the National Statistics Office (NSO);
Lease of a residential unit with a monthly rental not exceeding Ten thousand pesos (P12,800)
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);
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;
Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
Importation of fuel, goods and supplies by persons engaged in international shipping or air
transport operations;
Services of banks, non-bank financial intermediaries performing quasi-banking functions, and
other non-bank financial intermediaries; and

v.

Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of One million nine hundred nineteen thousand five hundred pesos
(P1,919,500): 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);

Rule on exempt sale of real property used in business Sec. 14 of RR No. 4-2007, which
amended RR No. 16.05
Section 4.109-1 Vat-Exempt Transactions
The following sales of real properties are exempt from VAT namely:
(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 real property is not primarily held for sale to customers or held for lease in the
ordinary course of trade or business but the same is used in the trade or business of the seller,
the sale thereof shall be subject to VAT being a transaction incidental to the taxpayers main
business.

However, in the case of CIR vs. Magsaysay Lines (G.R. No. 146984 dated July 28, 2006), the
sale of real properties that constitute and isolated transaction, such as sale of real properties
that are USED by entities but NOT held primarily for sale or lease, are not subject to VAT.
They are neither in the course of trade or business. With more reason, those transactions
could not have made incidental thereto.
Rules for Certain Services
In order to know for a particular service subject to VAT, the following steps should be followed.
1. Determine whether such service falls under Sec. 108 of the NIRC as amended.
(See for instance, Diaz vs. Sec. of Finance, G.R. No. 193007 dated July 19, 2011) if it is not
included,
2. Resort must be made to the legislative intent. (See for instance, CIR vs. SM Prime
Holdings, Inc. G.R. No. 183505, February 26, 2010. This is because the enumeration under
Sec. 108 is not exclusive.) If it appears from (1) or (2) that it is included.
3. Check if the transaction is exempt under Sec. 109 of the NIRC as amended.
Common Carriers
The rule on common carriers may be summarized as follows:
Common Carrier

Seller is a/an

Source
/Destination

What is
transported?

Liable for
VAT?

Liable for
franchise
tax?

Land

ANY

ANY

Passengers (
Goods (

NO
YES
YES
YES at
0%
NO

Yes 3%
NO
NO
NO

w/in the Philippines


Air or Sea

Domestic Carrier
Intl C NETB *

Phil to/from Abroad


ANY

* International Carrier Not engaged in trade or business


Lease of Properties
The rule on the lease of properties may be summarized as follows:

YES 3%

Lease Amount
Exceeds Php
12,800?

Sellers Annual
Income Exceeds
Php 1,919,500?

Liable for
VAT?

Liable for
Franchise tax?

NO

NO

NO Sec.1
09(Q)

NO No law
imposes the same

NO

YES

NO Sec.1
09(Q)

NO No law
imposes the same

YES

NO

NO Sec.1
09(Q)

YES Sec. 116


109(v)

YES

YES

YES Sec.
108

NO No law
imposes the same

Required to
Register?
NO No law
imposes such
requirement
NO -No law
imposes such
requirement
NO - No law
imposes such
requirement
YES Sec.
236(G)(1)(a)

Where the monthly lease amount is exempt (i.e. does not exceed the P 12, 800.00 threshold),
then the taxpayer is NOT liable for VAT, franchise tax, and is not required to register as a VAT
entity. On the other hand, when the monthly lease amount is not exempt but the annual income is
exempt (i.e. does not exceed the P1,919,500.00 threshold), then the taxpayer is likewise NOT
liable for VAT if he is exempt, under Sec. 109(V) and is therefore not required to register as a VAT
entity under Sec. 216(G)(1)(a). However, s/he/it will be liable for franchise tax of 3% pursuant to
Sec. 116 in relation to Sec. 109(V). Finally, when his lease amount and gross annual income are
both not exempt, then he is liable for VAT and is required to register, but not for franchise tax.
Professional Services
For purposes of VAT, a professional partnership shall be treated as a separate and distinct
taxable person from the individual partners composing the partnership. All gross receipts from
sales of services rendered by the partners for and in the name of the partnership shall entirely be
taxable against the partnership. Sales of services made by any of the partners thereof in his
personal and individual capacity shall not be attributed to the partnership but shall rather be
taxable against such partner in his individual capacity (Sec. 2, RR No. 1-2003, promulgated January
2, 2003).

Cinema Operators/ Proprietors

The Local Tax Code, in transferring the power to tax gross receipts derived by cinema/theater
operators or proprietor from admission tickets to the local government, did not intend to treat
cinema/theater houses as a separate class. No distinction must, therefore, be made between
the places of amusement taxed by the national government and those taxed by the local
government. To hold otherwise would impose an unreasonable burden on cinema/theater
houses operators or proprietors, who would be paying an additional 12% VAT on top of the
30% amusement tax imposed by Section 140 of the LGC of 1991, or a total of 40% tax. Thus,
the legislature never intended to include cinema/theater operations or proprietors in the
coverage of VAT (CIR vs. SM Prime Holding, Inc. G.R. No. 183505, February 26, 2010).
Medical Services
Sec. 4.109-1 (B)(g) of RR No. 16-05
Medical, dental, hospital and veterinary services, except those rendered by professionals.
Laboratory services are exampled. If the hospital or clinic operates a pharmacy or drug store, the
sale of drugs and medicine is subject to VAT

The validity of the imposition of the VAT on HMOs, as enunciated in VAT Ruling No, 18-98, on
the ground that HMOs do not actually provide medical and/or hospital services, but merely
arrange the provision of said services, which under the law, is not a VAT-exempt activity
(Philippine Healthcare Providers vs. CIR, G.R. No. 168129 dated April 24, 2007).

VAT on Toll Fees


Toll way operators are, owning to the nature and object of their business, franchise
grantees. The construction, operation, and maintenance of toll facilities on public
improvements are activities of public consequence that necessarily require a consequence
that necessarily require a special grant of authority from the state. Indeed, Congress granted
special franchise for the operation of tollways to the Philippine National Construction
Company, the former tollway concessionaire for the North and South Luzon Expressways.
Apart from Congress, tollway franchises may also be granted by the Toll Regulatory Board
(TRB), pursuant to the exercise of its delegated powers under P.D. 1112. The franchise in this
case is evidenced by a Toll Operation Certificate (Diaz vs. Sec of Finance, G.R. No. 193007,
July 19, 2011).

Franchise Grantees
Sec. 109 is not the only source of exemption from VAT. An exemption may come from the
franchise. Since PAGCOR is exempt from VAT under R.A. No. 9337, the BIR exceeded its
authority in subjecting PAGCOR to 10% VAT under RR No. 16-2005; hence, the said
regulatory provision is hereby nullified (PAGCOR vs. the BIR, G.R. No. 172087, March 15, 2011).
VAT Senior Citizens
To implement Sec. 4 of Republic Act 9994, also known as the Expanded Senior Citizens Act of
2010, BIR issued Revenue Regulations No. 7-2010 and 8-2010. Revenue Regulation 8-2010
(Promulgated September 3, 2010) amended RR No. 7-2010 by excluding the special discounts
on electric and water consumption of senior citizens from exemption from VAT.
Revenue Regulation No. 7-2010 stressed that a senior citizen shall be subject to VAT if he is selfemployed or engaged in business or practice of profession, and his gross annual sales and/or
receipts exceeds P 1,500,000 or such amount to which this may be adjusted pursuant to Sec.
109(1)(V) of the Tax Code Otherwise, he shall be subject to 3% percentage tax (Sec. 9, Revenue
Regulation No. 7-2010).
16. Input Tax and Output Tax, Defined
Input Tax is the VAT due or paid by a VAT registered person on importation of good or local
purchases of goods or services including lease or use of property from VAT registered person
in the course of his trade or business. It shall also include the transitional input tax
determined under NIRC (Section 110 NIRC of 1997).
Output Tax VAT due on the sale or lease of taxable goods or properties by any person
required to register under the NIRC (Section 110 NIRC of 1997).
Output Tax vs. Input Taxes
OUTPUT TAX
VAT-registrable person (CIR vs. Seagate
Technology (Phils), G.R. No. 153866, February 11,
2005, footnote 38).
Paid for the sale or importation
Paid directly by the seller, who is primarily liable
therefor

17. Source of Input Tax


(Sec. 110 (A))

INPUT TAX
Importation of goods or local purchases of goods
or services, including the lease or use of property
from a VAT-registered person (Seagate case, ft.
40).
Paid for the purchase
Paid by the buyer, who indirectly burdens the VAT

In general, the sources of input tax are the same as that of output tax, to wit:
Services
Goods
Importation
This is elaborated under Sec. 110(A) of the NIRC.
a) Purchase or importation of goods
i. For sale; or
ii. For conversion into or intended to form part of a finished product for sale including packaging
materials; or
iii. For use as supplies in the course of business; or
iv. For use as materials supplied in the sale of service; or
v. For use in trade or business for which deduction for depreciation or amortization is allowed
under this Code, except automobiles, aircraft and yachts. [AMENDED]
Rule on input Tax on Capital Goods
(Sec. 4.110-3 of RR no. 16-05)

Where a VAT-registered person purchases or imports (1) capital goods, which are (2)
depreciable assets for income tax purposes, the (3) aggregate acquisition cost of which
(exclusive of VAT) in a calendar month exceeds One Million pesos (P1,000,000.00), regardless of
the acquisition cost of each capital good, shall be claimed as credit against output tax in the
following manner:
(a) If the estimated useful life of a capital good is five(5) years or more the input tax shall be
spread evenly over a period of sixty (6) months and the claim for input tax credit will
commence in the calendar month when the capital good is acquired. The total input taxes on
purchases or importations of this type of capital goods shall be divided by 60 and the quotient
will be the amount to be claimed monthly.
(b) If the estimated useful life of a capital goods is less than five (5) years the input tax shall
be spread evenly on a monthly basis by dividing the input tax by the actual number of months
comprising the estimated useful life of the capital good. The claim for input tax credit shall
commence in the calendar month that the capital goods were acquired.
aggregate acquisition cost refers to the total price agreed upon for one or more assets
acquired and not on the payments actually made during the calendar month.
b) Purchase of real properties for which a VAT has actually been paid
The entire gross selling price on the sale or exchange of real property by a real estate dealer,
developer, or lessor is subject to VAT in the month of sale or exchange, where the initial
payments exceed 25% of the gross selling price.
Corollary to this rule, if the initial payments do not exceed 25% of the gross selling price, the
seller is subject to VAT only to the extent of the consideration received from the buyer during
the quarter.
If the consideration is paid in full cash which is evidenced by VAT receipt issued by the VATregistered seller, the VAT-registered buyer can immediately claim the input tax paid on the
transaction. On the other hand, if the consideration of a taxable sale or exchange of real
property is payable on installments, the amount of input tax that may be claimed by the VATregistered buyer thereof will depend on the terms of payments.

Note: Unlike in the sale of goods where it is required that the taxable sale must be
consummated as the VAT-registered seller issues a VAT sakes invoice, in sales of Real
Property, it is not required that the sale must be consummated. What is necessary is that the
seller executes a documents of sale (e.g. contract to sell and there is at least partial payment

of the consideration and the corresponding VAT thereon, for which the seller issues a VAT
official receipt.
c) Purchase of services in which VAT has actually been paid
The seller is subject to output tax only when he actually or constructively receives payment
from the buyer thereof.
Receipt of consideration, remuneration or fee, rather than the performance of the service, is
the criterion for determining liability for VAT.
d) Transactions deemed sale
Transfer, use or consumption not in the course of business or properties originally intended sale
of for use in the course of business.
e) Presumption input tax
Persons or firms engaged in the processing of sardines, mackerel and milk, and in manufacturing
refined sugar, cooking oil and packed noodle based instant noodle based instant meals shall be
allowed a presumptive input tax, creditable against the output tax, equivalent to 4% of the gross
value in money of their purchases of primary agricultural products which are used as inputs to
their production (Section 111 (b), NIRC of 1997 as amended by RA 9337).
f) Transitional input tax
A person who becomes liable to VAT or any person who elects to be a VAT registered person
shall, subject to the filing of an inventory according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner be allowed input tax on his
beginning inventory of goods, materials and supplies, equivalent to 2% of the value added tax
paid on such goods, materials and supplies, whichever is higher, which shall be creditable against
the output tax (Section 111 (a) NIRC of 1997 as amended by Section 7 RA 9337).
Transitional input tax credits allowed under the transitory and other provisions of the
regulations
A person who becomes liable to VAT or any person who elects a VAT registered person shall,
subject to the filing of an inventory according to rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner be allowed input tax on his beginning
inventory of goods, materials and supplies, equivalent to 2% of the value added tax paid on such
goods, materials and supplies, whichever is higher, which shall be creditable against the output
tax (Sec. 111 (a) NIRC of 1997 as amended by Sec. 7 RA 9337).

It is apparent that the transitional input tax credit operates to benefit newly VAT-registered
persons, whether or not they previously paid taxes in the acquisition of their beginning
inventory of goods, materials, and supplies. During that period of transition from non-VAT to
VAT status, the transitional input tax credit serves to alleviate the impact of the VAT on the
taxpayer. At the very beginning, the VAT-registered taxpayer is obliged to remit a significant
portion of the income it derived from its sales as output VAT. The transitional input tax credit
mitigates this initial diminution of the taxpayers income by affording the opportunity to offset
the losses incurred through the remittance of the output VAT at a stage when the person is
yet unable to credit input VAT payments, ruled the Court (Fort Bonifacio Development vs. CIR,
G.R. No. 158885 dated April 2, 2009).

18. Persons who can avail of input tax credit


Any VAT-registered person
19. Determination of output/input tax; VAT payable; Excess input tax credits
a) Determination of output tax
Excess Output or Input Tax (Sec. 110 B)

Verily, the VAT payable is simply the difference between the output tax over the input tax. Simply
put:
VAT payable = Output tax Input tax
If the output tax is equal to the input tax, then the VAT payable is zero. This means that there
is no value added to the goods or services; hence, no VAT.
If the output tax is greater than the input tax, then the net result would be an excess output
tax. The excess would be a positive VAT payable value the net VAT to be paid by the
taxpayer.
If the output tax is less than the input tax, then the net result would be an excess input tax.
The excess input tax may be carried over to the next quarter and deducted from the output
tax, and thereafter claim a refund if the net result is zero. Unlike in income taxation for
corporations under the last paragraph of Sec. 76., there is no irrevocability rule in VAT.
b) Determination of input tax creditable
The sum of the excess input tax carried over from the preceding month or quarter and the input
tax creditable to a VAT-registered person during the taxable month or quarter shall be reduced by
the amount of claim for refund or tax credit for value-added tax and other adjustments, such as
purchase returns or allowances and input tax attributable to exempt sale.
c) Allocation of input tax on mixed transactions
A VAT-registered person who is also engaged in transactions not subject to the value-added tax
shall be allowed tax credit as follows:
(a) Total input tax which can be directly attributed to transactions subject to value-added tax; and
(b) A ratable portion of any input tax which cannot be directly attributed to either activity.
d) Determination of the output tax and VAT payable and computation of VAT payable or
excess tax credits
(i) The 12% rate shall be applied to the gross selling price which may be billed separately, as in
transactions deemed sale.
(ii) If VAT is not billed separately the total invoice amount shall be multiplied by 1/11 to arrive at
the tax.
(iii) If VAT is billed separately but the amount billed is erroneous, the tax shall form, part of the
gross selling price by which 1/11 shall be multiplied.
Prescriptive period of claiming VAT refund

Failure to comply with the 120-day waiting period violates a mandatory provision of law. It
violates the doctrine of exhaustion of administrative remedies and renders the petition
premature and thus without a cause of action, with the effect that the Court of Tax Appeals
(CTA) does not acquire jurisdiction over the taxpayers petition. The charter of the CTA
expressly provides that its jurisdiction is to review on appeal decisions of the Commissioner
of Internal Revenue (CIR) in cases involving xxx refunds of internal revenue taxes. When a
taxpayer prematurely files a judicial claim for tax refund or credit with the CTA without waiting
for the decision of the CIR, there is no decision of the CIR to review and thus the CTA as a
court of special jurisdiction has no jurisdiction over the appeal (Commissioner of Internal
Revenue vs. San Roque Power Corporation/Taganito Mining Corporation vs. Commissioner of Internal
Revenue G.R. No. 187485 dated February 12, 2013).

Application of 120+30 day period

A claim for tax refund or credit, like a claim for tax exemption, is construed strictly against the
taxpayer. One of the conditions for a judicial claim of refund or credit under the VAT System is
compliance with the 120+30 day mandatory and jurisdictional periods. Thus, strict compliance
with the 120+30 day periods is necessary for such a claim to prosper, whether before, during,
or after the effectivity of the Atlas doctrine, except for the period from the issuance of BIR
Ruling No. DA-489-03 on 10 December 2003 to 6 October 2010 when the Aichi doctrine was
adopted, which again reinstated the 120+30 day periods as mandatory and jurisdictional

(Commissioner of Internal Revenue vs. San Roque Power Corporation/Taganito Mining Corporation vs.
Commissioner of Internal Revenue G.R. 187485 dated October 8, 2013).

20. Substantiation of Input Tax Credits


(Sec. 4.110-8 of RR No. 16-05)

Input taxes for the importation of goods or the domestic purchase of goods, properties or
services made in the course of trade or business, must be substantiated and supported by the
following documents, and must be reported in the information returns required to be submitted to
the Bureau (Sec. 4.110-8, RR No. 16-05, promulgated September 1, 2005):
(1) For the importation of goods import entry or other equivalent document showing actual
payment of VAT on the imported goods.
(2) For the domestic purchases of goods and properties invoice showing the information
required under Secs. 113 and 237 of the Tax Code.
(3) For the purchase of real property public instrument i.e., deed of absolute sale, deed of
conditional sale, contract/agreement to sell, etc., together with VAT invoice issued by the
seller.
(4) For the purchase of services official receipt showing the information required under Secs.
113 and 237 of the Tax Code.
A cash register machine tape issued to a registered buyer shall constitute valid proof of
substantiation of tax credit only if it shows the information required under Secs. 113 and 237 of
the Tax Code (Sec. 4.110-8, RR No. 16-05).
Claim for credit or refund of input value-added tax; printing of zero-rated.
The following invoicing requirements enumerated in Section 4.108-1 of the Revenue Regulations
(RR) 7-95 must be observed by all VAT-registered taxpayers:
(1) The name, TIN and address of seller;
(2) Date of transaction;
(3) quantity, unit cost and description of merchandise or nature of service;
(4) The name, TIN, business style, if any, and address of the VAT-registered purchaser, customer
or client;
(5) The word zero-rated imprinted on the invoice covering zero-rated sales; and the invoice
value or consideration.

The need for taxpayers to indicate in their invoices and receipts the fact that they are zerorated or that its transactions are zero-rated became more apparent upon the integration of the
abovementioned provisions of RR No. 7-95 in Section 113 of the NIRC enumerating the
invoicing requirements of VAT-registered persons when the NIRC was amended by Republic
Act No. 9337. The Court has consistently ruled that the absence of the word zero-rated on
the invoices and receipts of a taxpayer will result in the denial of the claim for tax refund
(Eastern Telecommunications Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No.
168856 dated August 29, 2012).

Transitional input tax shall be supported by an inventory of goods as shown in a detailed list to
be submitted to the BIR. (Sec. 4.110-8, RR No. 16-05)
Transitional Input Tax Credits; prior payment not required
Prior payment of taxes is not required for a taxpayer to avail of the 8% transitional input tax
credit. First, it was never mentioned in Section 105 that prior payment of taxes is a
requirement. To require it now would be tantamount to judicial legislation. Second, transitional
input tax credit is not a tax refund per se but a tax credit. Tax credit is not synonymous to tax
refund. Tax refund is defined as the money that a taxpayer overpaid and is thus returned by
the taxing authority. Tax credit, on the other hand, is an amount subtracted directly from
ones total tax liability. It is any amount given to a taxpayer as a subsidy, a refund, or an
incentive to encourage investment. For the existence or grant solely of such credit, neither a

tax liability nor a prior tax payment is needed (Fort Bonifacio Development Corporation vs.
Commissioner of Internal Revenue and Revenue District Officer, etc., G.R. No. 173425. January 22, 2013.)

Input tax on deemed sale transactions


shall be substantiated with an invoice. (Sec. 4.110-8, RR No. 16-05)
Input tax from payments made to non-residents (such as for services, rentals and royalties)
shall be supported by a copy of the Monthly Remittance Return of Value Added Tax Withheld (BIR
Form 1600) filed by the resident payor in behalf of the non-resident evidencing remittance of VAT
due which was withheld by the payor (Sec. 4.110-8, RR No. 16-05).

21. Refund or tax credit of excess input tax


General Law of Tax Remedies
Under the general law on tax remedies, the
taxpayer has option either to (1) wait for the
decision of the BIR, or (2) appeal to the CTA
within 30 days from the lapse of the 180-day
period to decide
The lapse of the 180-day period was deemed a
denial of the petition ONLY for purposes of
appeal.
The 180-day period is not mandatory, and the
taxpayer may file an appeal within the 180-day
period without waiting for the decision of the BIR.

Sec. 112, NIRC on VAT


The taxpayer has no other option to wait for the
decision of the BIR and must appeal within 30 days
from the lapse of the 120-day period.
The lapse of the 120-day period is deemed a denial
per se of the appeal.
The 120-day period is mandatory, and the taxpayer
cannot file an appeal within the 120-day period
without decision denying the claim for VAT refund.
Otherwise, it would be dismissed for being
premature.

a) Who may claim for refund/apply for issuance of tax credit certificate (TCC)
Under Revenue Memorandum Circular No. 29-09 which reiterates Section 112(C) of the 1997 Tax
Code and provides that, in proper cases, the Commissioner of Internal Revenue shall grant a
refund or issue a TCC within 120 days from the date of submission of complete documents.
However, this presupposes that, upon audit/verification, the taxpayer must:
1. Submit the complete documents necessary to determine and/or ascertain the correctness of
the return and the amount to be refunded/credited;
2. Ascertain that all books of accounts and accounting records pertaining to the claim are
immediately available to the concerned revenue office for audit and verification;
3. Explain in writing or reconcile any discrepancies/findings upon audit/verification within five
days from receipt of the notification from the revenue office; and
4. Signify his concurrence to the outcome of the verification, which shall be evidenced by an
Agreement Form
Grounds
[citing Sec. 112, NIRC]
In a nutshell, there are only two grounds when taxpayer may claim for a VAT refund, to wit:
Excess input VAT attributable to effectively zero-rated sales (Sec. 112(a)), and
Excess input VAT at the time of cancellation of the VAT registration (Sec. 112(b)).
The two ways to claim for refund are as follows:
Administrative claim for refund with the BIR, within two years from the close of the taxable
quarter from which the zero rated sales or cancellation of VAT registration were made.
Judicial claim for refund, within 30 days either:
a. from the date of the denial of BIR made within the 120-day period to decide, OR

b. if there is no such decision but inaction, from the date of the lapse of the 120-day period
Thus, when the BIR made a decision denying the claim for refund, the taxpayer must appeal right
within 30 days from the receipt of the decision, and has no option to decide, as the same applies
ONLY in case of inaction. Conversely when there is inaction, the taxpayer must appeal within 30
days from the lapse of the 120-day period, and he has no option to wait for the decision to be
made of the BIR.
Note that the two-year prescriptive period in the administrative claim does NOT apply to the
judicial claim.

Since the seller is the one directly liable for VAT, the Supreme Court held Contex vs. CIR
(G.R. No. 151135 dated July 2, 2004) that the Seller him/her/itself must claim for refund, and
thereafter return the same to the buyer.

b) Period to file claim/apply for issuance of TCC


Any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two
(2) years after the close of the taxable quarter when the sales were made, apply for the
issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such
sales, except transitional input tax, to the extent that such input tax has not been applied against
output tax.
Period Within Which Refund or Tax Credit of Input Taxes Shall be Made. In proper cases,
the Commissioner shall grant a refund or issue the tax credit certificate for creditable input taxes
within one hundred twenty (120) days from the date of submission of complete documents in
support of the application.
In case of full or partial denial of the claim for tax refund or tax credit, or the failure on the part of
the Commissioner to act on the application within the period prescribed above, the taxpayer
affected may, within thirty (30) days from the receipt of the decision denying the claim or after the
expiration of the one hundred twenty day-period, appeal the decision or the unacted claim with
the Court of Tax Appeals.

Sec. 112(A) of the NIRC, providing a two-year prescriptive period reckoned from the close of
the taxable quarter when the relevant sales or transactions were made pertaining to the
creditable input VAT and not to the other actions which refer to erroneous payment of taxes
(CIR vs. Mirant Pagbilao Corp. G.R. No. 172129, Sept. 12, 2008).

Stated otherwise, Section 229 does not apply to refunds/credits of input VAT (CIR vs. Aichi
Forging Co., G.R. No. 184823, Oct. 6, 2010).

Summary of rules on prescriptive periods involving VAT


The rules on the determination of the prescriptive period for filing a tax refund or credit of
unutilized input value-added tax (VAT), as provided in Section 112 of the 1997 Tax Code, are
as follows:
(1) An administrative claim must be filed with the Commissioner of Internal Revenue (CIR) within
two years after the close of the taxable quarter when the zero-rated or effectively zero-rated
sales were made.
(2) The CIR has 120 days from the date of submission of complete documents in support of the
administrative claim within which to decide whether to grant a refund or issue a tax credit
certificate. The 120-day period may extend beyond the two-year period from the filing of the
administrative claim if the claim is filed in the later part of the two-year period. If the 120-day

period expires without any decision from the CIR, then the administrative claim may be
considered to be denied by inaction.
(3) A judicial claim must be filed with the Court of Tax Appeals (CTA) within 30 days from the
receipt of the CIRs decision denying the administrative claim or from the expiration of the
120-day period without any action from the CIR.
(4) All taxpayers, however, can rely on Bureau of Internal Revenue Ruling No. DA-489-03, which

expressly states that the taxpayer-claimant need not wait for the lapse of the 120-day period
before it could seek judicial relief with the CTA by way of Petition for Review, from the time of
its issuance on 10 December 2003 up to its reversal by the Court in CIR vs. Aichi Forging
Company of Asia on 6 October 2010, as an exception to the mandatory and jurisdictional
120+30 day periods (Mindanao II Geothermal Partnership vs. Commissioner of Internal Revenue,
G.R. No. 193301 & G.R. No. 194637. March 11, 2013).

c) Manner of giving refund


Refunds shall be made upon warrants drawn by the Commissioner or by his duly authorized
representative without the necessity of being countersigned by the Chairman, Commission on
audit, the provisions of the Administrative Code of 1987 to the contrary notwithstanding: Provided,
That refunds under this paragraph shall be subject to post audit by the Commission on Audit.
d) Destination principle or Cross-border doctrine
The Phil VAT law adheres to the Cross Border Doctrine, which basically means that no VAT
shall be imposed to form part of the cost of goods destined for consumption OUTSIDE of the
territorial border of the taxing authority. Hence, actual export of goods and services from the Phil
to a foreign country must be free from VAT. Conversely, those destined for use or consumption
WITHIN the Phil shall be imposed with the 12% VAT.

22. Invoicing requirements (Sec. 113, NIRC)


a) Invoicing requirements in general
(Sec. 113 [A] [B])
Invoicing Requirements. A VAT-registered person shall issue:
(1) A VAT invoice for every sale, barter or exchange of goods or properties; and
(2) A VAT official receipt for every lease of goods or properties, and for every sale, barter or
exchange of services.
Information Contained in the VAT Invoice or VAT Official Receipt. The following information shall
be indicated in the VAT invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed by his Taxpayers
Identification Number (TIN);
(2) The total amount which the purchaser pays or is obliged to pay to the seller with the
indication that such amount includes the value-added tax: Provided, that:
a. The amount of the tax shall be shown as separate item in the invoice or receipt;
b. If the sale is exempt from value-added tax, 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; Provided, That the seller may 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.
b) Invoicing and recording 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

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 in Sec.
Invoice, at the time of the transaction, which
should include all the info prescribed in Sec.
113(B)
An inventory shall be prepared and submitted to
the RDO who has jurisdiction over the taxpayers
principal place of business not later than 30 days
after retirement or cessation from the business.
An invoice shall be prepared for the entire
inventory, which shall be the basis of 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.

c) Consequences of issuing erroneous VAT invoice or VAT official receipt (Sec. 113 D,
NIRC)
(1) If a person who is not a VAT-registered person issues an invoice or receipt showing is
Taxpayer Identification Number (TIN), followed by the word VAT.
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
i. The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
ii. A fifty percent (50%) surcharge under Section 248 (B) of this Code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is
shown on the invoice or receipt, be recognized as an input tax credit to the purchaser
under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term VAT-exempt
sale, the issuer shall be liable to account for the tax imposed in Section 106 or 108 as if
Section 109 did not apply
23. Filing of return and payment
Filing of Return. Every person liable to pay VAT shall file a quarterly return of the amount of his
quarterly gross sales or receipts within twenty five (25) days following the close of taxable quarter

using the latest version of Quarterly VAT Return. The term taxable quarter shall mean the
quarter that is synchronized to the income tax quarter of the taxpayer (i.e., the calendar quarter or
fiscal quarter).
Amounts reflected in the monthly VAT declarations for the first 2 months of the quarter shall still
be included in the quarterly VAT return which reflects the cumulative figures for the taxable
quarter. Payments in the monthly VAT declarations shall, however, 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.
Payment of VAT upon filing of VAT return
24. Withholding of Final VAT on Sales to Government (Sec. 114 C) (Sec. 4.114-2 of RR No.
16-05 as amended by Sec. 22 of RR No. 4-07)
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 a final value-added tax at the rate of five percent (5%) of the gross payment thereof:
Provided, That the payment for lease or use of properties or property rights to nonresident
owners shall be subject to ten percent (10%) withholding tax the time of payment. For purposes
of this Section, the payor or person in control of the payment shall be considered as the
withholding agent.
The value-added tax withheld under this Section shall be remitted within ten (10) days following
the end of the month the withholding tax was made.
Compliance Requirements (Internal Revenue Taxes)
1. Administrative requirements
a) Registration requirements
(i) Annual registration fee
Annual registration fee = P500.00 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.
(ii) Registration of each type of internal revenue tax
Non-VAT or VAT-exempt persons are also required to register as NON-VAT persons and pay the
annual registration fee of P500.00 for every separate or distinct establishment or place of
business before the start of such business and every year thereafter on or before the 31 st day of
January. Individuals engaged in business where the gross sales or receipts do NOT exceed
P100,000.00 during any 12-month period, and cooperatives other than electric cooperatives, are
required to register but will not be made to pay the P500.00 fee.
(iii) Transfer of registration
It shall be the duty of every VAT registered person to file a notice of change of his principal place
of business or nay of his branches or offices. Such notification shall be filed within 15 days from
the date of such change with the Revenue District Officer who have jurisdiction over his former
and new place of business
(iv) Other updates
Some instances where taxpayer will update his registration by submitting a duly accomplished
Registration Update Form:

1. A persons business has become exempt in accordance with Sec. 109


2. A change in the nature of the business itself from sale of taxable goods and/or services to
exempt sales and/or services;
3. A person whose transactions are exempt from VAT who voluntarily registered under VAT
system, who after the lapse of three years after his registration, applies for cancellation of his
registration as such; and
4. A VAT-registered person whose gross sales or receipts for three consecutive years did not
exceed P1,919,500.00 beginning July 1, 2005, which amount shall be adjusted to its present
value every three years using the Consumer Price Index, as published by the NSO.
Upon updating his registration, the taxpayer shall become liable to the percentage tax imposed in
Sec. 116 of the Tax Code. A short period return for the remaining period that he was VATregistered shall be filed within twenty five (25) days from the date of cancellation of his
registration.
(v) Cancellation of registration
Any person, whose registration has been cancelled in accordance with Section 236, shall file a
return and pay the tax due thereon within twenty-five (25) days from the date of cancellation of
registration:
Provided, that only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.
(vi) Power of the Commissioner to suspend the business operations
The Commissioner or his authorized representative is hereby empowered to suspend the
business operations and temporarily close the business establishment of any person for any of
the following violations:
(a)
(1)
(2)
(3)

In the Case of a VAT-registered Person.


Failure to issue receipts or invoices;
Failure to file a value-added tax return as required under Section 114;
Understatement of taxable sales or receipts by thirty percent (30%) or more of his correct
taxable sales or receipts for the taxable quarter.

(b) Failure of any Person to Register as Required under Section 236.The temporary closure of the establishment shall be for the duration of not less than five (5) days
and shall be lifted only upon compliance with whatever requirements prescribed by the
Commissioner in the closure order.
b) Persons required to register for VAT
Persons required to register for Value-Added Tax.
a. Any person who, in the course of trade of business, sells, barters or exchanges goods or
properties, or engages in the sale or exchange of services, shall be liable to register for
Value-added tax if:
b. His gross sales or receipts for the past twelve (12) months, other than those that are exempt
under section 109 (a) to (u), have exceeded One million nine hundred nineteen thousand five
hundred pesos (P1,919,500); or
c. There are reasonable grounds to believe that his gross sales or receipts for the next twelve
(12) months, other than those that are exempt under Section 109 (A) to (U), will exceed one
million nine hundred nineteen thousand five hundred pesos (P1,919,500).
(i) Optional registration for VAT of exempt person
Under Section 109 of NIRC as amended by RA 9337, there is an optional registration given to a
taxpayer whereby, a taxpayer engaged in exempt transactions in Sec. 109 is given the choice to
remain to be exempt from VAT or he can opt to be registered as a VAT-registered person.

(ii) Cancellation of VAT registration


Cancellation of Registration.
(1) General Rule. The registration of any person who ceases to be liable to a tax type shall be
cancelled upon filing with the Revenue District Office where he is registered, an application
for registration information update in a form prescribed therefor.
(2) Cancellation of Value-Added Tax Registration. A VAT-registered person may cancel his
registration for VAT if:
a. He makes written application and can demonstrate to the Commissioners satisfaction that
his gross sales or receipts for the following twelve (12) months, other than those that are
exempt under Section 109 (A) to (U), will not exceed One million five hundred thousand
pesos (P1,500,000), or
b. He has ceased to carry on his trade or business, and does not expect to recommence any
trade or business within the next twelve (12) months.
(iii) Changes in or cessation of status of a VAT-registered person
A VAT-registered person may cancel his registration for VAT as provided for in Sec. 236 (F) (2),
and also in the following instances:
1. A change of ownership, in the case of a single proprietorship;
2. Dissolution of a partnership or corporation;
3. Merger or consolidation with respect to the dissolved corporation(s);
4. A person who has registered prior to planned business commencement, but failed to actually
start his business
c) Supplying taxpayer identification number (TIN)
(i) Supplying of Taxpayer Identification Number (TIN). Any person required under the authority
of this Code to make, render or file a return, statement or other document shall be supplied
with or assigned a Taxpayer Identification Number (TIN) which he shall indicate in such
return, statement or document filed with the Bureau of Internal Revenue for his proper
identification for tax purposes, and which he shall indicate in certain documents, such as, but
not limited to, the following:
(1) Sugar quedans, refined sugar release order or similar instruments;
(2) Domestic bills of lading;
(3) Documents to be registered with the Register of Deeds or Assessors Office;
(4) Registration certificate of transportation equipment by land, sea or air;
(5) Documents to be registered with the Securities and Exchange Commission;
(6) Building construction permits;
(7) Application for loan with banks, financial institutions, or other financial intermediaries;
(8) Application for mayors permit;
(9) Application for business license with the Department of Trade and Industry; and
(10)Such other documents which may hereafter be required under rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
d) Issuance of receipts or sales or commercial invoices
(i) Printing of receipts or sales or commercial invoices
Section 238. Printing of Receipts or Sales or Commercial Invoices.
All persons who are engaged in business shall secure from the Bureau of Internal Revenue an
authority to print receipts or sales or commercial invoices before a printer can print the same.

No authority to print receipts or sales or commercial invoices shall be granted unless the receipts
or invoices to be printed are serially numbered and shall show, among other things, the name,
business style, Taxpayer Identification Number (TIN) and business address of the person or entity
to use the same, and such other information that may be required by rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
(ii) Invoicing requirements for VAT
Information contained in the VAT invoice or VAT official receipt
The following information shall be indicated in the VAT invoice or VAT official receipt:
(1) A statement that the seller is a VAT-registered person, followed by his Taxpayers
Identification Number (TIN);
(2) The total amount which the purchaser pays or is obligated to pay to the seller with the
identification that such amount includes the value-added tax: Provided, That:
a. The amount of the tax shall be shown as a separate item in the invoice or receipt;
b. If the sale is exempt from value0added tax, 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 break-down 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: Provided, That the seller may 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.
Consequences of issuing erroneous VAT invoice or official receipts
(1) 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:
(a) The issuer shall, in addition to any liability to other percentage taxes, be liable to:
(i) The tax imposed in Section 106 or 108 without the benefit of any input tax credit; and
(ii) A fifty percent (50%) surcharge under Section 248 (B) of this Code;
(b) The VAT shall, if the other requisite information required under Subsection (B) hereof is
shown on the invoice or receipt, be recognized as an input tax credit to the purchaser
under Section 110 of this Code.
(2) If a VAT-registered person issues a VAT invoice or VAT official receipt for a VAT-exempt
transaction, but fails to display prominently on the invoice or receipt the term VAT-exempt
sale, the issuer shall be liable to account for the tax imposed in Section 106 or 1085 as if
Section 109 did not apply.
e) Exhibition of certificate of payment at place of business
SECTION 241. Exhibition of Certificate of Payment at Place of Business. The certificate or
receipts showing payment of taxes issued to a person engaged in a business subject to an
annual registration fee shall be kept conspicuously exhibited in plain view in or at the place where
the business is conducted; and in case of a peddler or other persons not having a fixed place of
business, shall be kept in the possession of the holder thereof, subject to production upon
demand of any internal revenue officer.

f) Continuation of business of deceased person


When any individual who has paid the annual registration fee dies, and the same business is
continue by the person or persons interested in his estate, no additional payment shall be
required for the residue of the term of which the tax was paid: Provided, however, that the person
or persons interested in the estate should, within thirty (30) days from the death of the decedent,
submit to the Bureau of Internal Revenue or the Regional or Revenue District Officer inventories
of goods or stocks had at the time of such death.
The requirement under this Section shall also be applicable in the case of transfer of ownership
or change of mane of the business establishment. (Section 242, NIRC)
g) Removal of business to other location
Any business for which the annual registration fee has been paid may, subject to the rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner,
be removed and continued in any other place without the payment of additional tax during the
term for which the payment was made. (Section 243, NIRC)
2. Tax returns
A report prepared by the taxpayer showing to the internal revenue officers an enumeration of
taxable amounts and description of taxable transactions, allowable deductions, amounts subject
to tax and the tax payable by the taxpayer to the government.
a. Income Tax Returns
(i) Individual Tax Returns
(a) Filing of individual tax returns
(1) Who are required to file
A.
1.
2.
3.
4.

Individual
Resident Filipino citizen;
Non-Resident Filipino citizen, on his income from sources within the Philippines;
Resident alien, on income derived from sources within the Philippines; and
Non-resident alien engaged in trade or business or in the exercise of profession in the
Philippines. (NRAETB).

(a) Return of husband and wife


Husband and Wife. Married individuals, whether citizens, resident of nonresident aliens, who
do not derive income purely form compensation, shall file a return for the taxable year to include
the income of both spouses, 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 be consolidated by the
Bureau for purposes of verification for the taxable year.
(b) Return of parent to include income of children
Return of Parent to Include Income of Children. The income of unmarried minors derived
from property received from a living parent shall be included in the return of the parent, except (1)
when the donors tax has been paid on such property, or (2) when the transfer of such property is
exempt from donors tax.
(c) Return of persons under disability
Persons Under Disability. If the taxpayer is unable to make his own return, the return may be
made by his duly authorized agent or representative or by the guardian or other person charged

with the care of his person of property, the principal and his representative or guardian assuming
the responsibility of making the return and incurring penalties provided for erroneous, false or
fraudulent returns.
(2) Who are not required to file
Individuals Not Required to File an Income Tax Return:
1. One whose gross income DOES NOT EXCEED his total personal and additional exemptions

However, 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;

2. One with respect to pure compensation income, derived from sources within the Philippines
Exception: An individual deriving compensation concurrently from two or more employers at any
time during the taxable year shall file an income tax return
3. One whose sole income has been subjected to final withholding tax.
4. One who is exempt from income tax pursuant to the provisions of this Code and other laws,
general or special.
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.

1.
2.
3.
4.

Where to file
Authorized agent bank;
Revenue District Officer;
Collection Agent;
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.

When to file
When to File Individual Returns
On or before the 15th day of April of each year covering income for the preceding taxable year.
(ii) Corporate Returns
Every corporation, except foreign corporations not engaged in trade or business in the
Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or
adjustment return.
(a) Requirement for filing returns
(1) Declaration of quarterly corporate income tax
Every corporation subject to the tax herein imposed, except foreign corporations not engaged in
trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly
income tax return.
(a) Place of filing
Where to File (same as above)
1. Authorized agent bank;
2. Revenue District Officer;
3. Collection Agent;

4. 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.
(b) Time of filing
Every corporation whether using the fiscal year or calendar year shall file quarterly within 60
days following the close of each quarter.
(2) Final adjustment return
(a) Place of filing
Where to File (same as above)
1. Authorized agent bank;
2. Revenue District Officer;
3. Collection Agent;
4. 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 Officer of the Commissioner.
(b) Time of filing
Corporations using the Calendar Year shall file its final consolidated income tax return on or
before April 15.
Corporations using Fiscal Year the final consolidated income tax shall be filed on or before
the 15th day of the fourth (4th) month following the close of the taxable year.
(3) Taxable year of corporations
A corporation may employ either calendar year or fiscal year as a basis for filing its annual
income tax return
Unlike individuals, corporations are allowed to change their taxable period from calendar to
fiscal or vice versa or fiscal to fiscal.
(4) Extension of time to file return
The Commissioner may, in meritorious cases, grant a reasonable extension of time for filing
returns of income (or final and adjustment returns in case of corporations), subject to the
provisions of Section 56 of this Code. (Section 53, NIRC)

(b) Return of corporation contemplating dissolution or reorganization


All corporations, partnerships or persons that retire from business shall, within ten (10) days from
the date of retirement or within such period of time as may be allowed by the Commissioner in
special cases, submit their books of accounts, including the subsidiary books and other
accounting records to the Commissioner or any of his deputies for examination, after which they
shall be returned. Corporations and partnerships contemplating dissolution must notify the
Commissioner and shall not be dissolved until cleared of any tax liability.
(c) Return on capital gains realized from sale of shares of stock not traded in the local
stock exchange
The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is
hereby imposed upon the net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.
Not over P100,000 5%

On any amount in excess of P100,000.00 10%


(iii) Returns of receivers, trustees in bankruptcy or assignees
In cases wherein receivers, trustees in bankruptcy or assignees are operating the property or
business of a corporation, subject to the tax imposed by this Title, such receivers, trustees or
assignees shall make returns of net income as and for such corporation, in the same manner and
form as such organization is hereinbefore required to make returns, and any tax due on the
income as returned by receivers, trustees or assignees shall be assessed and collected in the
same manner as if assessed directly against the organizations of whose businesses or properties
they have custody or control. (Section 54, NIRC)
(iv) Returns of general partnerships
Every general professional partnership shall file, in duplicate, a return of its income, except
income exempt under Section 32(B) of this Title, setting forth the items of gross income and of
deductions allowed by this Title, and the names, Taxpayer Identification Numbers (TIN),
addresses and shares of each of the partners. (Section 55, NIRC)
(v) Fiduciary returns
A.
(1)
(2)
(3)
(4)
(5)
(6)
(7)

Who shall make the return


Guardians
Trustees
Executors
Administrators
Receivers
Conservators
All persons / corporations

File in duplicate a return of the income of the person, trust, or estate for whom or which they
act in case such person, trust or estate has a gross income = P20,000 or over during the
taxable year.

c) Donors Tax Returns


(i) Requirements
Any individual who makes any transfer by gift (except those which are exempt from Donors Tax)
shall, for the purpose of the said tax make a return under oath in duplicate.
The return shall set forth:
1. Each gift made during the calendar year which is to be included in computing net gifts;
2. The deductions claimed and allowable;
3. Any previous net gifts made during the same calendar year;
4. The name of the done; and
5. Such further information as may be required by rules and regulations made pursuant to law.
(ii) Time and place of filing
The donors tax return shall be filed within thirty (30) days after the date the gift is made or
completed and the tax due thereon shall be paid at the same time that the return is filed. Unless
the Commissioner otherwise permits, the Revenue District Officer, Revenue Collection Officer or
duly authorized Treasurer of the city or municipality where the donor was domiciled at the time of
the transfer, or if there be no legal residence in the Philippines, with the Office of the
Commissioner.
In the case of gifts made by a non-resident, the return may be filed with the Philippine Embassy
or Consulate in the country where he is domiciled at the time of the transfer, or directly with the
Office of the Commissioner. For this purpose, the term OFFICE OF THE COMMISSIONER shall

refer to the Revenue District Office (RDO) having jurisdiction over the BIR National Office
Building which houses the Office of the Commissioner, or presently, to the Revenue District Office
No. 39 South Quezon City.
d) VAT Returns
(i) In general
Every person liable to pay the value-added tax imposed under this Title shall file a quarterly return
of the amount of his gross sales or receipts the close of each taxpayer: Provided, however, That
VAT-registered persons shall pay the value-added tax on a monthly basis.
(ii) Where to file the return
Where to File the Return and Pay the Tax. Except as the Commissioner otherwise permits, the
return shall be filed with and the tax paid to an authorized agent bank, Revenue Collection Officer
or duly authorized city or municipal Treasurer in the Philippines located within the revenue district
where the taxpayer is registered or required to register.
e) Withholding Tax Returns
This practice which is also known as taxation at source, refers to the requirement that taxes
imposed or prescribed by the NIRC are to be deducted and withheld by the payor-corporations
and/or persons from payments made to payees-corporations and/or persons for the former to pay
the same directly to the BIR. Thus, the taxes are collected practically at the time the transaction is
made or when the taxable act occurs.
Basic Principles of the Withholding Tax System
An advance payment of the taxes of the recipient of the income.
The tax withheld is a tax credit against the income tax liability of the recipient of the payment.
On the part of the withholding agent, failure to withhold, or under withholding of the tax affects
the deductibility of the payment from gross income.
Penalties are imposed for non-compliance with the withholding tax rules.
(i) Quarterly returns and payments of taxes withheld
There are no quarterly returns/payments required for withholding taxes, only monthly returns,
which are generally made on or before the tenth (10th) day of the month following the month in
which withholding was made except for taxes withheld for the month of December which shall be
filed on or before January 15 of the succeeding year.
Annual information return
Annual information of income tax withheld on
compensation and final withholding taxes

Annual information return of expanded


withholding taxes

1. Tax payments
a. Income Taxes
(i) Payment, in general; time of payment

BIR Form No. 1604CF

On or before January 31

BIR Form No. 1604E

On or before March 1

PAYMENT OF TAX
In general: Who shall pay?
(a) Total amount of tax shall be paid
By the person subject thereto
At the time the return is filed (pay-as-you-file system)
(ii) Installment payment
INSTALLMENT PAYMENT (for individuals only)
If the tax due > P2,000, the taxpayer other than a corporation, may elect to pay in 2 equal
installments:
(a) 1st installment is paid at the time the return is filed
(b) 2nd installment is paid on/before July 15 following the close of the calendar year
(c) If any installment is not paid on the date fixed, whole amount of the tax unpaid becomes due
and demandable plus delinquency penalties
(iii) Payment of capital gains tax
Paid on the date the return is filed.
No payment is required if the seller submits proof of his intention to avail of exemption provided
by law
In case of failure to qualify for exemption the tax due shall immediately become due and payable
plus penalties
If tax has been paid, and seller submits proof of intent within 6 months from the registration of the
document transferring real property, he shall be entitled to a refund upon verification of his
compliance with requirements for such exemption
If the taxpayer elects to report gain by installments, tax due shall be paid within 30 days from
such receipt of payments
No registration of documents transferring real property unless CIR or duly authorized
representative certified that such transfer has been reported and tax due has been paid.
b. Estate Taxes
(i) Time of payment
When to file: Within 6 months from the decedents death.
Where to file:
1. Authorized agent bank
2. RDO
3. Duly authorized city or municipal treasurer of the place of decedents domicile
4. If there is no legal residence in the country, with the CIR
(a) Extension of time
Filing:
The CIR, in meritorious cases, grants a reasonable extension not exceeding 30 days for filing the
return.
Payment:

General rule at the time the return is filed by the executor, administrative but before delivery of
the distributive share in the inheritance to any heir or beneficiary.
Exception when the CIR finds that payment on due date would impose undue hardship upon
the estate or any of the heirs, he may extend the time for payment of such tax:
1. Not to exceed 5 years, in case the estate is settled through the courts; or
2. 2 years in case the estate is settled extra judicially
In which case it shall be paid on or before the expiration of the extension and running of the
Statute of Limitations for assessment shall be suspended for the period of any such extension.
The CIR may require a bond not exceeding double the amount of the tax and with such sureties
as the CIR deems necessary when an extension for payment is granted.
(ii) Liability for payment
(a) Discharge of executor or administrator from personal liability
Upon payment, the administrator shall deliver the distributive share in the inheritance to any heir
or beneficiary. The estate tax clearance issued by the CIR or the Revenue District Officer having
jurisdiction over the estate will serve as the authority to distribute the remaining/distributable
properties/share in the inheritance to the heir or beneficiary.
In case of installment payments, the clearance shall be released only with respect to the property
the corresponding tax has been paid.
(b) Definition of deficiency
Deficiency interest the term deficiency means the amount by which the taxed imposed under
the Code exceeds the amount shown on the return filed (249B)
(iii) Payment before delivery by executor or administrator
No judge shall authorize the executor or judicial administrator to deliver a distributive share to any
party interested in the estate unless a certification from the Commissioner that the estate tax has
been paid is shown. (Section 94, NIRC)
(a) Payment of tax antecedent to the transfer of shares, bonds or rights
There shall not be transferred to any new owner in the books of any corporation, sociedad
anonima, partnership, business, or industry organized or established in the Philippines any share,
obligation, bond or right by way of gift inter vivos or mortis causa, legacy or inheritance, unless a
certification from the Commissioner that the taxes fixed in this Title and due thereon have been
paid is shown.
If a bank has knowledge of the death of a person, who maintained a bank deposit account alone,
or jointly with another, it shall not allow any withdrawal from the said deposit account, unless the
Commissioner has certified that the taxes imposed thereon by this Title have been paid;
Provided, however, that the administrator of the estate or nay 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. (Section 97, NIRC)
(iv) Duties of certain officers and debtors
Registers of Deeds shall not register in the Registry of Property any document transferring real
property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa,

legacy or inheritance, unless a certification from the Commissioner that the tax fixed in this Title
and actually due thereon had been paid is shown, and they shall immediately notify the
Commissioner, Regional Director, Revenue District Officer or Revenue Collection Officer or
Treasurer of the city or municipality where their offices are located, of the nonpayment of the tax
discovered by them. Any lawyer, notary public, or any government officer who, by reason of his
official duties, intervenes in the preparation or acknowledgement of documents regarding partition
or disposal of donation inter vivos or mortis causa, legacy or inheritance, shall have the duty of
furnishing the Commissioner, Regional Director, Revenue District Officer or Revenue Collection
Officer of the place where he may have his principal office, with copies of such documents and
any information whatsoever which may facilitate the collection of the aforementioned tax. Neither
shall a debtor of the deceased pay his debts to the heirs, legatee, executor or administrator of his
creditor, unless the certification of the Commissioner that the tax fixed in this Chapter had been
paid is shown; but he may pay the executor or judicial administrator without said certification if the
credit is included in the inventory of the estate of the deceased. (Section 95, NIRC)
Executor or Administrator
When the gross estate is more than P20,000, the executor, administrator or any of the legal heirs
shall:
give a written notice of death to the BIR within two months after the decedents death OR
after the executor or administrator shall have qualified
file the estate tax return within the time prescribed by law
pay the estate tax within the time prescribed by law
If the executor or administrator makes a written application to the Commissioner for determination
of the amount of estate tax and discharge from personal liability therefor, the Commissioner shall
notify the executor or administrator of the amount of the tax. Upon payment of the tax, the
executor or administrator shall be DISCHARGED from PERSONAL LIABILITY for any deficiency
in the tax thereafter found to be due, and shall be entitled to a receipt or writing showing such
discharge (Section 92 of NIRC).
Judge
No judge shall authorize the executor or administrator to deliver a distributive share to any party
interested in the estate, unless a certification from the BIR that the estate tax has been paid is
show (Section 94 of NIRC).
Register of Deeds
The Register of deeds shall not register in the registry of property any transfer of real property or
real rights therein, or nay mortgage, by way of donation or mortis causa or inheritance, without a
certification from the BIR of payment of the estate tax, and they shall immediately notify the BIR
of non-payment of tax discovered by them (Section 95 of NIRC).
Bank
If a bank has knowledge of the death of a person who maintained a joint account or deposit jointly
with another, it shall not allow any withdrawal by a surviving depositor from the said joint account
unless the Commissioner has certified that the estate tax has been paid.
Exception: the administrator or any heir may, with the authorization of the Commissioner,
withdraw an amount NOT EXCEEDING P20,000 (Section 95 of NIRC).
Lawyer, Notary Public or any Government Officer
Any lawyer, notary public, or any government officer who, by reason of his official duties,
intervenes in the preparation or acknowledgement of documents regarding partition or disposal of
donations mortis causa, legacy or inheritance, shall furnish the BIR with copies of such
documents and any information whatsoever which may facilitate the collection of estate tax
(Section 95 of NIRC).

Corporate Secretary of other responsible officer


No transfer to any new owner in the books of any corporation, sociedad anonima, partnership,
business or industry organized or established in the Philippines, of any shares, obligations, bonds
or rights by way of donations mortis causa, legacy or inheritance shall be made, UNLESS a
certification from the BIR that the estate tax has been paid is shown (Section 97 of NIRC).
A debtor shall not pay his debts to the heirs, legatees, executor or administrator of his creditordecedent without a certification from the BIR that the estate tax has been paid.
Exception: If the credit is included in the inventory of estate of the decedent (Section 95 of
NIRC).
(v) Restitution of tax upon satisfaction of outstanding obligations
If, after the payment of the estate tax, new obligations of the decedent shall appear, and the
persons interested shall have satisfied them by order of the court, they shall have a right to the
restitution of the proportional part of the tax paid. (Section 96, NIRC)
3. Donors Taxes
(i) Time and place of payment
Same with above.
d) VAT
(i) Payment of VAT
Payment of VAT upon filing of VAT return
(ii) Where to pay the VAT
1. The monthly VAT declaration and quarterly return shall be filed with, and VAT due thereon
paid to, an AAB under the jurisdiction of the Revenue District/BIR Office where the taxpayer
(head office of the business establishment) is required to be registered.
2. In case where there are no duly accredited agent bank within the municipality or city, the
monthly VAT declaration and quarterly VAT return, shall be filed with and any amount due
shall be paid to the RDO, Collection Agent or duly authorized Treasurer of the
Municipality/City where such taxpayer (head office of the business establishment) is required
to be registered.
3. The quarterly VAT return and the monthly VAT declaration, where no payment is involved,
shall be filed with the RDO/LTDO/Large Taxpayers Assistance Division (LTAD), Collection
Agent, duly authorized
Municipal/City Treasurer of Municipality/City where the taxpayer (head office of the business
establishment) is registered or required to be registered.
Only one consolidated quarterly VAT return or monthly VAT declaration covering the results of
operation of the head office as well as the branches for all lines of business subject to VAT shall
be filed by the taxpayer, for every return period, with the BIR office where said taxpayer is
required to be registered.
E. Tax Remedies under the NIRC
Definition, Nature, Effect And Basis
(Ramo 1-00)
Terms

Definitions

Letter of Authority

Tax Verification Notices (TVNs)


Letter Notice

It is an official document that empowers a Revenue


Officer to examine and scrutinize a Taxpayers
books of accounts and other accounting records, in
order to determine the Taxpayers correct internal
revenue tax liabilities. (General Audit Procedures
and Documentation)
These are issued for estate tax cases. (RMO No.
69-2010)
This pertains to an automatic assessment issued
by the BIR pursuant to a computerized matching of
3rd party information without taxpayers contact.

The revenue examiner went beyond the authority conferred by LOA. A LOA authorizes or
empowers a designated revenue officer to examine, verify and scrutinize a taxpayers books
and records in relation to his internal revenue tax liability for a particular period. The LOA, the
examiners were authorize to examine Sonys book of accounts and other accounting records
for the period 1997 and unverified prior years. However, CIRs basis for deficiency VAT
for 1997 was 1998. They acted without authority in arriving at the deficiency vat assessment.
It should be considered without force and effect a nullity (CIR vs. Sony Philippines, Inc., May
17, 2007 CTA 90).

A LOA should cover a taxable period not exceeding 1 year. The practice of issuing LOA
covering audit of unverified prior years is prohibited.

1. Taxpayers Remedies
a) Assessment
An assessment contains not only a computation of tax liabilities, but also a demand for
payment within a prescribed period. It also signals the time when penalties and interests
begin to accrue against the taxpayer. To enable the taxpayer to determine the remedies
thereon, due process requires that it must be served and received by the taxpayer.
Accordingly, an affidavit which was executed by the revenue officer stating the tax liabilities of
a taxpayer and attached to a criminal complaint for tax evasion cannot be deemed an
assessment that can be questioned before the CTA. The fact that the complaint itself was
specifically directed and sent to DOJ and not to Pascor shows that the intent of the CIR was
to file a criminal complaint for tax evasion and not to issue an assessment (CIR vs. Pascor
Realty and Development Corporation, June 29, 1999, G.R. No. 128315).

An assessment is a written notice and demand made by the Bureau of Internal Revenue
(BIR) on the taxpayer for the settlement of a due tax liability that is there definitely set and
fixed. It is a written communication containing a computation by a revenue officer of tax
liability, giving the taxpayer an opportunity to contest or disprove the BIR examiners findings
(Jose C. Vitug and Ernesto D. Acosta, Tax Law and Jurisprudence, First Edition, p. 282).

(i) Concept of Assessment


(a)
1.
2.
3.

Requisites for valid assessment


Be in writing and signed by the BIR;
Contain the law and the facts on which the assessment is made; and
Contain a demand for payment within the prescribed period. (Sec. 228, NIRC)

Sec. 2 of RR No. 18-2013


Due Process

The concept of due process in assessment can be summarized as follows:


1. Tax payer should be notified that there is an assessment
2. In such notice he must be informed of the legal and factual basis of assessment, for BOTH
PAN and FAN (CIR vs. Metro Star Superama, Inc, G.R. No. 185371, December 8, 2010).

Assessment must not be based on mere conjectures or presumptions (CIR vs. Benipayo, 4
SCRA 182).

The alleged factual bases in the advice, preliminary letter and audit working papers did
not suffice. There was no going around the mandate of the law that the legal and factual
bases of the assessment be stated in writing in the formal letter of demand accompanying
the assessment notice (CIR vs. Enron Subic, G.R. No. 166387, January 19, 2009).
The formality of a control number in the assessment notice is not a requirement for its
validity but rather the contents thereof should inform the taxpayer of the declaration of
deficiency tax against the taxpayer (CIR vs. Gonzales, G.R. No. 177279, October 13, 2010).
The old requirement of merely notifying the taxpayer of the CIRs findings was changed in
1998 of informing the taxpayer of not only the law, but also of the facts on which an
assessment would be made, otherwise, the assessment itself would be invalid (CIR vs.
Azucena Reyes, G.R. No. 159694, January 27, 2006).

The sending of PAN and assessment notice to the wrong address may only be seen as an
attempt to mislead or confuse ABC. In the observance of procedural due process, the SC is
always mindful that a taxpayer being made liable with his property be given an opportunity to
be heard which is one of its essential elements. With the failure of CIR to strictly comply with
the procedure prescribed by law, and failure of ABC to receive a copy of the alleged
assessment, the latter was not afforded its right t be heard for it was denied the opportunity
to pretest or dispute the alleged assessment (A Brown Co., Inc. vs. CIR, CTA 6357, June 07,
2004).

While the lack of PRN and PAN is a deviation from the requirements under Sec. 1 and 2 of
RR 12-85, the same cannot detract from the fact that the FAN were issued to and actually
received by Menguito in accordance with Sec. 228 of NIRC. The stringent requirement that
an assessment notice be satisfactorily proven to have been issued and released or, if
receipt thereof is denied that the said assessment notice have been served on
taxpayer, applies only to FAN but not PRN or PAN. The issuance of valid FAN is a
substantive pre-requisite to tax collection, for it contains not only a computation of tax
liabilities but also a demand for payment within a prescribed period, thereby signaling the
time when penalties and interest begin to accrue against the taxpayer and enabling the latter
to determine his remedies thereof. Due process requires that it must be served on and
received by taxpayer. A PRN and PAN do not bear the gravity of a FAN. The PRN and PAN
merely hint at the initial findings of the BIR against a taxpayer and invited the latter to an
Informal Conference or Clarificatory Meeting. Neither notice contains a declaration of the tax
liability of the taxpayer or a demand for payment thereof. Hence, the jack of such notices
inflicts no prejudice on taxpayer for as long as the latter is property served with FAN
(CIR vs. Dominador Menguito, G.R. No. 167560, September 17, 2008).

Modes of Service of Assessments


Three ways to serve PAN/FAN/FDDA are as follows:
1. Personally, or
2. Registered mail
3. Substituted delivery (RR 18- 2013)
If the notice to the taxpayer is served by registered mail, and no response is received from the
taxpayer within the prescribed period from date of the posting thereof in the mail, the same shall
be considered actually or constructively received by the taxpayer. If the same is personally
served on the taxpayer or his duly authorized representative who, however, refused to
acknowledge receipt thereof, the same shall be constructively served on the taxpayer (Sec.
3.1.7, RR 12-99).

The presumption that a letter duly directed and mailed was received in the regular course of
mail cannot apply where none of the required facts to raise this presumption, i.e., that the
letter was properly addressed with postage prepaid and that it was mailed, have been show.
Mere notations on the records of the tax collector of the mailing of a notice of a deficiency tax
assessment to a taxpayer, made without the supporting evidence, cannot suffice to prove that
such notice was sent and received; otherwise, the taxpayer would be at the mercy of the
revenue officers, without adequate protection or defense (Nava vs. CIR (G.R. No. L-19470,
January 30, 1965).

(b) Constructive Methods of Income Determination


The following are some of the methods that may be used by the BIR in order to determine
whether a taxpayer has not reported all of his income during a particular taxable year:
1. Net worth method
2. Cash expenditure method
3. Percentage method
4. Bank deposit method
5. Unit and value method
6. Third party information or access to records method
7. Surveillance and assessments method
8. Such methods as in the opinion of the BIR Commissioner clearly reflect the income
(c) Inventory Method for Income Determination
The International Accounting Standard enumerated the following:
1. Last In First Out (LIFO)
2. First In First Out (FIFO)
3. Weighted Average
4. Specific identification
LIFO & FIFO
A method of assigning costs to both inventory and cost of goods sold. With regard to LIFO the
assumption is that the most recent inventory is the one sold first as compared to FIFO wherein
the inventory items
Weighted Average
A method of assigning cost which requires that we compute the weighted average cost per unit at
the time of each sale, equals the cost of goods available for sale divided by the units available.
Thus, the cost of goods sold would be dependent on the average acquisition cost of the inventory
currently available when a sale is done.
Specific Identification
A meticulous method wherein each item in inventory can be identified with a specific purchase
and invoice, when each item is sold the sales record should also contain the same. Thus the cost
of goods sold would depend on which item was sold for that particular sale.
(d) Jeopardy Assessment
A jeopardy assessment is a tax assessment made by an authorized Revenue Officer without the
benefit of the ROs belief that the assessment and collection of the deficiency tax will be
jeopardized by delay caused by the taxpayers failure to:
i. Comply with audit and investigation requirements to present his books of accounts and/or
pertinent records
ii. Substantiate all or any of the deductions, exemptions or credits claimed in his return (Sec. 3[1]
[a], RR No. 30-02, December 16, 2002).

It is usually issued when statutory prescriptive periods for the assessment or collection of taxes
are about to lapse due principally to the taxpayers fault.

Under Sec. 204(A) of the NIRC as implemented by Sec. 3 of RR 30- 2002, the Commissioner
may compromise the payment of any internal revenue tax when there was a doubtful validity of
the assessment where in a reasonable doubt as to the validity of the claim against the taxpayer
exists, when it is shown that the delinquent account or disputed assessment is one resulting from
a jeopardy assessment.
(e) Tax Delinquency and Tax Deficiency
DEFICIENCY
Exists when:
Amount imposed by law exceeds amount shown
as tax upon return
An amount is determined by the BIR, where
there is no amount stated in the return
To be collected, has to go through the
assessment process.
Filing of a civil action during pendency of protest
is a ground for a motion to dismiss
Generally not subject to 25% surcharge

DELIQUENCY
Exists when:
The self-assessed tax is not paid at all or was only
partially paid, or
When the deficiency tax assessed by the BIR has
become final and executor
Can be immediately collected
Filing of a civil action for the collection of taxes is the
proper remedy
Is subject to surcharges and administrative penalties.

Deficiency interest the term deficiency means the amount by which the taxed imposed under
the Code exceeds the amount shown on the return filed (249B)
Delinquency interest in case of failure to pay:
tax due on any return required to be filed, or
tax due for which no return is required, or
deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice
and demand of the Commissioner, there shall be assessed and collected on the unpaid
amount, interest at the rate prescribed until the amount is fully paid, which interest shall form
part of the tax. (249C)
(ii) Power of the Commissioner to Make Assessments and Prescribe Additional Requirements
for Tax Administration and Enforcement (Section 6, NIRC)
1. Examination of return and determination of tax due
2. Use of the best evidence available
3. Authority to conduct inventory taking, surveillance and prescribe gross sales and receipts if
there is reason to believe that the taxpayer is not declaring his correct income, sales or
receipts for internal revenue purposes
4. Authority to terminate taxable period in the following instances:
a. Taxpayer is retiring from business subject to tax;
b. Taxpayer is intending to leave the Philippines or to remove his property therefrom or to
hide or conceal his property and
c. Taxpayer is performing any act tending to obstruct the proceedings for the collection of
taxes.
5. Authority to prescribe real property values
6. Authority to inquire into bank deposits accounts in the following instances:
a. A decedent to determine his gross estate;
b. Any taxpayter who has filed an application for compromise of his tax liability by reason of
financial incapability to pay;
c. A specific taxpayer/s is subject of a request for the supply of tax information a foreign tax
authority pursuant to an intentional convention or agreement on tax matters to which the
Philippines is a signatory or a party of. Provided that the requesting foreign tax authority
is able to demonstrate the foreseeable relevance of certain information required to be
given to the request. (Sec. 3 & 8, RA 10021)

d. Where the taxpayer has signed a waiver authorizing the Commissioner or his duly
authorized representative to inquire into the bank deposits.
7. Authority to accredit and register tax agent.
8. Authority to prescribe additional procedural or documentary requirements.

In this era of developing information-storage technology, there is no valid reason to immunize


companies with computer-based, record-keeping capabilities from BIR scrutiny. The standard
is not the form of the record but where it might shed light on the accuracy of the taxpayers
return (CIR vs. Hantex trading, L-136975).
The best evidence obtainable rule under Section 6 of the 1997 NIRC, as amended, does not
include mere photocopies of records/documents. Mere photocopies of the Consumption
Entries have no probative weight if offered as proof of the contents thereof (CIR vs. Hantex
trading, L-136975).

The Best Evidence Obtainable Rule may be used when:


No return has been filed when a report is required by law as a basis for the assessment of
any tax within the time fixed by law or regulations; or
There is reason to believe that any such report is false, incomplete or erroneous.
As a general rule, Assessment is not necessary to establish taxpayers liability for internal
revenue taxes because IR taxes are self-assessing (self-computed).
As an exception, if the taxpayer is not cooperating with the tax officials in the investigation of his
books of account ( delays its presentation) the CIR may use the BEOR and prepare a tax return
for and in behalf of the taxpayer to expedite the collection of taxes.

Notwithstanding the powers of the BIR, the taxpayers are still entitled to their constitutional
right against illegal search and seizure (Bache & Co. (Phil.), Inc. vs. Judge Vivencio M. Ruiz, et. al.,
37 SCRA 823).

(a) Power of the Commissioner to Obtain Information, and to Summon/Examine, and Take
Testimony of Persons (Section 5, NIRC)
In ascertaining the correctness of any return, or in making a return when none has been made, or
in collecting any such liability, or in evaluating tax compliance, the Commissioner is authorized:
a. To examine any book, paper, record, or other date which may be relevant or material to such
inquiry;
b. To obtain on a regular basis from any person other than the person whose internal revenue
tax liability is subject to audit or investigation, or from any office or officer of the national and
local governments, government agencies and instrumentalities, including the Bangko Sentral
ng Pilipinas and government-owned or controlled corporations, any information such as, but
not limited to, costs and volume of production, receipts or sales and gross incomes of
taxpayers, and the names, addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures or consortia and registered
partnerships, and their members;
c. To summon the person liable for tax or required to file a return, or any officer or employee of
such person, or any person having possession, custody, or care of the books of accounts and
other accounting records containing entries relating to the business of the person liable for
tax, or any other person, to appear before the Commissioner or his duly authorized
representative at a time and place specified in the summons and to produce such books,
papers, records, or other data, and to give testimony;
d. To take such testimony of the person concerned, under oath, as may be relevant or material
to such inquiry; and

e. To cause revenue officers and employees to make a canvass form time to time of any
revenue district or region and inquire after and concerning all persons therein who may be
liable to pay any internal revenue tax, and all persons owning or having the care,
management or possession of any object with respect to which a tax is imposed.
The provisions of the foregoing paragraphs notwithstanding, noting in this Section shall be
construed as granting the Commissioner the authority to inquire into bank deposits other than as
provided for in Section 6(F) of this Code.
Note: Sec. 5 (B) is also known as the Third Party Information Rule.
Sec. 6 (F) Authority of the Commissioner to inquire into Bank Deposit Accounts.
Notwithstanding any contrary provision of Republic Act No. 1405 and other general or special
laws, the Commissioner is hereby authorized to inquire into the bank deposits of:
(1) a decedent to determine his gross estate; and
(2) any taxpayer who has filed an application for compromise of his tax liability under Sec. 204(A)
(2) of this Code by reason of financial incapacity to pay his tax liability.
In case a taxpayer files an application to compromise the payment of his tax liabilities on his claim
that his financial position demonstrates a clear inability to pay the tax assessed, his application
shall not be considered unless and until he waives in writing his privilege under Republic Act
No. 1405 or under other general or special laws, and such waiver shall constitute the authority of
the Commissioner to inquire into the bank deposits of the taxpayer.

Sec. 5 of NIRC allows the BIR access to all relevant or material records and data in the
person of the taxpayer, and the BIR can accept documents which cannot be admitted in a
judicial proceeding where the Rules of Court are strictly observed. The consent of the
taxpayer is NOT necessary for the procurement of the books of accounts needed for it to be
given an assessment. To require the consent of the taxpayer would defeat the intent of the
law to help the BIR assess and collect the correct amount of taxes [Fitness By Design, Inc. vs.
CIR, G.R. No. 177982; see the Omnibus Notes for the digest)].

The power of CIR to issue assessments is discretionary and NOT ministerial in character
(Meralco vs. Savellano, 117 SCRA 804).

(iii) When Assessment is Made


An assessment is deemed made when the demand letter or notice is RELEASED, MAILED OR
SENT by the BIR to the taxpayer. The law does not require that the taxpayer receive the notice
within the three-year or ten-year period (CIR vs. BAUTISTA [May 27, 1959)]. So, even if the taxpayer
actually received the assessment after the expiration of the prescriptive period, provided the
release thereof was effected before prescription sets in, the assessment is deemed made on
time.

When a mail matter is sent by registered mail, there exists a presumption set forth under Sec.
3(v) Rule 131 of the Rules of Court, that it was received in the regular course of mail. The
facts to be proved in order to raise this presumption are: a) The letter was properly addressed
with postage prepaid; and b) That it was mailed. While a mailed letter is deemed received by
the addressee in the ordinary course of mail, this is still merely a disputable presumption
subject to contravention, and a direct denial of the receipt thereof shifts the burden upon the
party favored by the presumption to prove that the mailed letter was indeed received by the
addressee (Barcelon Roxas Securities vs. CIR, G.R. No. 157064, August 7, 2006).

(a) Prescriptive Period for Assessment


The indefinite extension of the period for assessment is unreasonable because it deprives the
said taxpayer of the assurance that he will no longer be subjected to further investigation for
taxes after the expiration of a reasonable period of time (Philippine Journalists, Inc. vs.
Commissioner of Internal Revenue, G.R. No. 162852, 16 December 2004, 447 SCRA 214).

General Rule:
Taxes shall be assessed within three (3) years after either
(a) the last day prescribed by law for the filing of the return, or
(b) the actual filing of the return, whichever is later (Sec. 203).
Exception:
1. Compromise (waiver through agreement). If before the expiration of the time prescribed in
Section 203 for the assessment of the tax [3 years], both the Commissioner and taxpayer
have agreed in writing to its assessment after such time, the tax may be assessed within the
period agreed upon, extendible by subsequent agreements (Sec. 222(b), NIRC).

On Waiver: The waiver of the statute of limitations, whether on assessment or collection,


should not be construed as a waiver of the right to invoke the defense of prescription
but, rather, an agreement between the taxpayer and the BIR to extend the period to a date
certain, within which the latter could still assess or collect taxes due. The waiver does not
mean that the taxpayer relinquishes the right to invoke prescription unequivocally (Philippine
Journalists, Inc. vs. CIR, G.R. No. 162852, 16 December 2004, 447 SCRA 214).

Requisites of a valid waiver (RMO No. 20-90, issued on 04 April 1990) A waiver must:
Indicate the expiry date of the period agreed upon to assess/collect the tax
Be signed by the taxpayer himself or his duly authorized representative
Be duly notarized
Be signed by the CIR or the revenue official authorized by him, indicating that the BIR has
accepted and agreed to the waiver.
Both the date of execution by the taxpayer and date of acceptance by the Bureau should be
before the expiration of the period of prescription or before the lapse of the period agreed
upon in case a subsequent agreement is executed.
Be executed in three (3) copies
Rationale, Construction, Interpretation
The law prescribing a limitation of actions for collection of income tax is beneficial both to the
government and to its citizens. a) The Government because tax officers would be obliged to
act promptly in making of assessment; b) The Citizens because after the lapse of the period
of prescription, citizens would have the feeling of security against unscrupulous tax agents
who will always find an excuse to inspect the books of taxpayers, not to determine the latters
real liability, but to take advantage of every opportunity to molest, peaceful law-abiding
citizens. Without such legal defenses, taxpayers would furthermore be under obligation to
always keep their books and keep them open for inspection subject to harassment by
unscrupulous tax agents. The law on prescription being a remedial measure should be
interpreted in a way conducive to bring about the beneficent purpose of affording protection to
the taxpayer within the contemplation of the Commissioner which recommends the approval
of the law (Republic of the Philippines vs. Luis Ablaza).
A waiver of statute of limitations, to a certain extent, is a derogation of the taxpayers right to
security against prolonged and unscrupulous investigations and must therefore be carefully
and strictly construed. The waiver of statute of limitations is not a waiver of a right to invoke
the defense of prescription as erroneously held by the CA. It is an agreement between the
taxpayer and the BIR that the period to issue an assessment and collect the taxes due is
extended to a date certain. The waiver does not mean that the taxpayer relinquishes the right
to invoke prescription unequally particular where the language of the document is equivocal.
For the purpose of safeguarding taxpayers from an unreasonable examination, investigation
or assessment, our tax law provides a statute of limitations in the collection of taxes. The law
of prescription being a remedial measure should be liberally construed in order to afford such
protection. The exception to the law on prescription should perforce be strictly construed
(Philippine Journalists, Inc. vs. CIR, December 16, 2004 G.R. No. 162852).

Counting of periods
A year is composed of 12 calendar months. The Administrative Code of 1987, being the
more recent law than the New Civil Code, governs the computation of legal periods
(CIR vs. Primetown Property Group, G.R. No. 162155, August 8, 2007).

Where the government has not by express statutory provision provided a limitation upon its
right to assess unpaid taxes, such right is imprescriptible. Thus, there is no such time limit
on the right of the Commissioner of Internal Revenue to assess the IAET under section 29 of
the Tax Code (CIR vs. Ayala Securities, G.R. No. L-29485).

(1) False, fraudulent, and non-filing of returns


Extra-ordinary prescription. The tax may be assessed, or a proceeding in court for the
collection of such tax may be filed without assessment, at any time within ten (10) years after the
discovery of either of the following (Sec. 222(a), NIRC):
False return, [regardless of intent to evade tax]
Fraudulent return with intent to evade tax, or
Failure to file a return, as in the case of:

A wrong return (Butuan Sawmill, Inc. vs. CTA, G.R. No. L-20601)
A grossly defective return (CIR vs. Gonzales, 18 SCRA 757)

Note: Nothing in Section 222(A) shall be construed to authorize the examination and
investigation or inquiry into any tax return filed in accordance with the provisions of any tax
amnesty law or decree.
Under Art 222 of the NIRC provides that in the case of (1) False return, (2) Fraudulent return with
intent to evade tax, or (3) Failure to file a return, either:
Assessment and Collection:
a. The tax may be assessed within 10 years after discovery of the falsity, fraud or omission (Sec.
222[a], NIRC), and
b. Collected within five (5) years following the assessment of the tax (Sec. 222[c], NIRC);
OR
Collection only: A proceeding in court for the collection of tax is filed within ten (10) years after
the discovery of the falsity, fraud or omission. (Sec. 222(a), NIRC)
In a False Return, there is a deviation from the truth, whether intentional or not. It may be due to
mistake, ignorance, or carelessness.
A Fraudulent Return, on the other hand, implies intentional deceitful entry with intent to evade
the taxes due.

The ordinary period of prescription of 5 years within which to assess tax liabilities under Sec.
331 of NIRC should be applicable to normal circumstances, but where the government is
placed at a disadvantage so as to prevent its lawful agents from proper assessment of tax
liabilities due to false return, fraudulent returns intended to evade payment of tax or failure to
file returns, the period of 10 years provided in Sec. 332(a) of NIRC, from time of discovery of
the falsity, fraud or omission even seems to be inadequate and should be the one enforced
(Aznar vs. CTA, & CIR, August 23, 1974 G.R. 20569).

Sec. 203 of NIRC states that internal revenue taxes shall be assessed within 5 years after the
taxpayers return was filed. It is undisputed that Eastern failed to file any corporate ITR for a
period of 20-years from 1952-1971. CIR argued that under Sec. 223(a), Easterns failure to

file ITR authorizes him to assess income tax due from Eastern with 10years, after the
discovery of falsity, fraud or omission. The omission was discovered only in 1971. CIR has 10
years from 1971 or until 1981 within which to assess. The assessment of deficiency income
tax was issued on 1973, which is well within the period prescribed by law. But while it is true
that the assessment is within the prescribed period, it does not follow that it is a valid
statement in its entirely. RA 808 is an operative act. Eastern is exempted from payment of all
taxes, whether local, provincial or national, except franchise and real property taxes. It goes
without saying that the assessment cannot be held valid against the income derived from
Easterns operation authorized by the franchise. It can only stand valid insofar as the
assessment is for income derived from services within the Philippines and which is beyond
the scope of RA 808 (CIR vs. CTA, March 20, 1991, G.R. No. 44007).
Filing of Fraudulent Return
Fraud must be alleged and proved as a fact. It must be the product of a deliberate intent to evade
taxes. It may be established by the:
a. Intentional and substantial understatement of tax liability by the taxpayer;
b. Intentional and substantial overstatement of deductions of exemptions; and/or
c. Recurrence of the above circumstances

Falsity constitutes a deviation from the truth due to mistake, carelessness or ignorance.

There is fraud in the following decided cases:


1. Fraud must be the product of a deliberate intent to evade taxes (Jalandoni vs. Republic)
2. Simple statement that return filed was not fraudulent does not disprove existence of fraud
(Tayengco vs. Collector)
3. Substantial under-declarations of income for six consecutive five years demonstrate
fraudulence of return (Perez vs. CTA)
4. Presence of fictitious expenses, with no evidence presented, proves existence of fraud (Tan
Guan vs. Commissioner)

However, the courts did not consider the tax returns filed as false or fraudulent with intent to
evade payment of tax in the following cases:
a. Mere understatement in the tax return will not necessarily imply fraud (Jalandoni vs. Republic)
b. Sale of a real property for a price less than its fair market value is not necessarily a false
return (Commissioner vs. Ayala Securities).
c. Fraud is a question of fact and the circumstances constituting fraud must be alleged and
proved in the trial court (Commissioner vs. Ayala Securities).
d. Fraud is never imputed and the courts never sustain findings of fraud upon circumstances
that only create suspicion (Commissioner vs. Javier)
e. Mistakes of revenue officers on three different occasions remove element of fraud (Aznar vs.
CTA and Collector).

Rule on wrong returns or amended returns


An income tax return cannot be considered as a return for compensating tax for purposes of
computing the period of prescription under Section 331 of the Tax Code, and that the
taxpayer must file a return for the particular tax required by law in order to avail himself of
the benefits of Sec. 331 of the Tax Code; otherwise, if he does not file a return, an
assessment may be made within the time stated in Sec. 332(a) of the same Code (Butuan
Sawmill Inc. vs. CTA, G.R. No. L-20601).

The filing of a wrong return is equivalent to no return at all the third situation in Sec.
2229(a). Therefore in this case, the 10 years prescriptive period would apply.

The SC is persuaded by the fundamental principle invoked by CIR that limitations upon the
right of the government to assess and collect taxes will not be presumed in the absence of
clear legislation to the contrary and that where the government has not by express statutory

provision provided a limitation upon its right to assess unpaid taxes, such right is
imprescriptible. The SC, therefore, reconsiders its ruling in its decision under reconsideration
that the right to assess and collect the assessment in question had prescribed after 5 years,
and instead rules that there is no such time limit on the right of the CIR to assess the 25% tax
on unreasonably accumulated surplus provided in Sec. 25 of NIRC, since there is no express
statutory provision limiting such right or providing for its prescription. The underlying purpose
of the additional tax in question on a corporations improperly accumulated profits or surplus
is as set forth in the text of Sec. 25 of NIRC itself to avoid the situation where a corporation
unduly retains its surplus instead of declaring and paving dividends to its shareholders or
members who would then have to pay the income tax due on such dividends received by
them. The record amply shows that Ayala Securities is a mere holding company of its
shareholders through its mother company, a registered co-partnership then set up by the
individual shareholders belonging to the same family and that the prima facie evidence and
presumption set up by the Tax Code, therefore applied without having been adequately
rebutted by the Ayala Securities (CIR vs. Ayala Securities Co., November 21, 1980 G.R. L-29485).
A wrong return, however, is different from a defective return. Defective returns may be sufficient if
there is a substantial compliance.
There is substantial compliance when:
(1) The return is made in good faith and is not false or fraudulent;
(2) It covers the entire period involved; and
(3) It contains information as to the various items of income, deduction and credit with such
definiteness as to permit the computation and assessment of the tax (CIR vs. Lilia Gonzales,
[18 SCRA 757]).

Where the return was made in the wrong form, the filing thereof did not start the running of
the period of limitations, and where the return was very deficient; there was no return at all. If
the taxpayer failed to observe the law, Sec. 332 of NIRC grants CIR a 10 year period within
which to bring an action for tax collection, applies. The return filed in this case was so
deficient that it prevented the Commissioner from computing the taxes due on the estate. It
was though no return was made. The Commissioner had to determine and assess the taxes
on date obtained, not from the return, but from other sources (CIR vs. Lilia Gonzales, [18 SCRA
757]).

(b) Suspension of Running of Statute of Limitations


1. When taxpayer cannot be Located in the address given by him in the return, unless he
informs the CIR of any change in his address thru a written notice to the BIR;
2. When the taxpayer is Out of the Philippines (Sec. 223, NIRC)
3. When the Warrant of distraint and levy is duly served upon the taxpayer, his authorized
representative or a member of his household with sufficient discretion and no property is
located (proper only for suspension of the period to collect);
4. Where the CIR is prohibited from making the assessment or beginning distraint or levy or a
proceeding in court for 60 days thereafter, such as where there is a Pending petition for
review in the CTA from the decision on the protested assessment (Republic v. Ker & Co., GR L21609);

5. Where CIR and the taxpayer Agreed in writing for the extension of the assessment, the tax
may be assessed within the period so agreed upon (Sec. 222 [b], NIRC);
6. When the taxpayer Requests for reinvestigation which is granted by the Commissioner
(Collector v. Suyoc Consolidated Mining Co., GR L-11527, Nov. 25, 1958);

Note: A request for reconsideration alone does not suspend the period to assess/collect.
7. When there is an Answer filed by the BIR to the petition for review in the CTA (Hermanos v.
CIR, GR. No. L-24972. Sept. 30, 1969) where the court justified this by saying that in the answer
filed by the BIR, it prayed for the collection of taxes.

(iv) General Provisions on Additions to the Tax


(a) Civil Penalties
a. There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to be
paid twenty-five percent (25%) of the amount due, in the following cases:
(1) Failure to file any return and pay the tax due thereon as required under the provisions of
this Code or rules and regulations on the date prescribed; or
(2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue
officer other than those with whom the return is required to be filed; or
(3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of
assessment; or
(4) Failure to pay the full or part of the amount of tax shown on any return required to be filed
under the provisions of this Code or rules and regulations, or the full amount of tax due
for which no return is required to be filed, on or before the date prescribed for its
payment.
b. In case of willful neglect to file the return within the period prescribed by this Code or by rules
and regulations, or in case a false or fraudulent return is willfully made, the penalty to be
imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment
has been made on the basis of such return before the discovery of the falsity or fraud:
Provided, that a substantial under declaration of taxable sales, receipts or income, or a
substantial overstatement of deductions, as determined by the Commissioner pursuant to the
rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie
evidence of a false or fraudulent return:
Provided Further, that 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
thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial under
declaration of sales, receipts or income or for overstatement of deductions, as mentioned herein.
(Section 248, NIRC)

(b) Interest
There shall be assessed and collected an interest at 20% per annum on any unpaid amount of
tax or higher rate prescribed by rules and regulations from the date prescribed for payment until
the amount is fully paid.
(c) Compromise Penalties
The Commissioner of Internal Revenue may compromise the payment of any internal revenue tax
when:
1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax.
The compromise settlement of any tax liability shall be subject to the following minimum amounts:
1. For cases of financial incapacity, a minimum compromise rate equivalent to ten percent
(10%) of the basic assessed tax; and
2. For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic
assessed tax.
(Section 204[A], NIRC)
Note: Where the basic tax involved exceeds one million pesos (P1,000.000) or where the
settlement offered is less than the prescribed minimum rates, the compromise shall be subject to

the approval of the Evaluation Board which shall be composed of the Commissioner and the four
(4) Deputy Commissioners.
All criminal violations may be compromised except: (a) those already filed in court, or (b) those
involving fraud (Section 204[B], NIRC)
Compromise Penalty a certain amount of money which the taxpayer pays to compromise a tax
violation. The penalty is paid in lieu of criminal prosecution, and cannot be imposed in the
absence of a showing that the taxpayer consented thereto.
General Rule: The following are cases which may be compromised:
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal
Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other
offices in the National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud.
(Revenue Regulation No. 30-2002)

Exceptions:
1. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast
doubt on the taxpayers obligation to withhold;
2. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or his
duly authorized representative;
3. Criminal violations already filed in court;
4. Delinquent accounts with duly approved schedule of installment payments;
5. Cases where final reports of reinvestigation or 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;
6. Cases which become final and executory after final judgment of a court, where compromise is
requested on the ground of doubtful validity of the assessment; and
7. Estate tax cases where compromise is requested on the ground of financial incapacity of the
taxpayer. (Revenue Regulation No. 30-2002)
Basis for Acceptance of Compromise Settlement (Revenue Regulation No. 30-2002):
A. Doubtful validity of the assessment - The offer to compromise a delinquent account or
disputed assessment under these Regulations on the ground of reasonable doubt as to the
validity of the assessment may be accepted when it is shown that:
1. The delinquent account or disputed assessment is one resulting from a jeopardy
assessment (For this purpose, jeopardy assessment shall refer to a tax assessment
which was assessed without the benefit of complete or partial audit by an authorized
revenue officer, who has reason to believe that the assessment and collection of a
deficiency tax will be jeopardized by delay because of the taxpayers failure to comply
with the audit and investigation requirements to present his books of accounts and/or
pertinent records, or to substantiate all or any of the deductions, exemptions, or credits
claimed in his return); or
2. The assessment seems to be arbitrary in nature, appearing to be based on presumptions
and there is reason to believe that it is lacking in legal and/or factual basis; or
3. The taxpayer failed to file an administrative protest on account of the alleged failure to
receive notice of assessment and there is reason to believe that the assessment is
lacking in legal and/or factual basis; or

4. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days


from receipt of final assessment notice and there is reason to believe that the
assessment is lacking in legal and/or factual basis; or
5. The taxpayer failed to elevate to the Court of Tax Appeals (CTA) an adverse decision of
the Commissioner, or his authorized representative, in some cases, within 30 days from
receipt thereof and there is reason to believe that the assessment is lacking in legal
and/or factual basis; or
6. The assessments were issued on or after January 1, 1998, where the demand notice
allegedly failed to comply with the formalities prescribed under Sec. 228 of the National
Internal Revenue Code of 1997; or
7. Assessments made based on the Best Evidence Obtainable Rule and there is reason to
believe that the same can be disputed by sufficient and competent evidence; or
8. The assessment was issued within the prescriptive period for assessment as extended
by the taxpayers execution of Waiver of the Statute of Limitations the validity or
authenticity of which is being questioned or at issue and there is strong reason to believe
and evidence to prove that it is not authentic .
B. Financial incapacity - The offer to compromise based on financial incapacity may be
accepted upon showing that:
1. The corporation ceased operation or is already dissolved. Provided, that tax liabilities
corresponding to the Subscription Receivable or Assets distributed/distributable to the
stockholders representing return of capital at the time of cessation of operation or
dissolution of business shall not be considered for compromise; or
2. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the
Bureau of Internal Revenue, is suffering from surplus or earnings deficit resulting to
impairment in the original capital by at least 50%, provided that amounts payable or due
to stockholders other than business-related transactions which are properly includible in
the regular accounts payable are by fiction of law considered as part of capital and not
liability, and provided further that the taxpayer has no sufficient liquid asset to satisfy the
tax liability; or
3. The taxpayer is suffering from a networth deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net of deferred credits and amounts payable to
stockholders/owners reflected as liabilities, except business related transactions) from
total assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well
as appraisal increases in fixed assets), taken from the latest audited financial statements,
provided that in the case of an individual taxpayer, he has no other leviable properties
under the law other than his family home; or
4. The taxpayer is a compensation income earner with no other source of income and the
familys gross monthly compensation income does not exceed the levels of compensation
income provided for under Sec. 4.1.1 of these Regulations, and it appears that the
taxpayer possesses no other leviable or distrainable assets, other than his family home;
or
5. The taxpayer has been declared by any competent tribunal/authority/body/government
agency as bankrupt or insolvent.
Note: The Commissioner shall not consider any offer for compromise settlement by reason of
financial incapacity unless and until the taxpayer waives in writing his privilege of the secrecy of
bank deposits under R.A. No. 1405 or under other general or special laws, and such waiver shall
constitute as the authority of the Commissioner to inquire into the bank deposits of the taxpayer.
The compromise settlement is subject to the following minimum amounts:
1. For cases of financial incapacity, a minimum compromise rate of ten percent (10%) of the
basic assessed tax;
2. For other cases, a minimum compromise rate equivalent to forty percent (40%) of the basic
tax assessed.

Where the basic tax involved exceeds One Million Pesos (P 1,000,000.00) or the settlement
offered is less that the prescribed minimum rates, the compromise shall be subject to the
approval of the Evaluation Board composed of the Commissioner and the four (4) Deputy
Commissioners.
Assessment process
Tax Audit Process
Letter of
Authority
INFOCO
N

Service of LOA and

notice of INFOCON to Taxpayer

--according to RR18-2013, the requirement for the issuance of INFOCON has


been removed.

PAN
FAN with letter of demand / FLDAN

Protest?

Protest?

YES

YES

FDD

Assessme
nt
becomes
final

NO

Reconsideration

or Reinvestigation

Case
goes
to
CTA

NO
Decision
becomes final,
executory, and
demandable

FAN with letter


of demand /
FLDAN
Legend:
INFOCON = Informal Conference
PAN = Pre-assessment notice
FAN = Formal assessment notice
FLDAN = formal letter of demand and
assessment notice
PRN = Post-reporting notice
FDDA = Final decision on disputed
assessments.

Letter of Authority or LOA is the authority given to the appropriate revenue officer assigned to
perform assessment functions. Under Sec. 13 and 6(A), there must be a grant of authority
before any revenue office can conduct an examination or assessment. In the absence of such
an authority, the assessment or examination is a nullity (CIR vs. Sony Phil., Inc. G.R. No. 178697,
November 17, 2010).

Cases which need not be covered by a valid LOA:


1. Cases involving civil or criminal tax fraud which fall under the jurisdiction of the tax fraud
division of the Enforcement Services; and
2. Policy cases under audit by the Special Teams in the National Office (RMO 36-99)
A Letter of Authority should cover a taxable period not exceeding one taxable year. The
practice of issuing L/As covering audit of unverified prior years is therefore prohibited (CIR
vs. Sony Phil., Inc. G.R. No. 178697, November 17, 2010).

It must be served to the taxpayer within 30 days from its date of issuance; otherwise, it shall
become null and void. The taxpayer shall then have the right to refuse the service of this LA,
unless the LA is revalidated.
It can be revalidated through the issuance of a new LA. It can be revalidated only once, if
issued by the Regional Director; twice, if issued by the CIR. The suspended LA(s) must be
attached to the new issued LA. (RMO 38-88)

(a)
1.
2.
3.
4.
5.

Tax audit
Audit Stage/Issuance of Letter of Authority
Pre-Assessment Stage
Formal Assessment Stage
Collection Letter/Warrants
Compromise and Abatement

A RO is allowed only 120 days to conduct the audit and submit the required report of
investigation from the date of receipt of a LA by the taxpayer. If the RO is unable to submit his
final report of investigation within the 120-day period, he must then submit a Progress Report
to his Head of Office, and surrender the LA for revalidation.
As a general rule, a taxpayer can be subjected to examination and inspection for the same
taxable year ONLY ONCE.

The following are the exceptions:


1. When the CIR determines that fraud, irregularities, or mistakes were committed by the
taxpayer;
2. When the taxpayer himself requests for the re-investigation or re-examination of his books of
accounts and it was granted by the commissioner;
3. When there is a need to verify the taxpayers compliance with withholding and other internal
revenue taxes as prescribed in a Revenue Memorandum Order issued by the Commissioner;
4. When the taxpayers capital gains tax liabilities must be verified; and
5. When the commissioner chooses to exercise his power to obtain information relative to the
examination of other taxpayers (Secs. 5 and 235, NIRC)
b) Notice of Informed Conference
Note: According to RR 18-2013, it has removed the requirement for the issuance of a letter of
informal conference before a Preliminary Assessment (PAN) is issued
(c) Issuance of Preliminary Assessment Notice (PAN)

The Pre-Assessment Notice (PAN) is a communication issued by the Regional Assessment


Division or any other concerned BIR office, informing a taxpayer who has been audited of the
findings of the Revenue Officer, following the review of these findings.
The requirements of a valid PAN:
1. In writing; and
2. Should inform the taxpayer of the law and the facts on which the assessment is made (Sec.
228, NIRC)

(d) Exceptions to Issuance of PAN


(a) When the finding for any deficiency tax is the result of MATHEMATICAL ERROR in the
computation of the tax as appearing on the face of the return; or
(b) When a DISCREPANCY has been determined between the TAX WITHHELD and the amount
ACTUALLY REMITTED by the withholding agent; or
(c) When a taxpayer who opted to claim a refund or tax credit of excess creditable withholding
tax for a taxable period was determined to have carried over and automatically applied the
same amount claimed against the estimated tax liabilities for the taxable quarter or quarters
of the succeeding taxable year; OR
(d) When the EXCISE TAX due on excisable articles has not been paid; or
(e) When 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. (228)
NOTE: In the above-cited cases, a FLD/FAN shall be issued outright. (RR 18-2013)
(e) Reply to Preliminary Assessment Notice
If the taxpayer disagrees with the findings in the PAN, he has fifteen (15) days from his receipt of
the PAN to file a written reply contesting the proposed assessment.
If the taxpayer fails to respond within fifteen (15) days from the date of receipt of the PAN, he
shall be considered in default, in which case, a formal letter of demand and assessment notice
shall be caused to be issued by said Office calling for payment of the taxpayers deficiency tax
liability, inclusive of the applicable penalties (Section 3.1.2, RR 12-99).
(f) Issuance of Formal Letter of Demand and Assessment Notice/Final Assessment Notice
Notice of Assessment (Final Assessment Notice FAN or Formal Letter of Demand FLD)
A notice of assessment 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. This is commonly known as the Final Assessment Notice
(FAN). An assessment contains not only a computation of tax liabilities, but also a demand for
payment with a prescribed period.
NOTE: RR 18- 2013 mandates the issuance of a Final Assessment (FAN) within 15 days from
receipt of the protest to PAN.

The ultimate purpose of assessment is to ascertain the amount that each taxpayer is to pay.
An assessment is a notice to the effect that the amount therein stated is due as tax and a
demand for payment thereof (Tupaz vs. Ulep, G.R. No. 127777, October 1, 1999).

The formal letter of demand shall be issued by the Commissioner or his duly authorized
representative. The letter of demand calling for the payment of the taxpayers deficiency
taxes shall state the FACTS, the LAW, RULES and REGULATIONS or JURISPRUDENCE on
which the assessment is based, OTHERWISE, the formal letter of demand or assessment
notice shall be VOID (RR 12-99).

The taxpayer may protest the assessment within 30 days from receipt otherwise the
assessment becomes final, executory, demandable and not appealable to the CTA.
(g) Disputed Assessment
An assessment becomes a disputed assessment when petitioner requests for the cancellation
and or withdrawal of the same.

(h) Administrative Decision on a Disputed Assessment


Where there is a request for reconsideration, final demand letter from BIR is considered a
decision on a disputed or protested assessment which is therefore appealable to the CTA
(vi) Protesting Assessment
(a) Protest of Assessment by Taxpayer
It is the act by the taxpayer of questioning the validity of the imposition of the corresponding
delinquency increments for internal revenue taxes as shown in the notice of assessment and
letter of demand.
(1) Protested assessment
An assessment becomes a disputed assessment when petitioner requests for the cancellation
and or withdrawal of the same.
(2) When to file a protest
An assessment may be protested administratively by filing a request for reconsideration or
reinvestigation within thirty (30) days from receipt of the assessment. (228)
(3) Forms of protest
1. Request for reconsideration - a claim for re-evaluation of the assessment based on
existing records without need of additional evidence. It may involve a question of fact or law
or both. It does not toll the statute of limitations.
2. Request for reinvestigation - a claim for re-evaluation of the assessment based on newlydiscovered or additional evidence. It may also involve a question of fact or law or both. It tolls
the the statute of limitations.
Note: Under Sec. 223, NIRC, the running of the prescriptive period can only be suspended by a
request for reinvestigation, not a request for reconsideration.
(4) Content and validity of protest
A protest is considered validly made if it satisfies the following conditions:
1. In writing;
2. Addressed to the CIR;
3. Accompanied by a waiver of the Statute of Limitations in favor of the Government. Without
the waiver the prescriptive period will not be tolled; (BPI v. CIR, GR 139736, Oct. 17, 2005)
4. State the facts, applicable law, rules and regulations or jurisprudence on which the protest is
based otherwise the protest would be void; and
5. Must contain the following:
a. Name of the taxpayer and address for the immediate past 3 taxable years;
b. Nature of the request, specifying the newly discovered evidence to be presented;
c. Taxable periods covered by the assessment;
d. Amount and kind of tax involved and the assessment notice number;
e. Date of receipt of the assessment notice or letter of demand;
f. Itemized statement of the finding to which the taxpayer agrees (if any) as basis for the
computation of the tax due, which must be paid upon filing of the protest;
g. Itemized schedule of the adjustments to which the taxpayer does not agree;
h. Statements of facts or law in support of the protest; and

i.

Documentary evidence as it may deem necessary and relevant to support its protest to
be submitted 60 days from the filing thereof.

NOTE: RR 18-2013 Mandates that protest should include the facts, law, rules, regulations on
which the protest is based. Otherwise, the protest is void and of no effect. For items in the
assessment not properly protested, these shall become final and demandable and collection
letters shall be issued immediately.
(b) Submission of Documents Within 60 Days From Filing of Protest (Allowed Only in
Reinvestigation)
Within sixty (60) days from filing of the protest, all relevant supporting documents must be
submitted, otherwise the assessment shall become final. (228)
NOTE: RR 18-2013 Requires an identification of the kind of protest filed whether a
reconsideration or reinvestigation. The submission of additional documents within 60 days from
filing of protest is allowed only in the case of reinvestigation. For motion for reconsideration, the
decision of the BIR will be based only on documents already submitted to the BIR prior to the
issuance of FAN and no new evidence will be accepted.
(c) Effect of Failure to Protest
When no protest is seasonably made by the taxpayer, the assessment shall become final and
unappealable, and thus the tax shall be collectible.
(d) Period Provided for the Protest to be Acted Upon
It is filed within thirty (30) days from the Taxpayers receipt of the Notice of Assessment and
formal Letter of Demand.

If a protest filed by a Taxpayer be denied by the Commissioners duly authorized


representative, the Taxpayer may request the Commissioner for a reconsideration of such
denial and that his tax case be referred to the Bureaus Appellate Division. The Appellate
Division serves as a "Court", where both parties, i.e. the Revenue Officer on one hand, and
the Taxpayer on the other, can present testimony and evidence before a Hearing Officer, to
support their respective claims.

Should the Taxpayers request for reconsideration be denied or his protest is not acted upon
within 180 days from submission of documents by the Commissioner, the Taxpayer has the
right to appeal with the Court of Tax Appeals (CTA).

Any appeal must be done within thirty (30) days from the date of the Taxpayers receipt of the
Commissioners decision denying the request for reconsideration or from the lapse of the 180
day period counted from the submission of the documents. (Sec. 228 of the Tax Code, as
amended).

(vii)Rendition of decision by Commissioner


(a) Denial of Protest
Direct Denial of Protest By an administrative decision on a disputed assessment, stating the
facts, applicable law, rules and regulations or jurisprudence on which such decision is based

otherwise, the decision shall be void in which case the same shall not be considered a decision
on a disputed assessment and that the same is his final decision. (RR 12-99)
Indirect Denial of Protest:
a. Formal and final letter of demand from the BIR to the taxpayer.
b. Civil collection can also be considered as denial of protest of assessment (BIR v. Union
Shipping Corp., GR 66160, May 21, 1990)

c.

Commissioner did not rule on the taxpayers motion for reconsideration of the assessment,
the period to appeal will only start when the respondent would receive the summons for the
civil action for collection of deficiency tax (BIR v. Union Shipping Corp., GR 66160, May 21, 1990)
Note: Preliminary collection letter may serve as assessment notice. (United International
Pictures v. CIR, GR 110318, Aug. 28, 1996)

d. Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is


outright denial of the request for reconsideration (Hilado v. CIR. CTA case 1256, Feb. 25, 1964)
(1) Commissioners actions equivalent to denial of protest
a. Filing of criminal action against taxpayer
b. Issuing a warrant of distraint and levy

Issuance of warrant of distraint and levy to enforce collection of deficiency assessment is


outright denial of the request for reconsideration (Hilado v. CIR. CTA case 1256, Feb. 25, 1964)

(2) Inaction by Commissioner


An indirect denial of protest results if the CIR through its actions in relation to a pending protest,
does either of the following:
1. Inaction by the CIR within the 180-day period (Sec. 228, last par., NIRC) from either:
a. Protest, in the following cases:
i. Request for reconsideration, since it is not based on new or additional evidence,
ii. Request for reinvestigation, when
1. the document is already submitted with the protest, or
2. there is no submitted document
b. The submission of documents, in case of its submission in a request for reinvestigation
c. The lapse of the 60-day period in a request for reinvestigation, when the tax-payer
reserves his right to submit additional document
2. Filing of a collection case before the regular courts for the collection of the tax (Yabes vs.
Flojo, G.R. No. L-46954).
3. Issuance of a warrant of distraint or levy, except:
a. When the protest was not taken into account before the warrant of distraint and levy was
issued
b. When the taxpayer is left in the dark as to which action of the commissioner is appealable
4. Sending of a Final notice before seizure, indicating that the CIR is giving the taxpayer the
LAST OPPORTUNITY to settle the assessment.
5. Sending of a Demand letter, containing a text with the words final decision and appeal,
similar to the tenor of the following:
a. This constitutes our final decision on the matter. If you are not agreeable, you may
appeal to the CTA within 30 days from receipt of this letter.
b. This is our final decision based on the investigation. If you disagree, you may appeal this
final decision within 30 days from receipt hereof, otherwise said deficiency tax
assessment shall become final, executor and demandable.

6. Referral by the Commissioner of the request for reinvestigation to the Solicitor General,
because this shows the insistence of the commissioner to collect tax.
7. Service of a preliminary collection letter, since it presupposes the existence of a valid
assessment notice.
In all these cases, the 30-day period is reckoned from such implicit denial of protest.

CIR fails to act on the protest within 180 days from submission of relevant documents

In cases of inaction, Sec. 228 of Tax Code merely gave taxpayer an option: 1) he may appeal
to CTA w/in 30d from lapse of 180d period provided for OR 2) he may wait until
Commissioner decides on his protest before he elevates his case. The taxpayer was given
this option so that in case his protest isnt acted upon w/in 180d period, he may be able to
seek immediate relief & need not wait for indefinite period of time for Commissioner to
decide.- But if he chooses to wait for positive action on part of Commissioner, then the same
couldnt result in assessment becoming final, executor & demandable (Lascona Land Co. Inc.
vs. CIR).

RR 12-99 is not inconsistent w/ Sec 228. It merely implements Sec 228 by establishing
guideline on nature of decision rendered by authorized representative of CIR on disputed
assessment. Taxpayer is given choice whether to appeal decision to CIR or to CTA. Decision
of authorized rep will not attain finality if taxpayer appeals the same to CIR who shall then be
required to decide protest himself (Moog Controls Corp. Phil. Branch vs. CIR)

(viii)

Sec 228 requires that taxpayer shall comply w/ periods indicated defining the stages of
protest. One of those is the 180d time frame given to CIR to decide protest. Thereafter,
taxpayer has 30d to appeal to this Court which is jurisdictional. Petitioners right to seek
judicial relief accrues only upon lapse of 180d period in cases of inaction by CIR. If petitioner
doesnt comply w/ 180d period, right to file action hasnt yet accrued and the lapse of 180d
after filing of petition hadnt cured such defect.
Jurisdiction of CTA has been expanded to include not only decisions / rulings, but also
inaction of CIR. Decisions, rulings, inaction of CIR are necessary to vest CTA w/ jurisdiction to
entertain appeal, provided its filed w/in 30d after receipt of decision / ruling OR w/in 30d after
expiration of 180d fixed by law for CIR to act on disputed assessment. The 30d period is
jurisdictional and failure to comply bars appeal and deprives CTA of jurisdiction.- In case CIR
failed to act on disputed assessment w/in 180d period, taxpayer can either: 1. file petition for
review with CTA w/in 30d 2. await final decision of CIR on disputed assessments and appeal
such final decision to CTA w/in 30d after receipt of copy of decision these options are
mutually exclusive (RCBC vs. CIR).
Remedies of Taxpayer to Action by Commissioner

(a) In Case of Denial of Protest


The remedy is to appeal such decision to the CTA within 30 days from receipt of the decision
otherwise, the assessment will become final, executor and demandable.
Note: If the taxpayer elevates his protest to the CIR within 30 days from date of receipt of the
final decision of the CIRs duly authorized representative, such decision will not be final and
executory.
(b) In Case of Inaction by Commissioner Within 180 Days From Submission of Documents
The taxpayer has two alternative options:

1. File a petition for review with the CTA within 30 days after the expiration of the 180-day
period; or
2. Wait for the final decision of the CIR on the disputed assessment and appeal the final
decision to the CTA within 30 days from the receipt of the decision.
(c) Effect of Failure to Appeal
1. The decision or assessment becomes final and executory.
2. In an action for the collection of the tax by the government, the taxpayer is barred from reopening the question already decided.
3. The assessment is considered correct which may be enforced by summary or judicial
remedies.
4. In a proceeding for collection of tax by judicial action, the taxpayers defenses are similar to
those of the defendant in a case for the enforcement of a judgment by judicial action.
5. The assessment which has become final and executor cannot be superseded by a new
assessment.
Protesting an Assessment/ Remedy Before Payment
General Rule
Once the assessment has become final and executory, the taxpayer in a collection case cannot
go into the merits of the assessment.
Exception:
1. Non-service of PAN (CIR vs. Metro Star Superama, Inc., G.R. 185371, December 2010)
2. Waiver on part of Government (Republic vs. Ker, 18 SCRA 208 [1966])
3. No valid waiver of the prescriptive period on the part of the taxpayer (Philippine Journalists, Inc.
vs. CIR, G.R. No. 162852, 16 December 2004, 447 SCRA 214).

The fact that the assessment had reached finality for failure to protest must be raised by the
CIR as defense for the court to dismiss the case in its favor. Failure to do so would amount to
a waiver on the part of the government (Republic vs. Ker, 18 SCRA 208).
The validity of the assessment itself is a separate and distinct issue from the issue of whether
the right of the CIR to collect the validity assessed tax has prescribed (Marcos II vs. CA, G.R.
No. 120880).

The finality of the assessment, as worded in the provision of law, simply means that where
the taxpayer decides to forego with its opportunity to present the documents in support of its
claim within sixty (60) days from the filing of its protest, it merely lost its chance to further
contest the assessment (Solidbank Corporation vs. CIR, G.R. No. 148191, November 25, 2003).
Nowhere in the Tax Code is the Collector of Internal Revenue required to rule first on a
taxpayers request for reconsideration before he can go to court for the purpose of collecting
the tax assessed (Republic vs. Lim Tian Teng Son & Co., Inc., 16 SCRA 584 (1966), reiterated in a lot
of subsequent cases).

d) Collection
(i) Requisites
Collection is only allowed when there is already a final assessment made for the determination of
the tax due. Assessments are deemed final when:
1. The taxpayer fails to file a protest 30 days from receipt of the assessment
2. After the 180 day period and the CIR has not yet acted on the protest the taxpayer fails to
appeal it
3. After 30 days from the receipt of the decision of the CIR the taxpayer fails to appeal.
(ii) Prescriptive periods
General Rule:

1. Where an assessment was made - period for collection (by distraint or levy or by a
proceeding in court) is within 3 years following the assessment has been released, mailed, or
sent. (BPI v. CIR, GR 139736, Oct. 17, 2005)
2. In the case of a false or fraudulent return with intent to evade tax or of failure to file a return, a
proceeding in court for the collection of such tax may be filed without assessment, at any time
within 10 years after the discovery of the falsity, fraud or omission. (Sec.222 [a], NIRC)
Exceptions
1. The same exceptions relative to the prescriptive periods for assessment are also applicable.
2. If the government makes another assessment or the assessment made is revised, the
prescriptive period for collection of such tax should be counted from the date the last or
revised assessment was made.
3. Where an action is brought to enforce a compromise, the prescriptive period is 10 years from
the time the right of action accrues as fixed in the Civil Code. (Art. 1144 [1], NCC)
Note: When it comes to self-assessed taxes where a return is filed by the taxpayer. The taxpayer
is the one to assess himself and such assessment is deemed to be adopted by the government.
Thus, the filing of the return
(iii) Distraint of Personal Property Including Garnishment
Definition: It is the seizure by the government of personal property, tangible or intangible, to
enforce the payment of taxes. The property may be offered in a public sale, if taxes are not
voluntarily paid. It is a summary remedy.
Nature of the Warrant of Distraint or Levy: The warrant is a summary procedure forcing the
taxpayer to pay. The receipt of a warrant may or may not partake the character of a final decision.
If it is an indication of a final decision, the taxpayer may appeal to the CTA within 30 days from
service of the warrant.
Two kinds of Distraint
a. Actual Distraint where there is a taking of possession of the personal property out of the
taxpayer into that of the government.
b. Constructive Distraint owner is merely prohibited from disposing of his personal property.
Property Subject to Distraint
a. In general all goods, chattels or effects and other personal property belonging to the
taxpayer or in which the taxpayer has AN interest may be seized and distraint in such quantity
sufficient to satisfy the tax or charge, the increments and the expenses of the distraint and the
cost of the subsequent sale.
b. Bank accounts may be distraint notwithstanding RA 1405 since no inquiry in made
Requisites for the exercise of the Remedy of Distraint:
1. The taxpayer must be delinquent (except in constructive distraint) in the payment of tax;
2. There must be a subsequent demand for its payment (assessment);
3. The taxpayer must fail to pay the tax at the time required; and
4. The period within which to assess or collect the tax has not yet prescribed.
5. Amount of tax exceeds Php 100.00
Note: for constructive distraint tax delinquency is not essential
Duties of the officer serving the warrant of distraint:
(a) Make an account of the personal properties distrained;
(b) Sign the list of personal properties distrained to which shall be added, a statement of the sum
demanded and note of the time and place of sale;

(c) Leave either with the owner or person from whose possession such personal properties were
taken, or at the dwelling or place of business of such person with someone of suitable age
and discretion (Sec. 208, CTRP).
Persons who shall seize and distraint personal property (actual distraint):
(a) Amount of delinquent tax is more than P1,000,000 Commissioner or his duly authorized
representatives.
(b) Amount of delinquent tax is P1,000,000 or less Revenue District Officer (Sec. 207(A), 1997
NIRC).

Authority of the Commissioner to Inquire Into Bank Deposit Accounts


Distraint includes garnishment of money even in bank deposits because RA 1405 (Bank Secrecy
Law) covers only divulging of information of deposits. No inquiry is made on garnishment for it
only earmarks a portion of the deposits.
Notwithstanding any contrary provision of RA 1405, the Commissioner is authorized to inquire
into the bank deposits of: (1) a decedent to determine his gross estate; (2) a taxpayer who waives
his right by reason of financial incapacity to pay his tax liability (Sec. 5, NIRC)
(a) Summary Remedy of Distraint of Personal Property
Procedure for distraint and garnishment
GENERALLY, the remedies of distraint, levy or civil or criminal action may be pursued
SIMUTANEOUSLY. (205) Remedies of distraint and levy may be repeated if necessary until the
full amount due, including all expenses, is collected. (217)
HOWEVER, the remedies of distraint and levy shall not be available where the amount of the tax
involved is not more than One hundred pesos.
Sale of property distrained and disposition of proceeds
The Revenue District Officer or his duly authorized representative, other than the officer referred
to in Section 208 of this Code shall, according to rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, forthwith cause a notification
to be exhibited in not less than two (2) public places in the municipality or city where the distraint
is made, specifying the time and place of sale and the articles distrained. The time of sale shall
not be less than twenty (20) days after notice to the owner or possessor of the property as above
specified and the publication or posting of such notice. One place for the posting of such notice
shall be at the Office of the Mayor of the city or municipality in which the property is distrained.
At the time and place fixed in such notice, the said revenue officer shall sell the goods, chattels,
or effects, or other personal property, including stocks and other securities so distrained, at public
auction, to the highest bidder for cash, or with the approval of the Commissioner, through duly
licensed commodity or stock exchanges.
In the case of stocks and other securities, the officer making the sale shall execute a bill of sale
which he shall deliver to the buyer, and a copy thereof furnished the corporation, company or
association which issued the stocks or other securities.
Upon receipt of the copy of the bill of sale, the corporation, company or association shall make
the corresponding entry in its books, transfer the stocks or other securities sold in the name of the
buyer, and issue, if required to do so, the corresponding certificates of stock or other securities.
Any residue over and above what is required to expenses shall be returned to the owner of the
property sold. The expenses chargeable upon each seizure and sale shall embrace only the
actual expenses of seizure and preservation of the property pending the sale, and no charge shall
be imposed for the services of the local internal revenue officer or his deputy. (Section 209, NIRC)

Release of distrained property upon payment prior to sale


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. (Section 210,
NIRC)

1. Purchase by the government at sale upon distraint


When the amount bid for the property under distraint is not equal to the amount of the tax or is
very much less than the actual market value of the articles offered for sale, the Commissioner or
his deputy may purchase the same in behalf of the National Government for the amount of taxes,
penalties and cost due thereon.
Property so purchased may be resold by the Commissioner or his deputy, subject to the rules
and regulations prescribed by the Secretary of Finance, the net proceeds therefrom shall be
remitted to the National Treasury and accounted for as internal revenue. (Section 242, NIRC)
2. Report of sale to BIR
Within two (2) days after the sale, the officer making the same shall make a report of his
proceedings in writing to the Commissioner and shall himself preserve a copy of such report as
an official record. (Section 211, NIRC)
3. Constructive distraint to protect the interest of the government
To protect the interest of the Government, the CIR may place under constructive distraint the
property of a delinquent taxpayer or any taxpayer, who is in his opinion is:
1. Retiring from any business subject to tax, or
2. Is intending to leave the Philippines, or
3. Is intending to remove his properties therefrom or to hide or conceal his property, or
4. Is intending to perform any act tending to obstruct the proceedings for collecting the tax due
or which may be due from him.
(iv) Summary Remedy of Levy on Real Property
(a) Advertisement and Sale
Within twenty (20) days after levy, the officer conducting the proceedings shall proceed to
advertise the property or a usable portion thereof as may be necessary to satisfy the claim and
cost of sale; and such advertisement shall cover a period of at least thirty (30) days. It shall be
effectuated by posting a notice at the main entrance of the municipal building or city hall and in a
public and conspicuous place in the barrio or district in which the real estate lies and by
publication once a week for three (3) weeks in a newspaper of general circulation in the
municipality or city where the property is located. The advertisement shall contain a statement of
the amount of taxes and penalties so due and the time and place of sale, the name of the
taxpayer against whom taxes are levied, and a short description of the property to be sold. At any
time before the day fixed for the sale, the taxpayer may discontinue all proceedings by paying the
taxes, penalties and interest. If he does not do so, the sale shall proceed and shall be held either
at the main entrance of the municipal building or city hall, or on the premises to be sold, as the
officer conducting the proceedings shall determine and as the notice of sale shall specify.
Within five (5) days after the sale, a return by the distraining or levying officer of the proceedings
shall be entered upon the records of the Revenue Collection Officer, the Revenue District Officer
and the Revenue Regional Director. The Revenue Collection Officer, in consultation with the
Revenue District Officer, shall then make out and deliver to the purchaser a certificate from his
records, showing the proceedings of the sale, describing the property sold, stating the name of
the purchaser and setting out the exact amount of all taxes, penalties and interest:

Provided, however, that in case the proceeds of the sale exceeds the claim and cost of sale, the
excess shall be turned over to the owner of the property.
The Revenue Collection Officer, upon approval by the Revenue District Officer may, out of his
collection, advance an amount sufficient to defray the costs of collection by means of the
summary remedies provided for in this Code, including the preservation or transportation in case
of personal property, and the advertisement and subsequent sale, both in cases of personal and
real property including improvements found on the latter. In his monthly collection reports, such
advance shall be reflected and supported by receipts. (Section 213, NIRC)
(b) Redemption of Property Sold
Within one (1) year from the date of sale, the delinquent taxpayer, or any one for him, shall have
the right of paying to the Revenue District Officer the amount of the public taxes, penalties, and
interest thereon from the date of delinquency to the date of sale, together with interest on said
purchase price at the rate of fifteen percent (15%) per annum from the date of purchase to the
date of redemption, and such payment shall entitle the person paying to the delivery of the
certificate issued to the purchaser and a certificate from the said Revenue District Officer that he
has thus redeemed the property, and the Revenue District Officer shall forthwith pay over to the
purchaser the amount by which such property has thus been redeemed, and said property
thereafter shall be free from the lien of such taxes and penalties.
The owner shall not, however, be deprived of the possession of the said property and shall be
entitled to the rents and other income thereof until the expiration of the time for its redemption.
(Section 214, NIRC)

(c) Final Deed of Purchaser


Upon failure of the delinquent taxpayer to redeem the property within one year from the date of
sale shall cause the issuance of a final deed to the purchaser.
(v) Forfeiture to Government for Want of Bidder
In case there is no bidder for real property exposed for sale as hereinabove provided or if the
highest bid is for an amount insufficient to pay the taxes, penalties and costs, the Internal
Revenue Officer conducting the sale shall declare the property forfeited to the Government in
satisfaction of the claim in question and within two (2) days thereafter, shall make a return of his
proceedings and the forfeiture which shall be spread upon the records of his office. It shall be the
duty of the Register of Deeds concerned, upon registration with his office of any order from a
competent court.
Within one (1) year from the date of such forfeiture, the taxpayer, or any one for him, may redeem
said property by paying to the Commissioner or the latters Revenue Collection Officer the full
amount of the taxes and penalties, together with interest thereon and the costs of sale, but if the
property be not thus redeemed, the forfeiture shall become absolute. (Section 215, NIRC)
(a) Remedy of Enforcement of Forfeitures
(1) Action to contest forfeiture of chattel
In case of the seizure of personal property under claim of forfeiture, the owner desiring to contest
the validity of the forfeiture may, at any time before sale or destruction of the property, bring an
action against the person seizing the property or having possession thereof to recover the same,
and upon giving proper bond, may enjoin the sale, or after the sale and within six (6) months, he
may bring an action to recover the net proceeds realized at the sale. (Section 231, NIRC)
(b) Resale of Real Estate Taken for Taxes
The Commissioner shall have charge of any real estate obtained by the Government of the
Philippines in payment or satisfaction of taxes, penalties or costs arising under this code or in

compromise or adjustment of any claim therefore; and said Commissioner may, upon the giving
of not less than twenty (20) days notice, sell and dispose of the same at public auction, or with
the prior approval of the Secretary of Finance, dispose of the same at private sale. In either case,
the proceeds of the sale shall be deposited with the National Treasury, and an accounting of the
same shall be rendered to the Chairman of the Commission on Audit. (Section 216, NIRC)
(c) When Property to be Sold or Destroyed
Sales of Forfeited Chattels and removable fixtures, so far as practicable, 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 or for non-payment of taxes.
Destruction of distilled spirits, liquors, cigarettes, other manufactured products of tobacco and
all apparatus used in or about the illicit production of such articles by the CIR when the sale
of the same for consumption or use would be injurious to public health or prejudicial to the
enforcement of law.
All other articles subject to excise tax, which have been manufactured or removed in violation
of the NIRC, dies for printing or making of internal revenue stamps and labels which are in
limitation of or purport to be lawful stamps, or labels, may upon forfeiture, be sold or
destroyed in the discretion of the Commissioner.
Forfeited property shall not be destroyed at least 20 days after seizure.
(d) Disposition of Funds Recovered in Legal Proceedings or Obtained from Forfeiture
All judgments and monies recovered and received for taxes, costs, forfeitures, fines and penalties
shall be paid to the Commissioner or his authorized deputies as the taxes themselves are
required to be paid, and except as specifically provided, shall be accounted for and dealt within
the same way.
(vi) 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. (Section 217, NIRC)
(vii) Tax Lien
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 form 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.
HOWEVER, the lien shall not be valid against any mortgagee, purchaser or judgment creditor
until NOTICE of such lien shall be filed by the Commissioner in the Office of the Register of
Deeds of the province or city where the property of the taxpayer is situated or located.
(viii)
Compromise
A contract whereby the parties, by reciprocal concessions, avoid litigation or put an end to one
already commenced (Art. 2028, New Civil Code).
(a) Authority of the Commissioner to Compromise and Abate Taxes
The Commissioner may compromise the payment of any internal revenue tax under two
instances: (1) when a reasonable doubt as to the validity of the claim against the taxpayer exist;
(2) when the financial position of the taxpayer demonstrates a clear inability to pay the assessed
tax (Sec. 204[a], NIRC).
(ix) Civil and Criminal Actions
(a) Suit to Recover Tax Based on False or Fraudulent Returns
Where the return filed was fraudulent or false, the government may not only avail the remedy of
judicial action but also administrative action which is classified into three: (a) distraint; (b) levy; or
(c) tax lien (Sec. 205, NIRC)

Precondition Before a Criminal Case May Be Filed

An assessment of a deficiency is not necessary to a criminal prosecution for willful attempt to


defeat and evade the income tax. A crime is complete when the violator has knowingly and
willfully filed a fraudulent return with intent to evade and defeat the tax. The perpetration of
the crime is grounded upon knowledge on the part of the taxpayer that he has made an
inaccurate return, and the governments failure to discover the error and promptly to assess
has no connections with the commission of the crime (Ungab vs. Cusi, 97 SCRA 877). In plain
words, for criminal prosecution to proceed before assessment, there must be a prima facie
showing of willful attempt to evade taxes (CIR vs. CA, 257 SCRA 2000).

The conviction or acquittal obtained under this Section [Sec. 254] shall not be a bar to the
filing of a civil suit for the collection of taxes (Sec. 254, NIRC)

The following are punished under Sec. 254 and 255 of the NIRC:
1. Attempt to evade or defeat tax
2. In case of a person required to (a) Make a return, (b) keep any record, or (c) Supply correct
and accurate information who at the time or times required by law or rules and regulations
willfully fails to do either of the following:
a. pay such tax,
b. makes such return,
c. keep such record, or
d. supply correct and accurate information, or
e. withhold or remit taxes withheld, or
f. refund excess taxes withheld on compensation.
3. Attempting to make it appear for any reason that he or another has in fact filed a return or
statement, or
4. Actually filing a return or statement and subsequently withdraws the same return or statement
after securing the official receiving seal or stamp of receipt of internal revenue office wherein
the same was actually filed.
Criminal violations of the tax code prescribed after 5 five years, to be counted either from:
1. The commissioner of the violation of the law, if known at that time, or
2. From: (a) The discovery and (b) The institution of judicial proceeding for its investigation and
punishment (Lim vs. CA, 190 SCRA 616)
c) Refund
(i) Grounds and Requisites for Refund
1. Tax is erroneously or illegally collected.
2. Sum collected is excessive or in any manner wrongfully collected.
3. Penalty is collected without authority.
Requisites of Tax Refund
1. There must be a written claim with the CIR, as it would enable the CIR to correct the errors of
his subordinate and to notify the government;
2. Must be a categorical claim for refund or credit;
3. Must be filed within 2 years after the payment of the tax or penalty otherwise no refund or
credit could be taken. No suit or proceeding shall be instituted after the expiration of the 2
year period regardless of any supervening cause that may arise after payment; and
4. Present proof of payment of the tax.

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
(Commissioner of Internal Revenue vs. Tokyo Shipping Co., Ltd., G.R. No. 68282, May 26, 1995, 244
SCRA 332).

(ii)
(a)
(b)
(c)

Requirements for Refund as Laid Down by Cases


Necessity of written claim for refund
Claim containing a categorical demand for reimbursement
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

General Rule: a claim for refund or credit must be duly filed with the commissioner for tax
erroneously or illegally collected may be recovered (Sec. 229, NIRC).
Exception:
1. Where on the face of the return upon which payment was made, such payment appears
clearly to have been erroneously paid (Sec. 229, par. 2, NIRC), or
2. When the petitioner paid the disputed assessments under protest before filing his petition for
review with the CTA (Vda. de San Agustin vs. CIR, G.R. No. 138485, September 10, 2001).
Note: A return filed showing an overpayment shall be considered as a written claim for credit or
refund. (204C)
(iii) Legal Basis of Tax Refunds
Tax refunds are based on the principle of quasi-contract or solutio indebeti and the pertinent
laws governing this principle are found in Art. 2142 and Art. 2154 of the NCC. When money is
paid to another under the influence of a mistake of fact, on the mistaken supposition of the
existence of a specific fact, where it would not have been known that the fact was otherwise,
it may be recovered. The ground upon which the right of recovery rests is that money paid
through misapprehension of facts belongs in equity and in good conscience to the person
who paid it. The government comes within the scope of solutio indebeti principle, where that:
enshrined in the basic legal principles is the time honored doctrine that no person shall
unjustly enrich himself at the expense of another. It goes without saying that the Government
is not exempt from the application of this doctrine (CIR vs. Acesite (Philippines) Hotel Corporation,
February 16, 2007, G.R. No. 147295).

(iv)

Statutory Basis for Tax Refund Under the Tax Code (Sec. 204 (C) and 229 of the 1997

NIRC)

(a) Scope of claims for refund Tax recovery or refunds may encompasses the following
payments:
erroneously or illegally assessed or collected internal revenue taxes
Penalties imposed without authority
Any sum alleged to have been excessive or in any manner wrongfully collected
(b) Necessity of proof for claim or refund Claim for refund partakes the nature of an
exemption, hence it is strictly construed against the claimant and the failure to discharge said
burden is fatal to the claim (CIR vs. S.C. Johnson and Son, Inc., et al., G.R. No. 127105).
(c) Burden of proof for claim of refund
Burden of proof for claim of refund, hence it is strictly construed against the claimant.
(d) Nature of erroneously paid tax/illegally assessed collected
Taxes are erroneously paid when a taxpayer pays under a mistake of fact, such as, he is not
aware of an existing exemption in his favor at the time that payment is made. Taxes are illegally
collected when payments are made under duress.

(e) Tax refund vis--vis tax credit


They are essentially modes of recovering taxes that have been either erroneously or illegally paid
to the government. REFUND takes place when there is actual reimbursement. 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.
TAX CREDIT
Works by applying the refundable amount, as
shown on the final adjustment return (FAR) of a
given taxable year, against the estimated quarterly
income tax liabilities of the succeeding taxable
year.
There is no prescriptive period for the carrying over
of the same (CIR vs. BPI, G.R. No. 178490, July 7,
2009); It may be repeatedly carried over to
succeeding taxable years until fully utilized.

TAX REFUND
Any tax on income that is paid in excess of the
amount due the government may be refunded,
provided that a taxpayer properly applies for the
refund (Philam Asset Management, Inc. vs. CIR, G.R.
Nos. 156637/162004, December 14, 2005).
Prescribes after two years from the filing of the
FAR (Sec. 229, NIRC).

Pursuant to the foregoing cases, the choice of the taxpayer, whether tax refund or tax credit, may
be deduced as follows:
1. Tax refund, when the taxpayer files a written claim for the same, although it failed to signify
its intention in its return (Philam Asset Managament, Inc. vs. CIR, G.R. Nos. 156637/162004,
December 14, 2005, with respect to its 1997 FAR).

2. Tax credit, when the taxpayer filled out the portion Prior Years Excess Credits in its FAR
(Philam Asset Management, Inc. vs. CIR, G.R. Nos. 156637/162004, December 14, 2005, with respect
to its 1998 FAR, and CIR vs. BPR, G.R. No. 178490, July 7, 2009).

3. Tax credit for the succeeding taxable years after tax credit was chosen for the prior taxable
year (CIR vs. BPI, G.R. No. 178490, July 7, 2009).
Irrevocability Rule
If the sum of the quarterly tax payments made during the said taxable year is greater than the
total tax due on the entire taxable income of that year, the corporation is entitled to a refund and
under Section 76 has two (2) options:
a. Carry-over the excess credit [Tax Credit]; or
b. Be credited or refunded with the excess amount paid [Tax Refund].
(f) Essential requisites for claim of refund
A taxpayer claiming for a tax credit or refund of creditable withholding tax must comply with the
following requisites:
1. The claim must be filed with the CIR within the two-year period from the date of payment of
the tax;
2. It must be shown on the return that the income received was declared as part of the gross
income, and
3. The fact of withholding must be established by a copy of a statement duly issued by the payor
to the payee showing the amount paid and the amount of the tax withheld (Banco Filipino
Savings and Mortgage Bank vs. Court of Appeals, G.R. No. 155682, March 27, 2007, 519 SCRA 93,
96).

The time for bringing an action for a refund of income tax, fixed by statute, is not extended by
the delay of the Collector of Internal Revenue in giving notice of the rejection of such claim
(Koppel (Phil), Inc. vs. CIR, G.R. No. L-10550, September 19, 1961).

A taxpayer, resident or non-resident, who contributes to the withholding tax system, does not
really deposit an amount to the BIR Commissioner, but, to perform or extinguish his tax
obligation for the year concerned. He is paying his tax liabilities for that year. Consequently, a
taxpayer whose income is withheld at the source will be deemed to have paid his tax liability

when the same falls due at the end of the tax year. It is from this latter date then, or when the
tax liability falls due, that the 2-year prescriptive period under Sec. 306 of the Revenue Code
starts to run with respect to payments effected through the withholding tax system. It is of no
consequence whatever that a claim for refund or credit against the amount withheld at the
source may have been presented and may have remained unresolved since the delay of the
Collector is rendering the decision does not extend the peremptory period fixed by the statute
(Finley J. Gibbs & Diane P. Gibbs vs. CIR, CTA, November 29, 1965 GR. L-17406).

It is the duty of the taxpayer to urge the Collector for his decision and wake him up from his
lethargy or file his action within the time prescribed by law. Koppel not having filed his claim
within the time fixed by law, his cause of action has prescribed, and the court should not give
a premium to a litigant who sleeps on his rights. Having failed to file his action for refund on
time of Koppel may not now invoke estoppels when he himself is guilty of laches. The
government is never stopped by error or mistake on the part of its agents (Koppel (Philippines),
Inc. vs. CIR, September 19, 1961 G.R. L-10550).

Where a taxpayer seeking a refund of estate and inheritance taxes whose request is denied
and whose appeal to the CTA was dismissed for being filed out of time, sues anew to recover
such taxes, already paid under protest, his action is devoid of merit. For in the same way that
the expedient of an appeal from a denial of a tax request for cancellation of warrant of
distraint and levy cannot be utilized to test the legality of an assessment which had become
conclusive and binding on the taxpayer, so is Sec. 360 of the Tax Code not available to revive
the right to contest the validity of an assessment which had become final for failure to appeal
the same on time (CIR vs. Jose Concepcion, March 15, 1968 G.R. L-23912).

The SC has repeatedly held that the claim for refund with the BIR and the subsequent appeal
to the CTA must be filed within the 2-year period. If, however, the Collector takes time in
deciding the claim, and the period of 2 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
Collector. In the light of the above quoted ruling, the SC finds that the right of Victorias Milling
to claim refund of P2,817.08 has prescribed (CIR vs. Victorias Milling Co., & CTA January 03, 1968
G.R. L-24108).

(v) Who May Claim/Apply for Tax Refund/Tax Credit


(a) Taxpayer/Withholding Agents of Non-Resident Foreign Corporation
The SC believes that the BIR should not be allowed to defeat an otherwise valid claim for
refund by raising the question of alleged incapacity. CIR does not pretend that P&G-Phil.,
should it succeed in the claim for refund instead of transmitting such refund, is likely to run
away with the refund instead of transmitting such refund or tax credit to its parent of sole
stockholder. It is commonplace that in the absence of explicit statutory provisions to the
contrary, the government must follow the same rules of procedure which bind private parties.
It is, for instance, clear that the government is held to compliance with the provisions of
Circular No. 1- 88 of the SC in exactly the same way that private litigants are held to such
compliance, save only in respect of the matter of filing fees from which the Republic is
exempt by the Rules of Court. A taxpayer is any person subject to tax imposed by the Tax
Code. Under Sec. 53(c), the withholding agent who is required to deduct and withhold any tax
is made personally liable for such tax and is indemnified against any claims and demands
which the stockholder might wish to make in questioning the amount of payments effected by
the withholding agent in accordance with the provisions of NIRC. The withholding agent,
P&G-Phil., is directly and independently liable for the correct amount of the tax that should be
withheld from the dividend remittances. The withholding agent is, moreover, subject to and
liable for deficiency assessments, surcharges and penalties should the amount of the tax
withheld be finally found to be less than the amount that should have been withheld under the
law. A person liable for tax has been held to be a person subject to tax and subject to tax
both connote legal obligation or duty to pay a tax. By any reasonable standard, such a person

should be regarded as a part-in-interest or as a person having sufficient legal interest, to


bring a suit for refund of taxes he believes were illegally collected from him (CIR vs. Procter &
Gamble Philippines Manufacturing Corporation, & CTA, December 2, 1991 G.R. No. 66838).

Tax Pairing Rule


The ordinary 35% tax rate applicable to dividend remittances to non-resident corporate
stockholders of a Philippine corporation, goes down to 15% if the country of domicile of the
foreign stockholder corporation shall allow such foreign corporation a tax credit for taxes
deemed paid in the Philippines, applicable against the tax payable to the domiciliary country by
the foreign stockholder corporation. In the instant case, the reduced 15% dividend tax rate is
applicable if the USA shall allow to P&G-USA a tax credit for taxes deemed paid in the
Philippines applicable against the US taxes of P&G-USA. The NIRC specifies that such tax credit
for taxes deemed paid in the Philippines must, as a minimum, reach an amount equivalent to
20% points which represents the difference between the regular 35% dividend tax rate. However,
Sec. 24(b)(1), does not require that the US must give a deemed paid tax credit for the dividend
tax (20%points) waived by the Philippines in making applicable the preferred dividend tax rate of
15%. In other word, NIRC does not require that the US tax law deemed the parent-corporation to
have paid the 20% points of dividend tax waived by the Philippines. The NIRC only requires that
the US shall allow P&G-USA a deemed paid tax credit in an amount equivalent to the 20%
points waived by the Philippines.
(vi) Prescriptive Period for Recovery of Tax Erroneously or Illegally Collected
SECTION 229. Recovery of Tax Erroneously or illegally Collected. No suit or proceeding shall
be maintained in any court for the recovery of any national internal revenue tax hereafter alleged
to have been erroneously or illegally assessed or collected, or of any penalty claimed to have
been collected without authority, or of any sum alleged to have been excessively or in any
manner wrongfully collected, until a claim for refund or credit has been duly filed with the
Commissioner; but such suit or proceeding may be maintained, whether or not such tax, penalty,
or sum has been paid under protest or duress.
In any case, no such suit or proceeding shall be filed after the expiration of two (2) years from the
date of payment of the tax or penalty regardless of any supervening cause that may arise after
payment:
Provided, however, that the Commissioner may, even without a written claim therefore, refund or
credit any tax, where on the face of the return upon which payment was made, such payment
appears clearly to have been erroneously paid.
Commencement of the two (2) year period (Jurisprudence)
1. Tax sought to be refunded is illegally or erroneously collected
From the date the tax was paid (Commissioner vs. Victorias Milling, G.R. No. L-24108, January 31,
1968).

2. Tax is paid only in installments or only in part


From the date the last or final installment or payment because for tax purposes, there is no
payment until the whole or entire tax liability is fully paid (Collector vs. Prieto, G.R. No. L-11976,
August 29, 1961).

3. Taxpayer merely made a deposit


Counted from the conversion of the deposit to payment (Union Garment vs. Collector, CTA Case
No. 416, November 17, 1958)

Merely making a deposit is not equivalent to payment until the amount is actually applied to
the specific purpose for which it was deposited.

4. Tax has been withheld from source (through the withholding tax system)
Counted from the date it falls due at the end of the taxable year

A taxpayer who contributes to the withholding tax system does not really deposit an amount
to the government, but in truth, performs and extinguishes his tax obligation for the year
concerned (Gibbs vs. Commissioner, G.R. No. L-17406, November 29, 1965).

5. End of taxable year vs. date of the filing of the final adjusted return
From the date when the final adjusted return was filed.

The rationale in computing this period is the fact that it is only then the corporation can
ascertain whether it made profits or incurred losses in its business operations (ACRA
Investments vs. Court of Appeals, G.R. No. 96322, December 20, 1991).

6. Date when quarterly income tax was paid vs. date when final adjusted return was filed
From the date when final adjusted return was filed
The filing of the quarterly income tax return (Sec. 68) and payment of quarterly income tax
should only be considered mere installments of the annual tax due (Commissioner vs. TMX
Sales, G.R. No. 83736, January 15, 1992).

7. Date when the final adjustment return was actually filed (ex. Apr. 2) vs. Last day when
the adjustment return could still be filed (ex. Apr. 15)
From the date the final adjustment return was actually filed (Commissioner vs. Court of Appeals,
G.R. No. 117254, January 21, 1999).

8. Tax was not erroneously or illegally paid but the taxpayer became entitled to refund
because of supervening circumstances
From the date the taxpayer becomes entitled to refund and not from the date of payment
(Commissioner vs. Don Pedro Central Azucarera, GR No. L-28467, Feb. 28, 1973).

Payment under protest is not necessary under NIRC


A suit or proceeding for tax refund may be maintained whether or not such tax, penalty or sum
has been paid under protest or duress (Sec. 229, NIRC).
Note: Similarly, payment under protest is not necessary in refund for local taxes (See Sec. 196,
LGC).

However, payment under protest is necessary in claim for refund for real property taxes (Sec. 252,
LGC) and for customs duties (Sec. 2308, TCC).
Suspension of the two-year prescriptive period
1. There is a pending litigation between the Government and the taxpayer; and
2. CIR in that litigated case agreed to abide by the decision of the SC as to the collection of
taxes relative thereto (Panay Electric Co. vs. Collector, G.R. No. L-10574, May 28, 1958).
(vii)Other Consideration Affecting Tax Refunds
Refunds of Corporate Taxpayers
The two-year prescriptive period within which to claim a refund commences to run, at the
earliest, on the date of the filing of the adjusted final tax return (ACCRA Investments Corp vs.
CA, 204 SCRA 957).

For purposes of refunds of quarterly income taxes paid, the two-year prescriptive period
provided in Section 229 of the Tax Code should be computed from the time of filing the

Adjustment Return or Annual Income Tax Return and final payment of income tax (CIR vs.
TMX Sales, Inc., 205 SCRA 184).

There is a need to file a return first before a claim for refund can prosper inasmuch as the
Commissioner by his own rules and regulations mandates that the corporate taxpayer opting
to ask for a refund must show in its final adjustment return the income it received from all
sources and the amount of withholding taxes remitted by its withholding agents to the BIR.
ACCRA filed its final adjustment return for its 1981 taxable year on April 15, 1982. The 2-year
prescriptive period within which to claim a refund commences to run at the earliest, on the
date of the filing of the adjusted final tax return. Hence, ACCRA had until April 15, 1984 within
which to file its claim for refund (ACCRA Investments Corporation vs. CA, CIR, & CTA, December
20, 1991 G.R. No. 96322).

The filing of quarterly ITRs required in Sec. 68 and implemented per BIR
Form 1702-Q and payment of quarterly income tax should only be considered mere
installments of the annual tax due. These quarterly taxpayments which are computed based
on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable
income, should be treated as advances or portions of the annual income tax due, to be
adjusted at the end of the calendar or fiscal year. This is reinforced by Sec. 69 which provides
for the filing of adjustment returns and final payment of income tax. Consequently, the 2-year
prescriptive period provided in Sec. 230 of the Tax Code should be computed from the time of
filing of the Adjustment Return or Annual ITR and final payment of income tax (CIR vs. TMX
Sales Inc., & CTA, January 15, 1992 G.R. No. 83736).

A corporation entitled to a tax credit refund of the excess estimated quarterly income taxes
paid has 2 options: To carry over the excess credit; To apply for the issuance of a tax credit
certificated or to claim a cash refund. If the option to carry over the excess credit is exercised,
the same shall be irrevocable for that taxable period. In exercising its option, the corporation
must signify in its annual corporate adjustment return (by marking the option box provided in
the BIR Form) its intention either to carry over the excess credit or to claim a refund. To
facilitate tax collection, these remedies are in the alternative and the choice of one precludes
the other. This is known as the irrevocability rule and is embodied in the last sentence of Sec.
76 of the Tax Code. The phrase such option shall be considered irrevocable for that taxable
period means that the option to carry over the excess tax credits of a particular taxable year
can no longer be revoked. The rule prevents a taxpayer from claiming twice the excess
quarterly taxes paid: As automatic credit against taxes for the taxable quarters of the
succeeding years for which no tax credit certificate will be issued or which will be claimed for
cash refund (Systra Philippines, Inc. vs. CIR, September 21, 2007 G.R. No. 176290).

Sec. 76, gives the taxpayer the privilege to carry over its excess credit or crediting/claiming
for the refund of the excess amount paid, as the case may be. Thus, a taxpayers option to
carry over the excess credit or to refund/credit the excess amount paid is actually provided for
by Sec. 76. In order to give effect to its provisions, it is important that Sec. 76 should be read
together with Sec. 204 and Sec. 229 of the Tax Code. In the case at bar, when Sithe opted to
carry over its excess tax credit to the succeeding taxable year, it has in effect availed of the
privilege allowed only by Sec. 76. Thus, it is absurd for Sithe to exercise the option to carry
over the excess amount paid and on the same breath, invoke the inapplicability of Sec. 76 to
his case (Sithe Philippines Holdings, Inc. vs. CIR, April 04, 2003 CTA 6274).

It should be stressed that the rationale of the rules of procedure is to secure a just
determination of every action. They are tools designed to facilitate the attainment of justice.
But there can be no just determination of the present action if we ignore, on the grounds of
strict technicality, the Return submitted before the CTA and even before this Court. The
undisputed fact is that BPI suffered a net loss in 1990; accordingly, it incurred no tax liability
to which the tax credit could be applied. Consequently, there is no reason for the BIR and this
Court to withhold the tax refund which rightfully belongs to BPI. CIR argues that tax refunds

are in the nature of tax exemptions and are to be construed strictissimi juris against the
claimant. Under the facts of the case, the SC holds that BPI has established its claim. BPI
may have filed to strictly comply with the rules of procedure; it may have even been negligent.
These circumstances, however, should not compel the Court to disregard this cold,
undisputed fact: that BPI suffered a net loss in 1990, and that it could not have applied the
amount claimed as tax credits. Substantial justice, equity and fair play are on the side of BPI
(BPI-Family Savings Bank, Inc. vs. CA, CTA, & CIR, April 12, 2000 G.R. No. 122480).

Paid on options: no diligence on part of PHILAM


Sec. 76 offers 2 options to a taxable corporation whose total quarterly income tax payments in a
given taxable year exceed its total income tax due. These options are:
a) Filing for a tax refund;
b) Availing of a tax credit.

The first option is relatively simple. Any tax on income that is paid in excess of the amount
due the government may be refunded, provided that a taxpayer properly applies for the
refund. The second option works by applying the refundable amount, as shown on the FAR of
a given taxable year, against the estimated quarterly income tax liabilities of the succeeding
taxable year. These 2 options are alternative in nature. The choice of one precludes the other.
A corporation must signify its intention whether to request a tax refund or claim a tax credit
by marking the corresponding option box provided in the FAR. While a taxpayer is required
to mark its choice in the form provided by the BIR, this requirement is only for the purpose of
facilitating tax collection. One cannot get a tax refund and a tax credit at the same time for the
same excess income taxes paid. Failure to signify ones intention in the FAR does not mean
outright barring of a valid requires for a refund, should one still choose this option later on. A
tax credit should be construed merely as an alternative remedy to a tax refund under Sec. 76,
subject to prior verification and approval by CIR. The reason for requiring that a choice be
made in the FAR upon its filing is to ease tax administration, particularly the self-assessment
and collection aspects. A taxpayer that makes a choice expresses certainty or preference and
hence shows simple negligence or plain oversight. In the present case, CIR denied the claim
of Philam for a tax refund of excess taxes withheld in 1997, because the latter (1) had not
indicated in its ITR for that year whether it was opting for a credit or a refund; and (2) had not
submitted as evidence is 1998 ITR, which could have been applied against its 1998 tax
liabilities. Requiring that he ITR or the FAR of the succeeding year be presented to the BIR in
requesting a tax refund has no basis in law and jurisprudence. (PHILAM Asset Management, Inc.
vs. CIR, December 14, 2005 G.R. No. 156637 AND 162004).

Two year prescriptive period, not applicable


The Tax Code allows the refund of taxes to a taxpayer that claims it in writing within 2 years
after payment of the taxes erroneously received by the BIR. Despite the failure of Philam to
make the appropriate marking in the BIR from, the filing of its written claim effectively serves
as an expression of its choice to request a tax refund, instead of a tax credit. To assert that
any future claim for refund will be instantly hindered by a failure to signify ones intention in
the FAR is to render nugatory the clear provision that allows for a 2-year prescriptive period.
In BPI-Family Savings Bank vs. CA, the court ordered the refund of a taxpayers excess
creditable taxes, despite the express declaration in the FAR to apply the excess to the
succeeding year. When circumstances show that a choice of tax credit has been made, it
should be respected. But when indubitable circumstances clearly show that another choice
a tax refund is in order, it should be granted. Technicalities and legalisms, however exalted,
should not be misused by the government to keep money not belonging to it and thereby
enrich itself at the expense of its law abiding citizens.
Rule in Case of Merger, Corporate Taxpayers Contemplating Dissolution Sec. 52(C) of
NIRC
Sec. 46(a) of the NIRC applies only to instances in which the corporation remains subsisting and
its business operations are continuing. In instances in which the corporation is contemplating

dissolution, Sec. 78 of NIRC applies. It is a rule of statutory construction that Where there is in
the same statue a particular enactment and also a general one which in its most comprehensive
sense would include what is embraced in the former, the particular enactment must be operative,
and the general enactment must be taken to affect only such cases within its general language as
are not within the provisions of the particular enactment (Bank Of The Philippine Islands (BPI) vs.
CIR, October 25, 2005 G.R. No. 161997).
When two (2) year period does not apply
The instant case ought to be distinguished from a situation where, owing to net losses suffered
during a taxable year, a corporation was also unable to apply to its income tax liability taxes which
the law requires to be withheld and remitted. In the latter instance, such creditable withholding
taxes, able it also legally collected, are in the nature of erroneously collected taxes which
entitled the corporate taxpayer to a refund under Section 230 of the Tax Code
2. Government Remedies
The procedure for the collection of taxes can be summarized in the diagram below:

MOA

PLC

FNS

(simultaneous)

N1/4

WD/L

(To the TP)

(To the Bank)


Refuses?

YES
NO
NS/L

Subpoena

End when tax is


collected

Legend:
MOA = Memorandum of Assignment
PLC = Preliminary Collection Letter
FNS = Final Notice Before Seizure
WD/L = Warrant of Distraint/Levy
WG = Warrant of Garnishment
NS/L = Notice of Seizure (for distraint) or
Notice of Levy
TP = Taxpayer

The MOA is similar to the letter of authority for assessments. If at any stage of the collection
process there is a settlement, it (referring to the process) would terminate immediately.
Otherwise, collection will ensue.
1. IF the service of warrant of distraint or levy was filed on time, and the taxpayer have
sufficient properties to cover the taxes, THEN the property can be sold even beyond the
prescriptive period.
2. IF a judicial proceeding was initiated on time and the taxpayer has sufficient properties,
THEN the property can be sold even beyond the prescriptive period.
3. IF the service of warrant of distraint or levy was file on time, and the taxpayer does not
have sufficient properties, THEN the running of the prescriptive period to collect will be
suspended. Only a warrant of distraint or levy duly served upon the taxpayer who has no
properties will suspend the prescriptive period to collect. Thus,
4. IF a judicial proceeding was initiated on time, and the taxpayer does not have sufficient
properties, THEN the running of the prescriptive period to collect will NOT be suspended.

However, as regards the judicial proceeding, Rule 39 of the Rules of court governs, providing
that the execution of judgment may be done within five (5) years from the writ of execution,
and a motion for revival of judgment may be granted by the court, until such judgment is
satisfied (Republic vs. Hizon [G.R. No. 130430 December 13, 1999] and Advertising Associates Inc.
vs. CA [133 SCRA 765] in relation to Sec. 223 of the NIRC).

a) Administrative remedies
(i) Tax lien
Governments legal claim against your property when you neglect or fail to pay a tax debt. The
lien protects the governments interest in all your property, including real estate, personal property
and financial assets.
Tax lien is applied when:
1. With respect to personal property Tax lien attaches when the taxpayer neglects or refuses
to pay tax after demand and not from the time the warrant is served (Sec. 219, NIRC)
2. With respect to real property from time of registration with the register of deeds.
Tax lien is extinguished:
1. By payment or remission of the tax
2. By prescription of the right of government to assess or collect
3. By failure to file notice of such tax lien in the office of Register of Deeds
4. By destruction of property subject to tax lien
5. By replacing it with a bond

Note: A buyer in an execution sale acquires only the rights of the judgment creditor.
(ii) Levy and sale of real property
Levy of real property refers to the same act of seizure as in distraint, but in this case, of real
property, an interest in or rights to such property in order to enforce the payment of taxes. The
real property under levy shall be sold in a public sale, if the taxes involved are not voluntarily paid
following such levy.
(iii) Forfeiture of real property to the government for want of bidder
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
the GOVERNMENT in satisfaction of the claim.
The Commissioner may resell the property at a public auction after the giving of not less than
twenty (20) days notice. (216)
(iv) Further distraint and levy
DISTRAINT
Personal property only
Pre-emption only (no right of redemption)
No forfeiture in favor of government in case there is
no bidder/bid is insufficient, but BIR may purchase
the property.
There is constructive distraint

LEVY
Real property only
Pre-emption and redemption (w/in 1 year from
sale) available.
Sec. 215 provides that forfeiture is available in
case there is no bidder/bid is insufficient.
There is NO constructive levy

Thus, the constructive distraint may be done when the taxpayer, regardless of whether he is
delinquent or not, is either:
1. Retiring from any business subject to tax, or
2. Intending to leave the Philippines or
3. Intending to remove his property therefrom or
4. Intending to hide or conceal his property or
5. Intending to perform any act tending to obstruct the proceedings for collecting the tax due or
which may be due from him (Sec. 206, NIRC).

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 (Castro vs. CIR [1962]).

The claim of the government predicated on a tax lien is superior to the claim of a private
litigant predicated on a judgment (Republic vs. Enriquez, 166 SCRA 608).

The tax lien attaches not only from the service of the warrant of distraint of personal property
but from the time the tax became due and payable (HSBC vs. Rafferty, 39 Phil. 145).

Likewise, the claim of the government predicated on a tax lien is superior to the claim of the
laborers who won in a labor dispute, notwithstanding the provision in the labor code on
workers preference (CIR vs. NLRC, 218 SCRA 42).

(v) Suspension of business operation The CIR or his authorized representative may
suspend the business of a VAT-registered person for understatement of taxable sales or
receipts by 30% or more of his correct taxable sales or receipts for the taxable quarter.
(vi) Non-availability of injunction to restrain collection of tax
The administrative remedies can be summarized as follows:

1. Distraint, either:
a. Constructive, or
b. Actual
3. Levy (Actual only, no constructive)
4. Forfeiture (for real property only)
5. Tax Lien
(b) Judicial remedies
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
Shall be BORUGHT IN THE NAME OF THE GOVERNMENT of the Philippines
Shall be CONDUCTED BY LEGAL OFFICERS OF THE BIR
No civil or criminal action for the recovery of taxes or the enforcement of any fine, penalty or
forfeiture under the NIRC shall be filed in court without the APPROVAL OF THE
COMMISSIONER approval of the Commissioner. (220)
As can be culled from the cases in this sub-chapter, there are 3 ways to collect judicially:
1. By the BIR, upon its filing of a complaint for collection [Sec. 205(B), NIRC].
2. By the Taxpayers appeal, upon the answer of the BIR with a prayer for collection [Hermanos
vs. CIR, GR No. L-21551, September 30, 1969].

3. By the 3rd partys petition before the court, with a prayer for collection of taxes, where such
petitioner was granted by the CIR [PNOC vs. CIR, G.R. No. 109976, April 26, 2005].

Where the assessment has already become final and executory, the action to collect is akin
to an action to enforce a judgment. No inquiry can be made therein as to the merits of the
original case or the justness of the judgment relied upon, other than fraud in the party was
committed in the doing of the act (Mambulao Lumber Company vs. RP, G.R. no. L-37061
September 5, 1984).

3. Statutory Offenses and Penalties


a) Civil penalties
They are imposed in addition to the tax required to be paid.
(i) Surcharges
Surcharge is a civil penalty imposed by law as an addition to the main tax required to be paid. It is
not a criminal penalty but a civil administrative sanction provided primarily as a safeguard for the
protection of the State revenue and to reimburse the government for the expenses of
investigation and the loss resulting from the taxpayers fraud. A surcharge added to the main tax
is subject to interest.
Corresponding rates of surcharges:
1. Twenty-five percent (25%) of the amount due, in the following cases:
a. Failure to File any return and pay the tax due thereon as required under the provisions of
the NIRC or rules and regulations on the date prescribed
b. Failure to pay the deficiency tax within the Time prescribed for its payment in the notice
of assessment
c. Unless otherwise authorized by the CIR, filing a return with an internal revenue officer
Other than those with whom the return is required to be filed
d. Failure to Pay the full or part of the amount of tax shown on any return required to be filed
under the provisions of the NIRC or rules and regulations, or the full amount of tax due
for which no return is required to be filed, on or before the date prescribed for its payment
(Sec 248 [A], NIRC)

2. The penalty shall be fifty percent (50%) of the tax or of the deficiency tax, in the following
cases:
a. Willful neglect to file the return within the period prescribed; or
b. False or fraudulent return is
For the 10-year prescriptive period to attach to a false return, there need not be intent to evade
tax. On the other hand, there must be a fraudulent return with intent to evade tax in order for the
prescriptive period to attach.
Good faith and honest belief that one is not subject to tax on the basis of previous
interpretation of government agencies tasked to implement the tax law, are sufficient
justification to delete the imposition of surcharges and interest (Connel Bros. Co. (Phil.) vs. CIR,
119 Phil. 40, 46 (1963), as cited in Lhuillieer Pawnshop vs. CIR, G.R. No. 166786, September 11,
2006).

Fraud in its general sense is deemed to comprise anything calculated to deceive, including
all acts, omissions, and concealment involving a breach of legal of equitable duty, trust or
confidence justly reposed, resulting in the damage to another, or by which an undue and
unconscionable advantage is taken of another (CIR vs. Benigno Toda, 438 SCRA 290).
The fraud contemplated by law is actual and not constructive. Negligence, whether slight or
gross, is not equivalent to the fraud with intent to evade the tax contemplated by the law. A
mere mistake cannot be considered as fraudulent intent. It must be actual, amounting to
intentional wrong-doing with the clear purposes of avoiding the tax (Aznar vs. CTA, 58 SCRA
519).

(ii) 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,
form the date prescribed for payment until the amount is fully paid.
The principles governing interests imposed on taxes are as follows:
1. It is not a penalty, or its imposition is not penal in nature.
2. It is compensatory in nature, because of the concomitant use of the tax that is in the hands of
the taxpayer when it could have already been used by the government.
3. It is neither a civil nor an administrative sanction.
4. It is mandatory to be imposed, and cannot be waived by the BIR.
5. It forms part of the tax, and is therefore paid in the same time and manner as the tax itself.
6. Its purpose is to reimburse the government of the cost of assessing the tax, and of litigation, if
any.
Interest is imposed in two major situations:
1. Late filing, late paying, or non-filing
2. When a deficiency tax is assessed by the commissioner, with respect to the unpaid amount.
(Sec. 249, NIRC)

Penalties and interests are computed from the date of demand to pay taxes due until full payment
thereof. In all cases, the total tax due is computed as follows:
TT = B + S + I + CP
Where:
B = Basic tax
S = Surcharge, when applicable (25% of 50%)
I = Interest, when applicable (20%)
C = compromise penalty, when applicable.

TT = Total tax to be paid


The compromise penalty is NOT a tax. It is imposed based on contract. It is paid in lieu of a
criminal prosecution. Therefore, if the taxpayer does not want to pay, the BIR cannot issue
warrant of distraint or levy to enforce collection thereof. Its remedy is to file a criminal case.
In the event that the total tax due (TT) is contested by the taxpayer on appeal, and eventually the
appellate court (CTA or SC) rules in favor of the government, the interest a surcharge is
computed on top of the total tax, thus:
TT2 = TT + S + I + CP
Where:
TT2 = New total tax to be paid, after appeal
b) Deficiency interest
Any deficiency in the tax due, as the term is defined in the NIRC, shall be subject to the interest
prescribed in subsec. A hereof, which interest shall be assessed and collected from the date
prescribed for payment until the amount is fully paid (Sec. 249, NIRC)
c) Delinquency interest
In case of failure to pay:
(1) The amount of the tax due on any return required to be filed, or
(2) The amount of the tax due for which no return is required, or
(3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice
and demand of the Commissioner, there shall be assessed and collected on the
(4) rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall
form part of the tax.

DEFICIENCY
Exist when: Amount
imposed by law
exceeds
amount
shown as tax upon
return amount is
determined by the
BIR, where there is
no amount stated in
the return.
To be collected, has
to go through the
assessment
process.
Filingof a civil action
during pendency of
protest is a ground
for a motion to
dismiss
Generally
not
subject
to
25%
surcharge.

DELINQUENCY
Exist when: The selfassessed tax is not
paid at all or was
only partially paid, or
when the deficiency
tax assessed by the
BIR has become
final and executory.
Can be immediately
collected.
Filing of a civil action
for the collection of
taxes is the proper
remedy
Is
subject
administrative
penalties.

d) Interest on extended payment

to

If any person required to pay the tax is qualified and elects to pay the tax on installment under the
provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such
amount or installment on or before the date prescribed for its payment, or where the
Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or
any part thereof, there shall be assessed and collected interest at the rate hereinabove
prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and
demand until it is paid.
NOTE: RR 18-2013 required the imposition of a 20% delinquency interest per annum on
assessments unpaid which shall be computed from the time stated for its payment in the FAN
until paid. This shall be in addition to the 20% deficiency interests imposed on assessments from
time it is due until it is paid. It is possible that annual interest penalty may amount to 40% per
annum.
NOTE: RR 18-2013 Final Decision on Disputed Assessment (FDDA) issued by an authorized
representative of the Commissioner (such as the Regional Directors or Assistant Commissioner in
the case of the Large Taxpayers Service) may be appealed to the Court of Tax Appeals (in a
judicial appeal) or to the Commissioner (in an administrative appeal) within 30 days from receipt
of decision. For administrative appeal, no new evidence can further be introduced.
4. Compromise and Abatement of taxes
a. Compromise (to reduce the amount of tax payable)
It is an agreement between two or more persons who, amicably settle their differences on such
terms and conditions as they may agree on to avoid any lawsuit between them. It implies the
mutual agreement by the parties in regard to the thing or subject matter which is to be
compromised.
It is a contract whereby the parties, by reciprocal concessions avoid litigation or put an end to one
already commenced.
Requisites
1. The taxpayer must have a tax liability.
2. There must be an offer (by the taxpayer of an amount to be paid by the taxpayer)
3. There must be an acceptance (by the Commissioner or taxpayer as the case may be) of the
offer in the settlement of the original claim.
Note: If the offer to compromise was rejected by the taxpayer, the compromise penalty cannot be
enforced thru an action in court, or by distraint or levy. If the CIR wants to enforce a penalty he
must file a criminal action in
Compromise must be made in:
1. Criminal cases Compromise must be made prior to the filing of the information in court.
2. Civil cases Before litigation or at any stage of the litigation, even during appeal, although
legal propriety demands that prior leave of court should be obtained.
Authority of CIR to Abate Taxes
Accordingly, the commissioner can abate a tax liability when:
1. The tax or any portion thereof appears to be unjustly or excessively assessed; or
2. The administration and collection costs involved do not justify the collection of the amount
due (Sec. 204(A), NIRC).
For a compromise to be granted, the following requisites must concur:
1. It falls under any of the cases that can be compromised and does not belong to any of those
that cannot be compromised;

2. There must be a valid bases for compromise, i.e. doubtful validity, or financial incapacity
3. Taxpayer waives in writing his privilege of the secrecy of bank deposits under Republic Act
No. 1405 or under other general or special laws, and such waiver shall constitute as the
authority of the Commissioner to inquire into the bank deposits of the taxpayer, (Penultimate
paragraph of Sec. 3, RR 30-2002, promulgated December 16, 2002)

Officers authorized to compromise


The Commissioner of Internal Revenue (CIR) with respect to criminal and civil cases arising from
violations of the Tax Code [Secs. 7(C) and 204, 1997 NIRC].

This power of the CIR is discretionary and once exercised by him cannot be reviewed or
interfered with by the Courts (Koppel, Philippines vs. Commissioner, G.R. No. L-1977, September
21, 1950).

By the Regional Evaluation Board composed of:


a. the Regional Director as Chairman;
b. Assistant Regional Director, the heads of the Legal, Assessment and Collection Divisions,
and the Revenue District Officer having jurisdiction over the taxpayer, as members; on
assessments issued by the regional offices involving basic taxes of P500,000 or less, and
minor criminal violations.
Cases which may be compromised
1. Delinquent accounts;
2. Cases under administrative protest after issuance of the Final Assessment Notice to the
taxpayer which are still pending in the Regional Offices, Revenue District Offices, Legal
Service, Large Taxpayer Service (LTS), Collection Service, Enforcement Service and other
offices in the National Office;
3. Civil tax cases being disputed before the courts;
4. Collection cases filed in courts;
5. Criminal violations, other than those already filed in court or those involving criminal tax fraud;
and,
6. Cases covered by pre-assessment notices but taxpayer is not agreeable to the findings of the
audit office as confirmed by the review office (Sec. 2, Rev. Reg. 7-2001).
Exceptions
1. Criminal violations that are either:
a. Already filed in court; or
b. Involving fraud (Sec. 204(B), NIRC)
2. Withholding tax cases, unless the applicant-taxpayer invokes provisions of law that cast
doubt on the taxpayers obligation to withhold;
3. Criminal tax fraud cases confirmed as such by the Commissioner of Internal Revenue or
his duly authorized representative;
4. Criminal violations already filed in court;
5. Delinquent accounts with duly approved schedule of installment payments;
6. Cases where final reports of reinvestigation or 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;
7. Cases which becomes final and executory after final judgment of a court, where
compromise is requested on the ground of doubtful validity of the assessment; and
8. Estate tax cases where compromise is requested on the ground of financial incapacity
of the taxpayer (nos. 2-8 coming from Sec. 2, RR 30-2002, December 16, 2002).
The Commissioner may compromise the payment of any internal revenue tax in the
following cases:
1. Doubtful validity of assessment; or

2. Financial incapacity
Basis for Acceptance of Compromise Settlement and Rates
Under Sec. 204 (A) of the NIRC as implemented by Sec. 3 of RR 30-2002: Commissioner may
compromise the payment of any internal revenue tax when:
1. A reasonable doubt as to the validity of the claim against the taxpayer exists; or
a. The delinquent account or disputed assessment is one resulting from a jeopardy
assessment.
b. The assessment seems to be arbitrary in nature, appearing to be based on
presumptions, and there is reason to believe that it is lacking in legal and/or factual basis;
or
c. The taxpayer failed to file an administrative protest on account of the alleged failure to
receive notice of assessment or preliminary assessment and there is reason to believe
that it is lacking in legal and/or factual basis; or
d. The taxpayer failed to file a request for reinvestigation/reconsideration within 30 days
from receipt of final assessment notice and there is reason to believe that it is lacking in
legal and/or factual basis; or
e. The taxpayer failed to elevate to the CTA an adverse decision of the Commissioner, or his
authorized representative, in some cases, within 30 days from receipt therefore and there
is reason to believe that it is lacking in legal and/or factual basis; or
f. The assessment were issued on or after Jan. 1, 1998, where the demand notice allegedly
failed to comply with the formalities prescribed under Sec. 228 of the 1997 NIRC; or
g. Assessments made based on the Best Evidence Obtainable Rule and there is reason to
believe that the same can be disputed by sufficient and competent evidence.
h. The assessment was issued within the prescriptive period for assessment as extended
by the taxpayers execution of Waiver of the Statute of Limitations the validity or
authenticity or which is being questioned or at issue and there is strong reason to believe
and evidence to prove that it is not authentic. (RR. 30-2002)
i. The assessment is based on an issue where a court of competent jurisdiction made an
adverse decision against the Bureau, but for which the Supreme Court has not decided
upon with finality. (RR. 08-2004).
2. The financial position of the taxpayer demonstrates a clear inability to pay the assessed tax
[Sec. 204(A), 1997 NIRC). IN such case, the taxpayer should waive the confidentiality privilege
on bank deposits under RA No. 1405 [Sec. 6(F)(2), NIRC].
Financial Incapacity. The offer to compromise based on financial incapacity may be accepted
upon showing that:
a. The corporation ceased operation or is already dissolved. Provided, that tax liabilities
corresponding to the Subscription Receivable or Assets distributed/distributable to the
stockholders representing return of capital at the time of cessation of operation or dissolution
of business shall not be considered for compromise; or
b. The taxpayer, as reflected in its latest Balance Sheet supposed to be filed with the Bureau of
Internal Revenue, is suffering from surplus or earnings deficit resulting to impairment in the
original capital by at least 50%, provided that amounts payable or due to stockholders other
than business-related transactions which are properly includible in the regular accounts
payable are by fiction of law considered as part of capital and not liability, and provided
further that the taxpayer ahs no sufficient liquid asset to satisfy the tax liability; or
c. The taxpayer is suffering from a net-worth deficit (total liabilities exceed total assets)
computed by deducting total liabilities (net of deferred credits and amounts payable to
stockholders/owners reflected as liabilities, except business-related transactions) from total
assets (net of prepaid expenses, deferred charges, pre-operating expenses, as well as
appraisal increases in fixed assets), taken from the latest audited financial statements,
provided that in the case of an individual taxpayer, he has no other leviable properties under
the law other than his family home; (Sec. 3, RR. 30-2002).

d. The taxpayer is a compensation earner with no other source of income and the familys gross
monthly compensation does not exceed (P10,500/month if single; P21,000/month if married),
and that it appears that the taxpayer possesses no other leviable/distrainable assets, other
than his family home; or
e. The taxpayer has been granted by the SEC or by any competent tribunal a moratorium or
suspension of payments to creditors, or otherwise declared bankrupt or insolvent (Sec. 3, RR.
07-2001).

The Commissioner shall not consider any offer for compromise settlement on the ground of
financial incapacity of when the tax payer has either:
1. A Tax Credit Certificate (TCC), on hand or in transit; or
2. The tax payer has a pending claim for tax refund or tax credit; or
3. The tax payer has existing finalized agreement or prospect of future agreement with any party
that resulted or could result to an increase in the equity of the taxpayer at the time of the offer
for compromise or at a definite future time (RR 30-2002).

An invalid assessment cannot be used as a basis for the perfection of a tax compromise (CIR
vs. Azucena T. Reyes, G.R. No. 159694/163581, January 27, 2006).

Limitation of the Commissioners power to compromise


1. Minimum compromise rate:
In case of financial incapacity, 10% of basic assessed tax, in other cases, 40% of basic assessed
tax.
2.
a.
b.
c.

Subject to approval of Evaluation Board:


When basic tax involved exceeds P1,000,000
Where the settlement offered is less than the prescribed minimum rates. (Sec. 204, NIRC)
When the CIR is not authorized to compromise

Note: The minimum compromise rate may be less than the prescribed rates, as the case may be,
provided it is approved by the Evaluation Board.
May the Commissioner compromise cases of criminal violations?
1. Before the complaint is filed with the Prosecutors Office full discretion to compromise
except those involving fraud;
2. After the complaint is filed with the Prosecutors Office but before the information is filed with
the court can still compromise provided that the prosecutor gives his consent;
3. After the information is filed with the court no longer permitted to compromise with or
without the consent of the Prosecutor. (People v. Magdaluyo, GR L-1595, Apr. 20, 1961)
b) Abatement (to cancel the entire amount of tax payable)
Nature of Compromise in a Extrajudicial Settlement of the Taxpayers Criminal Liability for
his violation
It is consensual in character, hence, may not be imposed on the taxpayer without his consent.
The BIR may only suggest settlement of his tax liability through a compromise. The extra-judicial
settlement and the amount of the suggested compromise penalty should conform with the
schedule of compromise penalties provided under the relevant BIR regulations or orders.
Remedy in case the taxpayer refuses or fails to abide the Tax Compromise:
1. Enforce the compromise
a. If it is a judicial compromise, it can be enforced by mere execution. A judicial compromise
is one where a decision based on the compromise agreement is rendered by the court on
request of the parties.

b. Any other compromise is extrajudicial and like any other contract can only be enforced by
court action.
2. Regard it as rescinded and insist upon original demand (Art. 2041, Civil Code).
Compromise vs. Abatement
Compromise involves a reduction of the taxpayers liability, while abatement means that the entire
tax liability of the taxpayer is cancelled.
When may the Commissioner abate or cancel a tax liability?
The Commissioner may abate or cancel a tax liability when:
1) the tax or any portion thereof appears to be UNJUSTLY or EXCESSIBELY be ASSESSED; or
2) the ADMINISTRATION and COLLECTION COSTS do not justify the collection of the amount
due. (costs of collection > amount of tax due)
The Commissioner may abate or cancel a tax liability when:
a. The tax or any portion thereof appears to be unjustly or excessively assessed; [Sec. 204(B),
1997 NIRC].

b. When the filing of the return/payment is made at the wrong venue;


c. When the taxpayers mistake in payment of his tax is due to erroneous written official advice
of a revenue officer;
d. When the taxpayer fails to file the return and pay the tax on time due to substantial losses
from prolonged labor dispute, force majeure, legitimate business reverses, provided,
however, the abatement shall only cover the surcharge and the compromise penalty and not
the interest imposed under Sec. 249 of the Code;
e. When the assessment is brought about or the result of taxpayers non-compliance with the
law due to a difficult interpretation of said law.
f. When the taxpayer fails to file the return and pay the correct tax on time due to circumstances
beyond his control, provided, however, the abatement shall only cover the surcharges and the
compromise penalty and not the interest imposed under Sec. 249 of the Code;
g. Late payment of the tax under meritorious circumstances (ex. Failure to beat bank cut-off
time, surcharge erroneously imposed, etc.) (Sec. 2, Rev. Reg. 13-2001)
The administration and collection costs involved do not justify the collection of the amount due
[Sec. 204(B), 1997 NIRC].

a. Abatement of penalties on assessment confirmed by the lower court but appealed by the
taxpayer to a higher court
b. Abatement of penalties on withholding tax assessment under meritorious circumstances
c. Abatement of penalties on delayed installment payment under meritorious circumstances
d. Abatement of penalties on assessment reduced after reinvestigation but taxpayer is still
contesting reduced assessment; and
e. Such other circumstances which the Commissioner may deem analogous to the enumeration
above (Sec. 3, Rev. Reg. 13-2001).
The Commissioner may also, even without a claim therefore, refund or credit any tax where on
the face of the return upon which payment was made such payment appears clearly to have been
erroneously paid (Sec. 229, 1997 NIRC).
F. ORGANIZATION AND FUNCTION OF THE BUREAU OF INTERNAL REVENUE
1. Rule-Making Authority of the Secretary of Finance
a) Authority of secretary of finance to promulgate rules and regulations
Sec. 244 of the NIRC provides the authority for the Secretary of Finance. It states, upon
recommendation of the CIR, the Secretary of Finance shall promulgate all needful rules and
regulations for the effective enforcement of the provisions of the NIRC.

b) Specific provisions to be contained in rules and regulations


It must contain provisions specifying, prescribing, or defining: (Sec. 245, NIRC)
1. The time and manner in which Revenue Regional Director shall canvass their respective
Revenue Regions to discover persons and property liable to national internal revenue taxes,
and the manner their lists and records of taxable persons and taxable objects shall be made
and kept.
2. The forms of labels, brands or marks to be required on goods subject to excise tax, and the
manner how the labelling, branding or marking shall be effected.
3. The condition and manner for goods intended for export, which if not exported would be
subject to an excise tax, shall be labelled, branded or marked.
4. The conditions to be observed by revenue officers respecting the institutions and conduct of
legal actions and proceedings;
5. The conditions under which goods intended for storage in bonded warehouses shall be
conveyed thither, their manner of storage and method of keeping entries and records, also
the books to be kept by Revenue Inspectors and the reports to be made by them in
connection with their supervision of such houses.
6. The conditions under which denatured alcohol may be removed and dealt in, the character
and quantity of the denaturing material to be used, the 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 be given, the books and records to be kept, the entries to be made
therein, the reports to be made to the CIR, and the signs to be displayed in the business ort
by the person for whom such denaturing is done or by whom, such alcohol is dealt in.
7. The manner in which revenue shall be collected and paid, the instrument, document or object
to which revenue stamps shall be affixed, the mode of cancellation, the manner in which the
proper books, records, invoices and other papers shall be kept and entries therein made by
the person subject to the tax, as well as the manner in which licenses and stamps shall be
gathered up and returned after serving their purposes.
8. The conditions to be observed by revenue officers respecting the enforcement of Title III
imposing a tax on estate of a decedent, and other transfers mortis causa, as well as on gifts
and such other rules and regulations which the CIR may consider suitable for the
enforcement of the said Title III.
9. The manner tax returns, information and reports shall be prepared and reported and the tax
collected and paid, as well as the conditions under which evidence of payment shall be
furnished the taxpayer, and the preparation and publication of tax statistics.
10. The manner in which internal revenue taxes, such as income tax, including withholding tax,
estate and donor's taxes, value-added tax, other percentage taxes, excise taxes and
documentary stamp taxes shall be paid through the collection officers of the BIR or through
duly authorized agent banks which are hereby deputized to receive payments of such 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 the NIRC 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 6 years from the approval of RA 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.
c) Non-retroactivity of rulings
The rulings of the BIR are not retroactive. Any revocation, modification or reversal of any of the
rules and regulations promulgated or any of the rulings or circulars promulgated by the CIR shall
not be given retroactive application if it will be prejudicial to the taxpayers, except in the following
cases:

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. (Sec. 246, NIRC)

Rulings, circulars, rules and regulations promulgated by the Commissioner of Internal


Revenue would have no retroactive application if to so apply them would be prejudicial to the
taxpayers (CIR vs. CA, et al., G.R. No. 117982, 06 February 1997).

2. Power of the Commissioner to Suspend the Business Operation of a Taxpayer


1.
a.
b.
c.

In the case of VAT-registered person:


Failure to issue receipts or invoices;
Failure to file a VAT return as required under Sec. 114; or
Understatement of taxable sales or receipts by 30% or more of his correct taxable sales or
receipts for the taxable quarter.

2. Failure of any person to Register as required under Sec. 236:


The temporary closure of the establishment shall be for the duration of not less than 5 days and
shall be lifted only upon compliance with whatever requirements prescribed by the CIR in the
closure order. (Sec. 115 NIRC)

LOCAL GOVERNMENT CODE OF 1991, AS AMENDED


A. Local Government Taxation
1. Fundamental principles
Local Government Unit 1987 CONSTITUTION, ART X, SECTION 1.
The territorial and political subdivisions of the Republic of the Philippines are the provinces, cities,
municipalities, and barangays. There shall be autonomous regions in Muslim Mindanao and the
Cordilleras as hereinafter provided.
Sec. 130. Fundamental Principles. The following fundamental principles shall govern the
exercise of the taxing and other revenue-raising powers of the local government units:
(a) Taxation shall be uniform in each local government unit;
(b) Taxes, fees, charges and other impositions shall:
(1) be equitable and based as far as practicable on the taxpayers ability to pay;
(2) be levied and collected only for public purposes;
(3) not be unjust, excessive, oppressive, or confiscatory;
(4) not be contrary to law, public policy, national economic policy, or in the restraint of trade;
(c) The collection of local taxes, fees, charges and other impositions shall in no case be let to
any private person;

(d) The revenue collected pursuant to the provisions of this code shall inure solely to the benefit
of, and be subject to the disposition by, the local government unit levying the tax, fee, charge
or other imposition unless otherwise specifically provided herein; and,
(e) Each local government unit shall, as far as practicable, evolve a progressive system of
taxation. (LGC)

2. Nature and source of taxing power


Nature of the Taxing Power
a. Not inherent;
b. Exercised only if delegated to them by law or Constitution;
c. Not absolute; subject to limitations provided for by law.
Each local government until shall exercise its power to create its own sources of revenue and to
levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government
units (Sec. 5, Art. X, 1987 Constitution and Sec. 129, LGC).

Under the present constitutional rule, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress may provide statutory
limitations and guidelines. The basic rationale for the current rule is to safeguard the viability
and self-sufficiency of local government units by directly granting them general and broad tax
powers (Manila Electric Co. vs. Province of Laguna, G.R .No. 131359).
There is no validity to the assertion that the delegated authority can be declared
unconstitutional on the theory of double taxation. It must be observed that the delegating
authority specifies the limitations and enumerates the taxes over which local taxation
may not be exercised. The reason is that the State has exclusively reserved the same for its
own prerogative (Pepsi Cola Bottling vs. Municipality of Tanuan 69 SCRA 460).

a) Grant of local taxing power under the Local Government Code


Declaration of Policy. -(a) It is hereby declared the policy of the State that the territorial and political subdivisions of the
State shall enjoy genuine and meaningful local autonomy to enable them to attain their fullest
development as self-reliant communities and make them more effective partners in the
attainment of national goals. Toward this end, the State shall provide for a more responsive
and accountable local government structure instituted through a system of decentralization
whereby local government units shall be given more powers, authority, responsibilities, and
resources. The process of decentralization shall proceed from the National Government to
the local government units.
(b) It is also the policy of the State to ensure the accountability of local government units through
the institution of effective mechanisms of recall, initiative and referendum.
(c) It is likewise the policy of the State to require all national agencies and offices to conduct
periodic consultations with appropriate local government units, nongovernmental and
peoples organizations, and other concerned sectors of the community before any project or
program is implemented in their respective jurisdictions. (Sec. 2, LGC)
b) Authority to prescribe penalties for tax violations
Limited as to the amount of imposable fine as well as the length or period of imprisonment;
The Sanggunian is authorized to prescribe fines or other penalties for violation of tax
ordinances, but in no case shall fines be less than P1,000 nor more than P5,000 nor shall
the imprisonment be less than one (1) month nor more than six (6) months;
Such fine or other penalty shall be imposed at the discretion of the court.

The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than
P1,000 (Sec. 516, LGC).

c) Authority to grant local tax exemptions


Local government units may, through ordinances duly approved, grant tax exemptions, incentives
or reliefs under such terms and conditions as they may deem necessary. (Section 192, LGC)
d) Withdrawal of exemptions
Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently
enjoyed by all persons, whether natural or juridical, including government-owned or controlled
corporations, except local water districts, cooperatives duly registered under R.A. No. 6938,
non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon
the effectivity of this Code. (Sec. 193, LGC)

The withdrawal of tax exemptions or incentives provided in R.A. 7160 can only affect those
franchises granted prior to the effectivity of the law (Smart Communications vs. City of Davao,
G.R. No. 155491, September 16, 2008).

One of the most significant provisions of the LGC is the removal of the blanket exclusion of
instrumentalities and agencies of the National Government from the coverage of local
taxation. Although as a general rule, LGUs cannot impose taxes, fees, or charges of any kind
on the National Government, its agencies and instrumentalities, this rule now admits an
exception, i.e. when specific provisions of the LGC authorize the LGUs to impose taxes, fess,
or charges on the aforementioned entities. The legislative purpose to withdraw tax privileges
enjoyed under existing laws or charter is clearly manifested by the language used on Sec.
137 and 193 categorically withdrawing such exemptions subject only to the exceptions
enumerated. Since it would be tedious and impractical to attempt to enumerate all the
existing statutes providing for special tax exemptions or privileges, the LGC provided for an
express, albeit general, withdrawal of such exemptions or privileges. No more unequivocal
language could have been used (NPC vs. City of Cabanatuan, G.R. No. 149110, April 9, 2003).

e) Authority to adjust local tax rates


Local government units shall have the authority to adjust the tax rates as prescribed herein not
oftener than once every five (5) years, but in no case shall such adjustment exceed ten percent
(10%) of the rates fixed under this Code.
f) Residual taxing power of local governments
Local government units may exercise the power to levy taxes, fees or charges on any base or
subject not otherwise specifically enumerated herein or taxed under the provisions of the National
Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or
charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national
policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be
enacted without any prior public hearing conducted for the purpose.
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
(See Section 132, LGC above)
a) Power to create revenues exercised thru LGUs
Each local government unit shall exercise its power to create its own sources of revenue and to
levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of
local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government
units (Sec. 129, LGC).

b) Procedure for Approval of and Effectivity of Tax Ordinances


The procedure for approval of local tax ordinances and revenue measures shall be in accordance
with the provisions of this Code: Provided, That public hearings shall be conducted for the
purpose prior to the enactment thereof: Provided, further, That any question on the
constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within
thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision
within sixty (60) days from the date of receipt of the appeal: Provided, however, That such appeal
shall not have the effect of suspending the effectivity of the ordinance and the accrual and
payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty (30) days
after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice
period acting upon the appeal, the aggrieved party may file appropriate proceedings with a court
of competent jurisdiction. (Section 187, NIRC)
Publication (Sec. 188)
Within ten (10) days after their approval, certified true copies of all provincial, city, and municipal
tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a
newspaper of local circulation: Provided, however, That in provinces, cities and municipalities
where there are no newspapers of local circulation, the same may be posted in at least two (2)
conspicuous and publicly accessible places. (Section 188, NIRC)
Construction of Tax Ordinances (Sec. 5b)
Rules of Interpretation
In case of doubt, any tax ordinance or revenue measure shall be construed strictly against the
local government unit enacting it, and liberally in favor of the taxpayer. Any tax exemption,
incentive or relief granted by any local government unit pursuant to the provisions of this Code
shall be construed strictly against the person claiming it.

Any prudent adjudication should fully ascertain the mandate of local government units to
impose taxes on petroleum products, and such mandate should be cast in so specific terms
as to leave no dispute as to the legislative intendment to extend such power in the name of
local autonomy. What we have found instead, form the plain letter of the law is an explicit
disinclination on the part of the legislature to impart that particular taxing power to local
government units (Petron Corp. vs. Mayor Tobias Tiangco, G.R. No. 158881, April 16, 2008).

Doctrine of Preemption or Exclusionary Rule


Preemption in the matter of taxation simply refers to an instance where the national
government elects to tax a particular area, impliedly withholding from the local government
the delegated power to tax the same field. This doctrine primarily rests upon the intention of
Congress allow municipal corporations to cover fields of taxation it already occupies, then the
doctrine of preemption will not apply (Victorias Milling Co., Inc. vs. Municipality of Victorias, G.R.
No. L-21183, September 27, 1968).

Excluded impositions (pursuant to the doctrine of preemption):


1. Taxes which are levied under the NIRC, unless otherwise provided by LGC of 1991;
2. Taxes, fees, etc. which are imposed under the Tariffs and Customs Code;
3. Taxes, fees, etc., the imposition of which contravenes existing governmental policies or which
violates the fundamental principles of taxation;
4. Taxes, fees and other charges imposed under special law.
4. Scope of Taxing Power
Provinces

Except as otherwise provided in this Code, the province may levy only the taxes, fees, and
charges as provided in this Article (Article refers to Article I Provinces, LGC see specific taxing
powers of LGUs below).(Section 134, LGC)
Municipalities
Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not
otherwise levied by provinces. (Section 142, LGC)
Cities
Except as otherwise provided in this Code, the city, may levy taxes, fees, and charges which the
province or the municipality may impose xxx (see specific taxing powers of LGUs bellow ) (Section,
151, LGC)

Barangay
The barangays may levy taxes, fees, and charges, as provided in this Article, which shall
exclusively accrue to them (Article refers to Article IV Barangays, LGC see specific taxing
powers of LGUs below). (Section 152, LGC)
5. Specific Taxing Power of Local Government Unit (LGUs)
a) Taxing powers of PROVINCES
(i) Tax on transfer of real property ownership
The province may impose a tax on the sale, donation, barter, or on any other mode of transferring
ownership or title of real property at the rate of not more than fifty percent (50%) of the one
percent (1%) of the total consideration involved in the acquisition of the property or of the fair
market value in case the monetary consideration involved in the transfer is not substantial,
whichever is higher.
The sale, transfer or other disposition of real property pursuant to R.A. No. 6657 shall be exempt
from this tax. (Section 135, LGC)
(ii) Tax on business of printing and publication
The province may impose a tax on the business of persons engaged in the printing and/or
publication of books, cards, posters, leaflets, handbills, certificates, receipts, pamphlets, and
others of similar nature, at a rate not exceeding fifty percent (50%) of one percent (1%) of the
gross annual receipts for the preceding calendar year.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the
business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereof, as provided herein.
The receipts from the printing and/or publishing of books or other reading material prescribed by
the Department of Education, Culture and Sports as school texts or references shall be exempt
from the tax herein imposed. (Section 136, LGC)
(iii) Franchise tax
Notwithstanding any exemption granted by any law or other special law, the province may impose
a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one
percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction.
In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one
percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the

business started to operate, the tax shall be based on the gross receipts for the preceding
calendar year, or any fraction thereon, as provided herein. (Section 137, NIRC)
Franchise In its specific sense, franchise may refer to a general or primary franchise or to a
special or secondary franchise. The former relates to the right to exist as a corporation by virtue
of duly approved Articles of Incorporation, or a charter pursuant a special law creating the
corporation. The right is vested with the individuals composing the corporation. On the other
hand, the latter refers to the right or privileges conferred upon existing corporation such as the
right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires. This
right is vested with the corporation itself.
Tax on businesses enjoying a franchise As commonly used, a franchise tax is a tax on the
privilege of transacting business in the state and exercising corporate franchises granted by the
state. It is not levied on the corporation simply for existing as a corporation, upon its property or
its income, but on its exercise of the rights or privileges granted to it by the government. Hence, a
corporation need not pay franchise tax from the time it ceased to do business and exercise its
franchise.
Verily, to determine whether a taxpayer is covered by the franchise tax in question, the following
requisites should concur:
(1) That the taxpayer has a franchise in the sense of a secondary or special franchise; and
(2) That is exercising its rights or privileges under this franchise within the territory of the LGU
concerned (NPC vs. City of Cabanatuan, G.R. No. 149110, April 9, 2003).

Aside from the national franchise tax, a franchisee is still liable to pay the local franchise tax,
unless it its expressly and unequivocally exempted from the payment thereof under its
legislative franchise. The in lieu of all taxes clause in a legislative franchise should
categorically state that the exemptions apply to both local and national taxes; otherwise, the
exemption claimed should be strictly construed against the taxpayer and liberally in favor of
the taxing authority. The said clause has become functus officio with the abolition of the
national franchise tax on telecommunications companies by the Expanded VAT Law. The
Expanded VAT Law did not remove or abolish the payment of local franchise tax. It merely
replaced the national franchise tax that was previously paid by telecommunications franchise
holders and in its stead imposed a ten percent (10%) VAT in accordance with Section 108 of
the Tax Code (Smart Communications vs. City of Davao, G.R. No. 155491, September 16, 2008/July
21, 2009).

(iv) Tax on sand, gravel and other quarry services


The province may levy and collect not more than ten percent (10%) of fair market value in the
locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, as
defined under the National Internal Revenue Code, as amended, extracted from public lands or
from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial
jurisdiction.
The permit to extract sand, gravel and other quarry resources shall be issued exclusively by the
provincial governor, pursuant to the ordinance of the sangguniang panlalawigan.
The proceeds of the tax on sand, gravel and other quarry resources shall be distributed as
follows:
(1) Province Thirty percent (30%);
(2) Component City or Municipality where the sand, gravel, and other quarry resources are
extracted Thirty percent (30%); and
(3) Barangay where the sand, gravel, and other quarry resources are, extracted Forty percent
(40%).
(Section, 138, LGC)

A cursory reading of the provision would show that it refers to ordinary sand, stone, gravel,
earth and other quarry resources extracted from public lands (Province of Bulacan vs. CA, G.R.
No. 126232, November 27, 1998).

(v) Professional tax


(a) The province may levy an annual professional tax on each person engaged in the exercise or
practice of his profession requiring government examination at such amount and reasonable
classification as the sangguniang panlalawigan may determine but shall in no case exceed
Three hundred pesos (P300.00).
(b) Every person legally authorized to practice his profession shall pay the professional tax to the
province where he practices his profession or where he maintains his principal office in case
he practices his profession in several places:
Provided, however, that such person who has paid the corresponding professional tax shall be
entitled to practice his profession in any part of the Philippines without being subjected to any
other national or local tax, license, or fee for the practice of such profession.
(c) Any individual or corporation employing a person subject to professional tax shall require
payment by that person of the tax on his profession before employment and annually
thereafter.
(d) The professional tax shall be payable annually, on or before the thirty-first (31 st) day of
January. Any person first beginning to practice a profession after the month of January must,
however, pay the full tax before engaging therein. A line of profession does not become
exempt even if conducted with some other profession for which the tax has been paid.
(Section 139, LGC)
Professional exclusively employed in the government shall be exempt from the payment of this
tax.
e) Any person subject to the professional tax shall write in deeds, receipts, prescriptions,
reports, books of account, plans and designs, surveys and maps, as the case may be, the
number of the official receipt issued to him.
Definition of Professionals (Sec. 238 (f) IRR of the LGC)
Professional tax may be imposed by a province or city but not by a municipality or barangay.
Transaction taxed: Exercise or practice of profession requiring government licensure
examination.
Tax rate: Not be exceed P300.00.
Tax base: Reasonable classification by the sanggunian.
Exception: Payment to one province or city no longer subject to any other national or local
tax, license or fee for the practice of such profession in any part of the Philippine professional
exclusively employed in the government.
Date of payment: or on before January 31 or engaging in the profession.
Place of payment: Province or city where the professional practices his profession or where
he maintains his principal office in case he practices his profession in several places.
Requirements: Any individual or corporation employing a person subject to professional tax
shall require payment by that person of the tax on his profession before employment and
annually thereafter. Any person subject to the professional tax shall write in deeds, receipts,
prescriptions, reports, books of accounts, plans and designs, surveys and maps, as the case
may be, the number of the official receipt issued to him. Exemption: Professional exclusively
employed in the government shall be exempt from payment (Sec. 139, LGC).

Professional practices his profession in several places (Sec. 228 (b) IRR of LGC)
Professionals who are subject to professional tax, defined. The professional subject to the
professional tax are only those who have passed the bar examinations, or any board or other
examinations conducted by the Professional Regulation Commission (PRC). For example, a
lawyer who is also a Certified Public Accountant (CPA) must pay the professional tax imposed on
lawyers and that fixed for CPAs, if he is to practice both professions [Sec. 238 (f), Rule XXX,
Rules and Regulations Implementing the Local Government Code of 1991].
(vi) Amusement tax
(a) The province may levy an amusement tax to be collected from the proprietors, lessees, or
operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of
amusement at a rate of not more than thirty percent (30%) of the gross receipts from
admission fees.
(b) In the case of theaters or cinemas, the tax shall first be deducted and withheld by their
proprietors, lessees, or operators and paid to the provincial treasurer before the gross
receipts are divided between said proprietors, lessees, or operators and the distributors of the
cinematographic films.
(c) The holding of operas, concerts, dramas, recitals, painting and art exhibitions, flower shows,
musical programs, literary and oratorical presentations, except pop, rock, or similar concerts
shall be exempt from the payment of the tax hereon imposed.
(d) The sangguniang panlalawigan may prescribe the time, manner, terms and conditions for the
payment of tax. In case of fraud or failure to pay the tax, the sangguniang panlalawigan may
impose such surcharges, interest and penalties as it may deem appropriate.
(e) The proceeds from the amusement tax shall be shared equality by the province and the
municipality where such amusement places are located.
(Section 140, LGC)

Professional basketball games do not fall under the same category as theaters,
cinematographs, concert halls and circuses as the latter basically belong to artistic forms of
entertainment while the formers caters to sports and gaming (PBA vs. CA, G.R. No. 119122,
August 8, 2000).

Resorts, swimming pools, bath houses, hot springs and tourist spots cannot be considered
venues primarily where one seeks admission to entertain oneself by seeing or viewing the
show or performances. While it is true that they may be venues where people are visually
engaged, they are not primarily venues for their proprietors or operators to actively display,
stage or present shows and/or performances.. Thus, they do not belong to the same category
or class as theaters, cinemas, concert halls, circuses, and boxing stadia. It follows that they
cannot be considered as among the other places of amusement contemplated by Section
140 of the LGC and which may properly be subject to amusement taxes (Pelizloy Realty Corp.
vs The Province of Benguet, G.R. No. 183137, April 10, 2013).

(vii)Tax on delivery truck/van


SECTION 141. Annual Fixed Tax For Every Delivery Truck or Van of Manufacturers or Producers,
Wholesalers of, Dealers, or Retailers in, Certain
Products
(a) The province may levy an annual fixed tax for every truck, van or any vehicle used by
manufacturers, producers, wholesalers, dealers or retailers in the delivery or distribution of
distilled spirits, fermented liquors, soft drinks, cigars and cigarettes, and other products as
may be determined by the sangguniang panlalawigan, to sales outlets, or consumers,
whether directly or indirectly, within the province in an amount not exceeding Five hundred
pesos (P500.00).
(b) The manufacturers, producers, wholesalers, dealers and retailers referred to in the
immediately foregoing paragraph shall be exempt from the tax on peddlers prescribed
elsewhere in this Code.

b) Taxing powers of CITIES


Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which
the province or municipality may impose.
Provided, however, that the taxes, fees and charges levied and collected by highly urbanized and
independent component cities shall accrue to them and distributed in accordance with the
provisions of this Code.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the province
or municipality by not more than fifty professional amusement taxes. (Section 151, LGC)
c) Taxing powers of MUNICIPALITIES
(i) Tax on various types of businesses
Business Tax vs. Income Tax
Business taxes imposed in the exercise of police power for regulatory purposes are paid for the
privilege of carrying on a business in the year the tax was paid. It is paid at the beginning of the
year as a fee to allow the business to operate for the rest of the year. It is deemed a prerequisite
to the conduct of business.

Income tax, on the other hand, is a tax on all yearly profits arising from property, professions,
trades or offices, or as a tax on a persons income, emoluments, profits and the like. It is tax
on income, whether net or gross realized in one taxable year. It is due on or before the 15 th
day of the 4th month following the close of the taxpayers taxable year and is generally
regarded as an excise tax, levied upon the right of a person or entity to receive income or
profits (Mobil Phils vs. City Treasurer of Makati, G.R .No. 154092, July 14, 2005).
The imposition of local business tax based on petitioners gross revenue will inevitably result
in the constitutionally proscribed double taxation taxing of the same person twice by the
same jurisdiction for the same thing inasmuch as petitioners revenue or income for a
taxable year will definitely include its gross receipts already reported during the previous year
and for which local business tax has already been paid. Thus, respondent committed a
palpable error when it assessed petitioners local business tax based on its gross revenue as
reported in its audited financial statements, as Section 143 of the Local Government Code
and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be
computed based on gross receipts (Ericsson Telecommunication vs. City of Pasig, G.R. No.
176667, November 22, 2007).

Condominium corporations are generally exempt from local business taxation under the Local
Government Code, irrespective of any local ordinance that seeks to declare otherwise
(Yamane vs. BA Lepanto G.R. No. 154992, October 25, 2005).

Catch all provision Sec. 143 (h)


On any business, not otherwise specified in the preceding paragraphs, which the sanggunian
concerned may deem proper to tax: Provided, Than on any business subject to the excise, valueadded or percentage tax under the National Internal Revenue Code, as amended, the rate of tax
shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. The
sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed
the rates prescribed herein.
(ii) Ceiling on business tax impossible on municipalities within Metro Manila
The municipalities within the Metropolitan Manila Area may levy taxes at rates which shall not
exceed by fifty percent (50%) the maximum rates prescribed in the preceding section. (Section
144, LGC)

(iii) Tax on retirement on business

A business subject to tax pursuant to the preceding sections shall, upon termination thereof,
submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during
the year be less than the tax due on said gross sales or receipts of the current year, the
difference shall be paid before the business is considered officially retired . (Section 145, LGC)

A newly-started business is already liable for business taxes (i.e. license fees) at the start of
the quarter when it commences operations. In computing the amount of tax due for the first
quarter of operations, the business capital investment is used as the bases. For the
subsequent quarters of the first year, the tax is based on the gross sales/receipts for the
previous quarter. In the following year(s), the business then taxed based on the gross sales
or receipts of the previous year. The amount of tax as computed based on petitioners gross
sales for 1998 is only P1,331,538.84. Since the amount paid is more than the amount
computed based on petitioners actual gross sales for 1998, petitioner upon its retirement is
not liable for additional taxes to the City of Makati (Mobil Phils. vs. City Treasurer of Makati, G.R.
No. 15092, July 14, 2005).

(iv) Rules on payment of business tax


(a) The taxes imposed under Section 143 shall be payable for every separate or distinct
establishment or place where business subject to the tax is conducted and one line of
business does not become exempt by being conducted with some other businesses for which
such tax has been paid. The tax on a business must be paid by the person conducting the
same.
(b) In cases where a person conducts or operates two (2) or more of the businesses mentioned
in Section 143 of this Code which are subject to the same rate of tax, the tax shall be
computed on the combined total gross sales or receipts of the said two (2) or more related
businesses.
(c) In cases where a person conducts or operates two (2) or more businesses mentioned in
Section 143 of this Code which are subject to different rates of tax, the gross sales or receipts
of each business shall be separately reported for the purpose of computing the tax due from
each business.
(Section 146, LGC)
(v) Fees and charges for regulation & licensing
The municipality may impose and collect such reasonable fees and charges on business and
occupation and, except as reserved to the province in Section 139 of this Code, on the practice of
any profession or calling, commensurate with the cost of regulation, inspection and licensing
before any person may engage in such business or occupation, or practice such profession or
calling. (Section 147, LGC)
(vi) Situs of tax collected
(a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers,
assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled
spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers,
contractors, banks and other businesses, maintaining or operating branch or sales outlet
elsewhere shall record the sale in the branch or sales outlet making the sale or transaction,
and the tax thereon shall accrue and shall be paid to the municipality where such branch or
sales outlet is located. In cases where there is no such branch or sales outlet in the city or
municipality where the sale or transaction is made, the sale shall be duly recorded in the
principal office and the taxes due shall accrue and shall be paid to such city or municipality.
(Section 150 [a], LGC)
Where to pay business tax?
It is not the place where the contract was perfected, but the place of delivery which
determines the taxable situs of the property sought to be taxed. (Municipality of Jose
Panganiban vs. The Shell Company of the Philippines, Ltd., G.R. No. L-18349, July 30, 1966) Thus, it

is all inconsequential where the subject transactions were perfected and consummated or
paid.
(a) The following sales allocation shall apply to manufacturers, assemblers, contractors,
producers, and exporters with factories, project offices, plants, and plantations in the pursuit
of their business:
(1) Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the
city or municipality where the principal office is located;
(2) Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the
city or municipality where the factory, project office, plant, or plantation is located.
(b) In case of a plantation located at a place other than the place where the factory is located,
said seventy percent (70%) mentioned in subparagraph (b) of subsection (2) above shall be
divided as follows:
(1) Sixty percent (60%) to the city or municipality where the factory is located; and
(2) Forty percent (40%) to the city or municipality where the plantation is located.
(c) In cases where a manufacturer, assembler, producer, exporter or contractor has two (2) or
more factories, project offices, plants, or plantations located in different localities, the seventy
percent (70%) sales allocation mentioned in subparagraph (b) of subsection (2) above shall
be prorated among the localities where the factories, project offices, plants, and plantations
are located in proportion to their respective volumes of production during the period for which
the tax is due.
(d) The foregoing 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.
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 vs.
Mun. of Sipocol, 105 Phil. 1263).

The city can validly tax the sales of matches to customers outside of the city as long as the
orders were booked and paid for in the companys branch office in the city. Those matches
can be regarded as sold in the city, as contemplated in the ordinance, because the matches
were delivered to the carrier in Cebu City. Generally, delivery to the carrier is delivery to the
buyer (Article 1523, Civil Code). A different interpretation would defeat the tax ordinance in
question or encourage tax evasion through the simple expedient of arranging for the delivery
of the matches at the outskirts of the city though the purchases were effected and paid for the
purchases were effected and paid for in the companys branch office in the city. The municipal
board of the city is empowered to provided for the levy and collection of taxes for general
special purposes in accordance with law (Phil. Match vs. City of Cebu, G.R. No. L-30745, January
18, 1978).

d) Taxing powers of BARANGAYS


The barangays may levy taxes, fees, and charges, as provided in this Article, which shall
exclusively accrue to them:
(a) Taxes On stores or retailers with fixed business establishments with gross sales of receipts
of the preceding calendar year of Fifty thousand pesos (P50,000.00) or less, in the case of
cities and Thirty thousand pesos (P30,000.00) or less, in the case of municipalities, at a rate
not exceeding one percent (1%) on such gross sales or receipts.
(b) Service Fees of Charges. Barangays may collect reasonable fees or charges for services
rendered in connection with the regulations or the use of barangay-owned properties or
service facilities such as palay, copra, or tobacco dryers.
(c) Barangay Clearance. No city or municipality may issue any license or permit for any
business or activity unless a clearance is first obtained from the barangay where such
business or activity is located or conducted. For such clearance, the sanggunian barangay

may impose a reasonable fee. The application for clearance shall be acted upon within seven
(7) working days from the filing thereof. In the event that the clearance is not issued within the
said period, the city or municipality may issue the said license or permit.
(d) Other fees and Charges. The barangay may levy reasonable fees and charges:
(1) On commercial breeding of fighting cocks, cockfights and cockpits;
(2) On places of recreation which charge admission fees; and
(3) On billboards, signboards, neon signs, and outdoor advertisements.
(Section 152, LGC)
e) Common revenue raising powers
(i) Service fees and charges
Local government units may impose and collect such reasonable fees and charges for services
rendered. (Section 153, LGC)
(ii) Public utility charges
Local government units may fix the rates for the operation of public utilities owned, operated and
maintained by them within their jurisdiction. (Section 154, LGC)
(iii) Toll fees or charges
The sanggunian concerned may prescribe the terms and conditions and fix the rates for the
imposition of toll fees or charges for the use of any public road, pier, or wharf, waterway, bridge,
ferry or telecommunication system funded and constructed by the local government unit
concerned. Provided, That no such toll fees or charges shall be collected from officers and
enlisted men of the Armed Forces of the Philippines and members of the Philippine National
Police on mission, post office personnel delivering mail, physically-handicapped, and disabled
citizens who are sixty-five (65) years or older.
When public safety and welfare so requires, the sanggunian concerned may discontinue the
collection of the tolls, and thereafter the said facility shall be free and open for public use.
(Section 155, LGC)
f) Community tax
Cities or municipalities may levy a community tax in accordance with the provisions of this Article.
(Section 156, LGC)
Read other provisions Sec. 157-164. LGC
6. Common limitation on the taxing powers of LGUs
Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities,
municipalities, and barangays shall not extend to the levy of the following:
(a) Income tax, except when levied on banks and other financial institutions; (Correlate with Sec.
143 (f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of
one percent (1%) on the gross receipts of the preceding calendar year derived from interest,
commissions and discounts from lending activities, income from financial leasing, dividends,
rentals on property and profit from exchange or sale of property insurance premium)
(b) Documentary stamp tax;
(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as
otherwise provided herein; (Correlate with Sec. 135.-Ta on Transfer of Real Property
Ownership. (a) The province may impose a tax on the sale , donation, barter, or on any
other mode of transferring ownership or title of real property at the rate of not more than fifty
percent (50%) of one percent (1%) of the total consideration involved in the transfer is not
substantial, whichever is higher. The sale, transfer or other disposition of real property
pursuant to R.A. No. 6657 shall be exempt from this tax)

(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all
other kinds of customs fees, charges and dues except wharfage on wharves constructed and
maintained by the local government unit concerned;
(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units in the guise of charges for
wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form
whatsoever upon such goods or merchandise; (Correlate with Sec. 155. Toll Fees or
Charges. The sanggunian concerned may prescribe the terms and conditions and fix the
rates for the imposition of toll fees or charges for the use of any public road, pier or wharf,
waterway, bridge, ferry or telecommunication system funded and constructed by the local
government unit concerned: Provided, That no such toll fees or charges shall be collected
from officers and enlisted men of the Armed Forces of the Philippines and members of the
Philippine National Police on mission, post office personnel delivering mail, physicallyhandicapped, and disabled citizens who are sixty-five (65) years or older. When public safety
and welfare so requires, the sanggunian concerned may discontinue the collection of the
tolls, and thereafter the said facility shall be free and open for public use)

SC annulled an ordinance of Tacloban City levying inspection fees (in reality taxes) upon
animals exported or taken away from the City. The inspection fee sought to be collected
upon every head of specified animals to be transported out of the City of Tacloban (P2.00 per
hog, P10.00 per cow and P20.00 per carabao) was in reality an export tax specifically
withheld from municipal taxing power under Section 2287 of the Revised Administrative Code
(Panaligan vs. City of Tacloban, G.R. No. L-9319, September 27, 1957).

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or
fishermen;
Marginal Farmer or Fisherman refers to an individual engaged in subsistence farming or
fishing which shall be limited to the sale, barter or exchange of agricultural or marine products
produced by himself and his immediate family (Sec. 122, LGC).

The provision prohibits a local government from imposing an inspection fee on agricultural
products and fish is an agricultural products. Contrary to the claim of petitioners, under
Section 102 of City Ordinance No.1 a fisherman selling his fish within the city has to pay the
inspection fee of P0.03 for every kilo of fish sold. Furthermore, the imposition of the tax will
definitely restrict the free flow of fresh fish to Cebu City because the price of fish will have to
increase. This power to tax articles subject to specific tax which was expressly granted to
cities by the original provisions of Section 24 was deleted in the amendment. The said section
24, as it now reads, merely grants the city the power to levy any tax, fee or other imposition
not specifically enumerated or otherwise provided for in the Local Tax Code. The
amendment evinces the intent of the lawmaker to remove such taxing authority (on articles
already subject to the national specific tax) from the cities like Cebu City (City of Cebu vs. IAC,
144 SCRA 710).

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or nonpioneer for a period of six (6) and four (4) years, respectively from the date of registration;
(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended,
and taxes, fees or charges on petroleum products;

A tax is not excise where it does not subject directly the produce or goods to tax but indirectly
as an incident to, or in connection with, the business to be taxes. It this can assert with clear
comfort that excise taxes, as imposed under the NIRC, do not pertain to the performance,
carrying on, or exercise of an activity, at least not to the extent of equating excise with
business taxes (Petron Corp. vs. Mayor Tobias Tiangco, G.R. No. 158881, April 16, 2008).

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions
on goods or services except as otherwise provided herein;
The limitation applies particularty to the prohibition against municipalities and municipal districts
to impose any percentage tax or other taxes in any form based thereon nor impose taxes on
articles subject to specific tax except gasoline, under the provisions of the NIRC.
(Section 133, LGC)
Percentage tax when it prescribes a set ratio between the amount of tax and the volume of sale
of the taxpayer.
Specific Taxes are those imposed on specified articles, such as distilled spirits, wines,
fermented liquors, products of tobacco other than cigars and cigarettes, matches, firecrackers,
manufactured oils and other fuels, coal, bunker fuel oil, diesel fuel oil, cinematographic films,
playing cards, saccharine, opium and other habit-forming drugs.
(j) Taxes on the gross receipts of transportation contractors and persons engaged in the
transportation of passengers or freight by hire and common carriers by air, land or water,
except as provided in this Code;

The fact that petitioner has a limited clientele does not exclude it from the definition of a
common carrier. Furthermore, Section 21 of Provincial Ordinance No. 3 is practically only a
reproduction of Section 138 of the Local Government Code. A cursory reading of both would
show that both refer to ordinary sand, stone, gravel, earth and other quarry resources
extracted from public lands. Even if we disregard the limitation set by Section 133 of the Local
Government Code, petitioners may not impose taxes on stones, sand, gravel, earth and other
quarry resources extracted from private lands on the basis of Section 21 of Provincial
Ordinance No. 3 as the latter clearly applies only to quarry resources extracted from public
lands. Petitioners may not invoke the Regalian doctrine to extend the coverage of their
ordinance to quarry resources extracted from private lands, for taxes, being burdens, are not
to be presumed beyond what the applicable statue expressly and clearly declares, tax
statutes being construed strictissimi juris against the government. (First Philippines Industrial
Corporation vs. CA, G.R. No. 125948, December 29, 1998)

(k) Taxes on premiums paid by way of reinsurance or retrocession;


(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds
of licenses or permits for the driving thereof, except tricycles;

It has been the perception that local governments are in good position to achieve the end
desired by the law-making body because of their proximity to the situation that can enable
them to address that serious concern better than the national government. It may not be
amiss to state, nevertheless, that under Article 458 (a)[3-VI] of the Local Government Code,
the power of LGUs to regulate the operation of tricycles and to grant franchises for the
operation thereof is still subject to the guidelines prescribed by the DOTC. In compliance
therewith, the Department of Transportation and Communications (DOTC) issued
Guidelines to Implement the Devolution of LTFRBs Franchising Authority over Tricycles-ForHire to Local Government units pursuant to the Local Government Code. Such as can be
gleaned from the explicit language of the statute, as well as the corresponding guidelines
issued by DOTC, the newly delegated powers pertain to the franchising and regulatory
powers theretofore exercised by the LTFRB and not to the functions of the LTO relative to the
registration of motor vehicles and issuance of licenses for the driving thereof (LTO vs. City of
Butuan, G.R. No. 131512, January 20, 2000).

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise
provided herein; (Correlate with Sec. 143 (c) On exporters, and on manufacturers, millers,

producers, wholesalers, distributors, dealers or retailers of essential commodities enumerated


hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections
(a), (b) and (d) of this Section)
(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and
cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine
hundred thirty-eight (R.A. No. 6938) otherwise known as the Cooperative Code of the
Philippines respectively; and
(o) Taxes, fees or charges of any kind on the National Government, its agencies and
instrumentalities, and local government units.

The Authority should be classified as an instrumentality of the national government which is


liable to pay taxes only with respect to the portions of the property, the beneficial use of which
were vested in private entities. When local governments invoke the power to tax on national
government instrumentalities, such power is construed strictly against local governments. The
rule is that a tax is never presumed and there must be clear language in the law imposing the
tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This
rule applies with grater force when local governments seek to tax national government
instrumentalities (Philippine Fisheries Devt Authority vs. CA, G.R. No. 169836, July 31, 2007).
The exercise of the taxing power of local government units is subject to the limitations
enumerated in Section 133 of the Local Government Code. Under Section 133(o) of the Local
Government Code, local government units have no power to tax instrumentalities of the
national government like the MIAA (MIAA vs. City of Pasay G.R. No. 163072, April 2, 2009).

7. Collection of business tax


a) Tax period and manner of payment
Unless otherwise provided in this Code, the tax period of all local taxes, fees and charges shall
be the calendar year. Such taxes, fees and charges may be paid in quarterly installments.
(Section 165, LGC)

b) Accrual of tax
Unless otherwise provided in this Code, all local taxes, fees, and charges shall accrue on the first
(1st) day of January of each year.
However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first
(1st) day of the quarter next following the effectivity of the ordinance imposing such new levies or
rates. (Section 166, LGC)
c) Time of payment
Unless otherwise provided in this Code, all local taxes, fees, and charges shall be paid within the
first twenty (20) days of January or of each subsequent quarter, as the case may be. The
sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such
taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6)
months. (Section 167, LGC)
d) Penalties on unpaid taxes, fees or charges
The sanggunian may impose a surcharge not exceeding twenty-five (25%) of the amount of
taxes, fees or charges not paid on time and an interest at the rate not exceeding two percent
(2%) per month of the unpaid taxes, fees or charges including surcharges, until such amount is
fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed
thirty-six (36) months. (Section 168, LGC)
e) Authority of treasurer in collection and inspection of books
All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or barangay
treasurer, or their duly authorized deputies.

The provincial, city or municipal treasurer may designate the barangay treasurer as his deputy to
collect local taxes, fees, or charges.
In case a bond is required for the purpose, the provincial, city or municipal government shall pay
the premiums thereon in addition to the premiums of bond that may be required under this Code.
(Section 170, LGC)

The provincial, city, municipal or barangay treasurer may, by himself or through any of his
deputies duly authorized in writing, examine the books, accounts, and other pertinent records of
any person, partnership, corporation, or association subject to local taxes, fees and charges in
order to ascertain, assess, and collect the correct amount of the tax, fee, or charge. Such
examination shall be made during regular business hours, only once for every tax period, and
shall be certified to by the examining official.
Such certificate shall be made of record in the books of accounts of the taxpayer examined.
In case the examination herein authorized is made by a duly authorized deputy of the local
treasurer, the written authority of the deputy concerned shall specifically state the name, address,
and business of the taxpayer whose books, accounts, and pertinent records are to be
examination and the procedure to be followed in conducting the same.
For this purpose, the records of the revenue district office of the Bureau of Internal Revenue shall
be made available to the local treasurer, his deputy or duly authorized representative. (Section
171, LGC)

8. Taxpayers remedies

Section 187 authorizes the Secretary of Justice to review only the constitutionality or legality
of the tax ordinance and, if warranted, to revoke it on either or both of these grounds. When
he alters or modifies or sets aside a tax ordinance, he is not also permitted to substitute his
own judgment for the judgment of the local government that enacted the measure. Secretary
An officer in controls lays down the rules in the doing of an act. If they are not followed, he
may, in his discretion, order the act undone or re-done by his subordinate or he may even
decide to do it himself. Supervision does not cover such authority. The supervisor or
superintendent merely sees to it that the rules are followed, but he himself does not lay down
such rules, nor does she have the discretion to modify or replace them. If the rules are not
observed, he may order the work done or re-done but only to conform to the prescribed rules.
He may not prescribe his own manner for the doing of the act. He has no judgment on this
matter except to see to it that the rules are followed. In the opinion of the Court, Secretary
Drilon did precisely this, and no more nor less than this, and so performed an act not of
control but of mere supervision (Drilon vs. Lim, G.R. No. 111249, August 4, 1994).
Tax Ordinance No. 7988 is null and void as said ordinance was published only for one day in
the 22 May 2000 issue of the Philippine Post in contravention of the unmistakable directive of
the Local Government Code of 1991. As held by this Court in the case of People v. Lim, if an
order or law sought to be amended is or law sought to be amended is invalid, then it does not
legally exist, there should be no occasion or need to amend it (Coca-Cola Bottlers vs. City of
Manila, G.R. No. 156252, June 27, 2006).

a) Periods of assessment and collection of local taxes, fees or charges


(a) Local taxes, fees, or charges shall be assessed within five (5) years from the date they
became due.
No action for the collection of such taxes, fees, or charges, whether administrative or judicial,
shall be instituted after the expiration of such period:

Provided, that taxes, fees or charges which have accrued before the effectivity of this Code may
be assessed within a period of three (3) years from the date they became due.
(a) 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.
(b) Local taxes, fees, or charges may be collected within five (5) years from the date of
assessment by administrative or judicial action.
No such action shall be instituted after the expiration of said period:
Provided, however, that taxes, fees or charges assessed before the effectivity of this Code may
be collected within a period of three (3) years from the date of assessment.
(c) The running of the periods of prescription provided in the preceding paragraphs shall be
suspended for the time during which;
(d) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration
of the period within which to assess or collect; and
(e) The taxpayer is out of the country or otherwise cannot be located.
(Section 194, LGC)
b) Protest of assessment
When the local treasurer or his duly authorized representative finds that correct taxes, fees, or
charges have not been paid, he shall issue a notice of assessment stating the nature of the tax,
fee, or charge, the amount of deficiency, the surcharges, interests and penalties. Within sixty (60)
days from the receipt of the notice of assessment, the taxpayer may file a written protest with the
local treasurer contesting the assessment, otherwise, the assessment shall become final and
executor. The local treasurer shall decide the protest within sixty (60) days from the time of its
filing. If the local treasurer finds the protest to be wholly or partly meritorious, he shall issue a
notice cancelling wholly or partially the assessment.
However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny
the protest wholly or partly with notice to the taxpayer. The taxpayer shall have thirty (30) days
from the receipt of the denial of the protest or from the lapse of the sixty (60)-day period
prescribed herein within which to appeal with the court of competent jurisdiction otherwise the
assessment becomes conclusive and unappealable. (Section 195, LGC)

Petitioner should thus have, following the earlier above-quoted Section 195 of the Local
Government Code, either appealed the assessment before the court of competent jurisdiction
or paid the tax and then sought a refund Petitioner did not observe any of these remedies
available to him, however He instead opted to file a petition for mandamus to compel
respondent to accept payment of transfer tax as computed by him. Mandamus lies only to
compel an officer to perform a ministerial duty (one which is so clear and specific as to leave
no room for the exercise of discretion in its performance) but not a discretionary function (one
which by its nature requires the exercise of judgment). Respondents argument
the[m]andamus cannot lie to compel the City Treasurer to accept as full compliance a tax
payment which in his reasoning and assessment is deficient and incorrect is thus persuasive
(San Juan vs. Castro, G.R. No. 174617, December 27, 2007).

c) Claim for refund of tax credit for erroneously or illegally collected tax, fee or charge
No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge
erroneously or illegally collected until a written claim for refund or credit has been filed with the
local treasurer. No case or proceeding shall be entertained in any court after the expiration of two
(2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer
is entitled to a refund or credit. (Section 196, LGC)

9. Civil remedies by the LGU for collection of revenues


a) Local governments lien for delinquent taxes, fees or charges
Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or
encumbrances in favor of any person, enforceable by appropriate administrative or judicial action,
not only upon any property or rights therein which may be subject to the lien but also upon
property used in business, occupation, practice of profession or calling, or exercise of privilege
with respect to which the lien is imposed. The lien may only be extinguished upon full payment of
the delinquent local taxes, fees and charges including related surcharges and interest. (Section
173, LGC)

b) Civil remedies, in general


The civil remedies for the collection of local taxes, fees, or charges, and related surcharges and
interest resulting from delinquency shall be: (Section 174, LGC)
(i) Administrative action
By administrative action through distraint of goods, chattels, or effects, and other personal
property of whatever character, including stocks and other securities, debts, credits, bank
accounts, and interest in and rights to personal property, and by levy upon real property and
interest in or rights to real property; and
Procedure for administrative action
(i) Distraint of personal property
The remedy by distraint shall proceed as follows:
Seizure Upon failure of the person owing any local tax, fee, or charge to pay the same at the
time required, the local treasurer or his deputy may, upon written notice, seize or confiscate any
personal property belonging to that person or any personal property subject to the lien in
sufficient quantity to satisfy the tax, fee, or charge in question, together with any increment
thereto incident to delinquency and the expenses of seizure.
In such case, the local treasurer or his deputy shall issue a duly authenticated certificate based
upon the records of his office showing the fact of delinquency and the amounts of the tax, fee, or
charge and penalty due. Such certificate shall serve as sufficient warrant for the distraint of
personal property aforementioned, subject to the taxpayers right to claim exemption under the
provisions of existing laws. Distrained personal property shall be sold at public auction in the
manner herein provided for. (Section 175, LGC)
(ii) Levy of real property, procedure
After the expiration of the time required to pay the delinquent tax, fee, or charge, real property
may be levied on before, simultaneously, or after the distraint of personal property belonging to
the delinquent taxpayer. To this end, the provincial, city or municipal treasurer, as the case may
be, shall prepare a duly authenticated certificate showing the name of the taxpayer and the
amount of the tax, fee, or charge, and penalty due from him. Said certificate shall operate with the
force of a legal execution throughout the Philippines.
Levy shall be effected by writing upon said certificate the description of the property upon which
levy is made. At property the same time, written notice of the levy shall be mailed to or served
upon the assessor and the Register of the Deeds of the province or city where the property is
located who shall annotate the levy on the tax declaration and certificate of title of the property,
respectively, and the delinquent taxpayer or, if he be absent from the Philippines, to his agent or
the manager of the business in respect to which the liability arose, or if there be none, to the
occupant of the property in question.

In case the levy on real property is not issued before or simultaneously with the warrant of
didstraint 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 taxpayers real
property.
A report on any levy shall, within ten (10) days after receipt of the warrant, be submitted by the
levying officer to the sanggunian concerned. (Section 176, LGC)
(iii) Further distraint or levy
The remedies by distraint and levy may be repeated if necessary until the full amount due,
including all expenses, is collected. (Section 184, LGC)
(iv) Exemption of personal property from distraint or levy
The following property shall be exempt from distraint and levy, attachment or execution thereof for
delinquency in the payment of any local tax, fee or charge, including the related surcharge and
interest:
(i) Tools and implements necessarily used by the delinquent taxpayer in his trade or
employment;
(ii) One (1) horse, cow, carabao, or other breast of burden, such as the delinquent taxpayer may
select, and necessarily used by him in his ordinary occupation;
(iii) His necessary clothing, and that of all his family;
(iv) 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 Ten thousand pesos
(P10,000.00);
(v) Provisions, including crops, actually provided for individual or family use sufficient for four (4)
months;
(vi) The professional libraries of doctors, engineers, lawyers and judges;
(vii) One fishing boat and net, not exceeding the total value of Ten thousand pesos (P10,000.00),
by the lawful use of which a fisherman earns his livelihood; and
(viii)
Any material or article forming part of a house or improvement of any real property.
(v) Penalty on local treasurer for failure to issue and execute warrant of distraint or levy
(Section 185, LGC)
Without prejudice to criminal prosecution under the Revised Penal Code and other applicable
laws, any local treasurer who fails to issue or execute the warrant of distraint or levy after the
expiration of the time prescribed, or who is found guilty of abusing the exercise thereof by
complement authority shall be automatically dismissed from the service after due notice and
hearing. (Section 177, LGC)
(ii) Judicial action
By judicial action.
Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of
the local government until concerned.
Procedure for judicial action
The local government unit 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 within the period prescribed in Section 194 of this Code.
(Section 183, LGC)

Periods of Assessment and Collection


(a) Local taxes, fees or charges shall be assessed within five (5) years from the date they
became due.

No action for the collection of such taxes, fees, or charges, whether administrative or judicial,
shall be instituted after the expiration of such period:
Provided, that taxes, fees or charges which have accrued before the effectivity of this Code may
be assessed within a period of three (3) years from the date they became due.
(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be
assessed within ten (10) years from discovery of the fraud or intent to evade payment.
(c) Local taxes, fees, or charges may be collected within five (5) years from the date of
assessment by administrative or judicial action. No such action shall be instituted after the
expiration of said period: Provided, however, that taxes, fees or charges assessed before the
effectivity of this Code may be collected within a period of three (3) years from the date of
assessment.
(d) The running of the periods of prescription provided in the preceding paragraphs shall be
suspended for the time during which:
(1) The treasurer is legally prevented from making the assessment of collection;
(2) The taxpayer request 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.
B. Real Property Taxation
A real property taxation is a direct tax on the ownership of lands and buildings or other
improvements thereon, not specially exempted, and is payable regardless of whether the
property is used or not, although the value may vary in accordance with such factor. The tax
is usually single or indivisible, although the land and building or improvements erected
when the land and building or improvements belong to separate owners. It is a fixed
proportion of the assessed value of the property taxed, and requires, therefore, the
intervention of assessors. It is collected or payable at appointed times, and it
constitutes a superior lien on and is enforceable against the property subject to such
taxation, and not by imprisonment of the owner (Villanueva vs. City of Iloilo, G.R. No. L-26521,
December 28, 1968).

In the case of Province of Nueva Ecija vs Imperial Mining Inc., G.R. No. L-59463 November
19, 1982, It was held that: A new Real Property Tax Code came into being when Presidential
Decree 464 was issued. It changed the basis of real property taxation. It adopted the policy of
taxing real property on the basis of actual use, even if the user is not the owner.
The present law on real property taxation (R.A. 7160, Local Government Code) adopts actual
use of real property as basis of assessment. (Sec. 199[b], LGC)

REAL PROPERTY subject to the definition given by Art. 415 of the Civil Code.
MACHINERIES (see Sec. 199 [o], LGC)

Movable equipment, to be immobilized in contemplation of Article 415 of the Civil Code, must
be the essential and principal elements of an industry or works which are carried on in a
building or on a piece of land. Thus, where the business is one of transportation, which is
carried on without a repair or service shop, and its rolling equipment is repaired or serviced in
a shop belonging to another, the tools and equipment in its repair shop which appear
movable are merely incidentals and may not be considered immovables, and, hence, not
subject to assessment as real estate for purposes of the real estate tax (Mindanao Bus Co. vs.
City Assessor and Treasurer, G.R. No. L-17870, September 29, 1962).

The underground tanks although installed by the lessee, Shell and Caltex, are considered
real property for purposes of the imposition of the real property taxes. It is only for purpose of
executing a final judgment that these machinery and equipment, installed by the lessee on a
leased land, would not be considered as real property. But in the imposition of the real
property tax, the underground tanks are taxable as necessary fixtures of the gasoline

station without which the gasoline station would not be operational (Caltex Phils. Inc. vs.
CBAA. 114 SCRA 296).

While the two storage tanks are not embedded in the land, they may, nevertheless, be
considered as improvements on the land, enhancing its utility and rendering it useful to the
oil industry. It is undeniable that the two tanks have been installed with some degree of
permanence as receptacles for considerable quantities of oil needed by MERALCO for its
operations. The case of Board of Assessment Appeals vs. Manila Electric Company, 119 Phil
328, wherein MERALCOs steel towers were held not to be subject to realty tax, is not in
point because in that case the steel towers were regarded as poles and under its franchise
MERALCOs poles are exempt from taxation. Moreover, steel towers were not attached to
any land or building. They were removable from their metal frames (Manila Electric Company
vs. CBAA, G.R. No. L-47943, May 31. 1982).

Who should pay the real property tax?


THE PARTY CONTRACTUALLY ASSUMING REAL PROPERTY TAX LIABILITY
PURSUANT TO AN ENERGY CONVERSION AGREEMENT DOES NOT HAVE LEGAL
INTEREST TO GIVE IT PERSONALITY TO PROTEST THE TAX IMPOSED BY LAW ON
THE OTHER PARTY. Legal interest should be an interest that is actual and material, direct
and immediate, not simply contingent or expectant. In this case, NPCs ownership of the
plant will happen only after the lapse of the 25-year period. Prior to this event, the real
interest of NPC is only in the continued operation of the plant for the generation of electricity.
Moreover, the tax liability that would give NPC the personality to protest the assessment is
the liability arising from the law that the local government unit can rightfully and successfully
enforce, not the contractual liability that is enforceable between the parties to a contract
(National Power Corporation vs. Province of Quezon and Municipality of Pagbilao, G.R. No. 171586
dated July 15, 2009).

Where use is the test, the ownership is immaterial. In the instant case, although the property
was still in the name of the GSIS pending payment of the full price, its use and possession
was already transferred to the defendant (Baguio vs. Busuego, G.R. No. 29772, September 18,
1980).

Unpaid realty taxes attach to the property and is chargeable against the person who had
actual or beneficial use and possession of its regardless of whether or not he is the owner. To
impose the real property tax 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 vs. City of Manila, G.R. No. 90639, February 21,
1990).

Baguio Case vs. Estate of Lim Case


In Baguio case, the assumption by the vendee of the liability for real estate taxes
prospectively due was in harmony with the tax policy that the user of the property bears the
tax. In Estate of Lim case, the interpretation that the [vendee] assumed the liability for
overdue real estate taxes for the periods prior to the contract of sale is incongruent with the
said policy because there was no immediate transfer of possession of the properties
previous to full payment of the repurchase (Estate of Lim vs. City of Manila, G.R. No. 90639,
February 21, 1990).

Baguio Case vs. NPC Case


In Baguio case, the vendee not only assumed liability for the taxes on the property, but also
acquired its use and possession, even though title remained with the vendor pending full
payment of the purchase price. Compared with Baguio case, NPC is neither the owner nor
the possessor or user of the property taxed. Only Mirant as the contractual obligor, not the
local government unit, can enforce the tax liability that the NPC contractually assumed (Estate
of Lim vs. City of Manila, G.R. No. 90639, February 21, 1990).

Fundamental principles

The appraisal, assessment, levy and collection of real property tax shall be guided by the
following fundamental principles:
(a) Real property shall be appraised at its current and fair market value;
(b) Real property shall be classified for assessment purposes on the basis of its actual use;
(c) Real property shall be assessed on the basis of a uniform classification within each local
government unit;
(d) The appraisal, assessment, levy and collection of real property tax shall not be let to any
private person; and
(e) The appraisal and assessment of real property shall be equitable. (Section 198, LGC)
2 Nature of real property tax
The taxing power of local governments in real property taxation is a delegated power.
Characteristics of Real Property Tax
1. Direct tax on the ownership of real property
2. Ad valorem tax. The value is based on the tax base.
3. Proportionate the tax is calculated on the basis of a certain percentage of the value
assessed.
4. Invisible single obligation
5. Local tax
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. (Section 232, LGC)
RATES OF LEVY (Sec. 233)
Real properties shall be appraised at the current and fair market value prevailing in the
locality where the property is situated and classified for assessment purposes on the basis of
its actual use (Allied Banking Corporation, etc., vs. Quezon City Government, et al., G.R. No. 154126,
October 11, 2005).

b) Exemption of real property tax


The following are exempted from payment of the real property tax:
(a) Real property owned by the Republic of the Philippines or any of its political subdivisions
except when the beneficial use thereof has been granted, for consideration or otherwise, to a
taxable person;

To be exempted, the government agencies should not have separate and distinct
personalities, meaning unincorporated agencies (NDC vs. Cebu City, 215 SCRA 382).

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques,


non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly,
and exclusively used for religious, charitable or educational purposes;

Under the 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to the exemption,
the petitioner is burdened to prove, by clear and unequivocal proof, that (a) it is a charitable
institution; and (b) its real properties are ACTUALLY, DIRECTLY and EXCLUSIVELY used for
charitable purposes. If real property is used for one or more commercial purpose, 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 Constitutions and the law (Lung Center of the Philippines vs. Quezon City and
Rosas. G.R. No. 144104, June 29, 2004).

(c) All machineries and equipment that are actually, directly and exclusively used by local water
districts and government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power;
(d) All real property owned by duly registered cooperatives as provided for under R.A. No. 6938;
and
(e) Machinery and equipment used for pollution control and environmental protection.
Except as provided herein, any exemption from payment of real property tax previously granted
to, or presently enjoyed by, all persons, whether natural or judicial, including all governmentowned or controlled corporations are hereby withdrawn upon the effectivity of this Code.
(Section 234, LGC)
Art. XIV, Sec. 4(3) 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.
Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall
be disposed of in the manner provided by law.
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.

Barges on which were mounted gas turbine power plants designated to generate electrical
power, the fuel oil barges which supplied fuel oil to the power plant barges, and the accessory
equipment mounted on the barges were subject to real property taxes (FELS Energy, Inc., vs.
Province of Batangas, G.R. No. 168557, February 16, 2007).
Exemption of GSIS from RPT (City of Davao vs. RTC, GR 127383, Aug 18, 2005)

These exemptions are based on the ownership, character, and use of the property:
(a) Ownership Exemptions. Exemptions from real property taxes on the basis of ownership are
real properties owned by: (i) the Republic, (ii) a province, (iii) a city, (iv) a municipality, (v) a
Barangay, and (vi) registered cooperatives.
(b) Character Exemptions. Exempted from real property taxes on the basis of their character
are: (i) charitable institutions, (ii) houses and temples of prayer like churches, parsonages or
convents appurtenant thereto, mosques, and (ii) non profit or religious cemeteries.
(c) Usage Exemptions. Exempted from real property taxes on the basis of the actual, direct and
exclusive use to which they are devoted are: (i) all lands buildings and improvements which
are actually, directed and exclusively used for religious, charitable or educational purpose; (ii)
all machineries and equipment actually, directly and exclusively used or by local water
districts or by government-owned or controlled corporations engaged in the supply and
distribution of water and/or generation and transmission of electric power; and (iii) all
machinery and equipment used for pollution control and environmental protection.
4

Appraisal and assessment of real property tax

Appraisal is the act or process of determining the value of real property as of a specific date for
a specific purpose (Sec. 199 [e])
Assessment is the act or process of determining the value of a property, or proportion thereof
subject to tax, including the discovery, listing, classification, and appraisal of properties (Sec. 199
[f])

a) Rule on appraisal of real property at fair market value

SECTION 201. Appraisal of Real Property. All real property, whether taxable or exempt, shall be
appraised at the current and fair market value prevailing in the locality where the property is
situated.
The Department of Finance shall promulgate the necessary rules and regulations for the
classification, appraisal, and assessment of real property pursuant to the provisions of this Code.
b) Declaration of real property
It shall be the duty of all persons, natural or juridical, owning or administering real property,
including the improvements therein, within a city or municipality, or their duly authorized
representative, to prepare, or cause to be prepared, and file with the provincial, city or municipal
assessor, a sworn statement declaring the true value of their property, whether previously
declared or undeclared, taxable or exempt, which shall be the current and fair market value of the
property, as determined by the declarant. Such declaration shall contain a description of the
property sufficient in detail to enable the assessor or his deputy to identify the same for
assessment purposes.
The sworn declaration of real property herein referred to shall be filed with the assessor
concerned once every three (3) years during the period from January first (1 st) to June thirtieth
(30th) commencing with the calendar year 1992. (Section 202, LGC)
c) Listing of real property in assessment rolls
(a) In every province and city, including the municipalities within the Metropolitan Manila Area,
there shall be prepared and maintained by the provincial, city or municipal assessor an
assessment roll wherein shall be listed all real property, whether taxable or exempt, located
within the territorial jurisdiction of the local government unit concerned.
Real property shall be listed, valued and assessed in the name of the owner or administrator, or
anyone having legal interest in the property.
(b) The undivided real property of a deceased person may be listed, valued and assessed in the
name of the estate or of the heirs and devisees without designating them individually; and
undivided real property other than that owned by a deceased may be listed, valued and
assessed in the name of one or more co-owners:
Provided, however, that such heir, devisee, or co-owner shall be liable severally and
proportionately for all obligations imposed by this Title and the payment of the real property tax
with respect to the undivided property.
(c) The real property of a corporation, partnership, or association shall be listed, valued and
assessed in the same manner as that of an individual.
(d) Real property owned by the Republic of the Philippines, its instrumentalities and political
subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to
a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee
or of the public entry if such property has been acquired or held for resale or lease.
(Section 205, LGC)
d) Preparation of schedules of fair market value
Before any general revision of property assessment is made pursuant to the provisions of this
Title, there shall be prepared a schedule of fair market values by the provincial, city and municipal
assessors of the municipalities within the Metropolitan Manila Area for the different classes of real
property situated in their respective local government units for enactment by ordinance of the
sanggunian concerned.

The schedule of fair market values shall be published in a newspaper of general circulation in the
province, city or municipality concerned, or in the absence thereof, shall be posted in the
provincial capitol, city or municipality hall and in two (2) other conspicuous public places therein.
(Section 212, LGC)

(i) Authority of assessor to take evidence


For the purpose of obtaining information on which to base the market value of any real property,
the assessor of the province, city or municipality or his deputy may summon the owners of the
properties to be affected or persons having legal interest therein and witnesses, administer oaths,
and take deposition concerning the property, its ownership, amount, nature, and value. (Section
213, LGC)

(ii) Amendment of schedule of fair market value


The provincial, city or municipal assessor may recommend to the sanggunian concerned
amendments to correct errors in valuation in the schedule of fair market values.
The sanggunian concerned shall, by ordinance, act upon the recommendation within ninety (90)
days from receipt thereof. (Section 214, LGC)

Should the taxpayers question the excessiveness of the amount of tax, he must first pay the
amount due, in accordance with Section 252 of R.A. 7160. Then, he must request the
annotation of the phrase paid under protest and accordingly appeal to the Board of
Assessment Appeals by filing a petition under oath together with copies of the tax
declarations and affidavits or documents to support his appeal (Lopez vs. City of Manila, GR No.
127139, February 19, 1999).

c) Classes of real property


For purposes of assessment, real property shall be classified as residential, agricultural,
commercial, industrial, mineral, timberland or special.
The city or municipal within the Metropolitan Manila Area, through their respective sanggunian,
shall have the power to classify lands as residential, agricultural, commercial, industrial, mineral,
timberland with their zoning ordinances. (Section 215, LGC)
All lands, buildings, and other improvements thereon actually, directly and exclusively used for
hospitals, cultural, or scientific purposes, and those owned and used by local water districts, and
government-owned or controlled corporations rendering essential public services in the supply
and distribution of water and/or generation and transmission of electric power shall be classified
as special. (Section 216, LGC)
d) Actual use of property as basis of 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. (Section 217, LGC)
Actual Use refers to the purpose for which the property is principally or predominantly utilized
by the person in possession thereof.

Appraisal and assessment are based on actual use irrespective of any previous assessment
or taxpayers valuation thereon which is based on the taxpayers valuation thereon which is
based on the taxpayers declaration (Patalinghug vs. CA, G.R. No. 104789, January 27, 1994).
e) Assessment of real property
(i) Assessment levels
The assessment levels to be applied to the fair market value of real property to determine its
assessed value shall be fixed by ordinances of the sangguniang panlalawigan, sangguniang

panlungsod or sangguniang bayan of a municipality within the Metropolitan Manila Area, at the
rates not exceeding the following: (Section 218, LGC)
On Lands:
CLASS ASSESSMENT LEVELS
Residential
20%
Agricultural
40%
Commercial
50%
Industrial
50%
Mineral
50%
Timberland
20%
On buildings and Other Structures:
Residential
Fair Market Value
Over
P175,000.00
300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.000
5,000,000.00
10,000,000.00

Not Over
P175,000.00
300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.00
5,000,000.00
10,000,000.00

Assessment Levels
0%
10%
20%
25%
30%
35%
40%
50%
60%

Agricultural
Over
P300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.00

Not Over
P 300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.00

Assessment Levels
25%
30%
35%
40%
45%
50%

Commercial / Industrial
Over
P300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.00
5,000,000.00
10,000,000.00

Not Over
P 300,000.00
500,000.00
750,000.00
1,000,000.00
2,000,000.00
5,000,000.00
10,000,000.00

Assessment Levels
30%
35%
40%
50%
60%
70%
75%
80%

Timberland
Over
P300,000.00
500,000.00
750,000.00

Not Over
P 300,000.00
500,000.00
750,000.00
1,000,000.00

Assessment Levels
45%
50%
55%
60%

1,000,000.00
2,000,000.00

2,000,000.00

65%
70%

On Machineries
Class
Agricultural
Residential
Commercial
Industrial

Assessment Levels
40%
50%
80%
80%

On Special Classes: The assessment levels for all lands, buildings, machineries and other
improvements;
Actual Use
Assessment Level
Cultural
15%
Scientific
15%
Hospital
15%
Local water districts
10%
Government-owned or
controlled corporations
engaged in the supply
and distribution of water
and/or generation and
transmission of
electric power
10%
(ii) General revisions of assessments and properly classification
The provincial, city or municipal assessor shall undertake a general revision of real property
assessments within two (2) years after the effectivity of this Code and every three (3) years
thereafter. (Section 219, LGC)
(iii) Date of effectivity of assessment or reassessment
All assessments or reassessments made after the first (1 st) day of January of any years shall take
effect on the first (1st) day of January of the succeeding year.
Provided, however, That the reassessment of real property due to its partial or total destruction,
or to a major change in its actual use, or to any great and sudden inflation or deflation of real
property values, or to the gross illegality of the assessment when made or to any other abnormal
cause, shall be made within ninety (90) days from the date any such cause or causes occurred,
and shall take effect at the beginning of the quarter next following the reassessment. (Section 221,
LGC)

(iv) Asessment of property subject to back taxes


Real property declared for the first time shall be assessed for taxes for the period during which it
would have been liable but in no case for more than ten (10) years prior to the date of initial
assessment:
Provided, however, that such taxes shall be computed on the basis of the applicable schedule of
values in force during the corresponding period.
If such taxes are paid on or before the end of the quarter following the date the notice of
assessment was received by the owner or his representative, no interest for delinquency shall be
imposed thereon;

otherwise, such taxes shall be subject to an interest at the rate of two perent (2%) per month or a
fraction thereof from the date of the receipt of the assessment until such taxes are fully paid.
(Section 222, LGC)

(v) 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 provincial, city or municipal assessor shall within thirty (30) days give written
notice of such new or revised assessment to the person in whose name the property is declared.
The notice may be delivered personality or by registered mail or through the assistance of the
punong barangay to the last known address of the person to be served. (Section 223, LGC)
h) Appraisal and assessment of machinery
(a) The fair market value of abrand-new machinery shall be the acquisition cost. In all other
cases, the fair market value shall be determined by dividing the remaining economic life of
the machinery by its estimated economic life and multiplied by the replacement or
reproduction cost.
(b) If the machinery is imported, the acquisition cost includes freight, insurance, bank and other
charges, brokerage, arrastre and handling, duties and taxes, plus cost of inland
transportation, handling, and installation charges at the present site.
The cost in foreign currency of imported machinery shall be converted to peso cost on the basis
of foreign currency exchange rates as fixed by the Central Bank . (Section 224, LGC)
5

Collection of real property tax

a) Date of accrual of real property tax


The real property tax for any year shall accrue on the first (1 st) day of January and from that date
it shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall
be extinguished only upon the payment of the delinquent tax. (Section 246, LGC)
b) Collection of tax
(i) Collecting authority
The collection of the real property tax with interest thereon and related expenses, and the
enforcement of the remedies provided for in this Title or any applicable laws, shall be the
responsibility of the city or municipal treasurer concerned.
The city or municipal treasurer may deputize the barangay treasurer to collect all taxes on real
property located in the barangay: Provided, that the barangay treasurer is properly bonded for the
purpose:
Provided, further, that the premium on the bond shall be paid by the city or municipal government
concerned. (Section 247, LGC)
(ii) Duty of assessor to furnish local treasurer with assessment rolls
The provincial, city or municipal assessor shall prepare and submit to the treasurer of the local
government unit, on or before the thirty-first (31 st) day of December each year, an assessment roll
containing a list of all persons whose real property have been newly assessed or reassessed and
the values of such properties.
The owner of the property or the person having legal interest therein is out of the country or
otherwise cannot be located. (Section 248, LGC)
(iii) Notice of time for collection of tax
The provincial or city treasurer shall, on or before the thirty-first of January each year, cause
notice of the periods during which real property tax may be paid without penalty in their respective
jurisdiction to be posted at the main entrance of the provincial building or city hall and of all

municipal buildings and in a public conspicuous place in each barrio, and published in a
newspaper and announced by crier at least three times.
The form and detail of the notice shall be prescribed by the Secretary of Finance: Provided,
however, That in lieu of or in addition to such notice, the Secretary of Finance may require
notification in any province, municipality, or city to be accomplished through the mailing of
individual tax bills which shall estate the exact amount of the annual tax due, the amount of
quarterly installment, its due date, the delinquency, and the applicable penalty.
c) Periods within which to collect real property tax (Sec. 270)
1. Basic real property tax and any other tax levied under the title on Real Property Taxation
Five (5) years from the date they became due.
2. When there is fraud or intent to evade the payment.
The period of prescription within which to collect shall be SUSPENDED for the time during which:
1. The local treasurer is legally prevented from collecting the tax;
2. The owner of the property or the person having legal interest therein requests for
reinvestigation and executes a waiver in writing before the expiration of the period within
which to collect; and
3. The owner of the property or the person having legal interest therein is out of the country or
otherwise cannot be located.
d) Special rules on payment
(i) Payment of real property tax in installments
The owner of the real property or the person having legal interest therein may pay the basic real
property tax and the additional tax for Special Education Fund (SEF) due thereon without interest
in four (4) equal installments: the first installment to be due and payable on or before the thirtyfirst (31st) of March; the second installment, on or before the thirtieth (30 th) of June; the third
installment, on or before the thirtieth (30th) of September; and the last installment on or before the
thirty-first (31st) of December, except the special levy the payment of which shall be governed by
ordinance of the sanggunian concerned. (Section 250, LGC)
(ii) Interest on unpaid real property tax
In case of failure to pay the basic real property tax or any other tax levied under this Title upon the
expiration of the periods as provided in Section 250, or when due, as the case may be, shall
subject the taxpayer to the payment of interest at the rate or two percent (2%) per month on the
unpaid amount or a fraction thereof, until the delinquent tax shall have been fully paid:
Provided, however, that in no case shall the total interest on the unpaid tax or portion thereof
exceeds thirty-six (36) months. (Section 255, LGC)
(iii) Condonation of real property tax
In case of a general failure of crops or substantial decrease in the price of agricultural or agribased products, or calamity in any province, city or municipality, the sanggunian concerned, by
ordinance passed prior to the first (1 st) day of January of any year and upon recommendation of
the Local Disaster Coordinating Council, may condone or reduce, wholly or partially, the taxes
and interest thereon for the succeeding year or years in the city or municipality affected by the
calamity. (Section 276, LGC)
The President of the Philippines may, when public interest so requires, condone or reduce the
real property tax and interest for any year in any province or city or a municipality within the
Metropolitan Manila Area. (Section 277, LGC)
e) Remedies of LGUs for collection of real property tax

(i) Issuance of notice of delinquency for real property tax payment


(a) When the real property tax or any other tax imposed under this Title becomes delinquent, the
provincial, city or municipal treasurer shall immediately cause a notice of the delinquency to
be posted at the main entrance of the provincial capitol, or city or municipal hall and in a
publicly accessible and conspicuous place in each barangay of the local government unit
concerned. The notice of delinquency shall also be published once a week for two (2)
consecutive weeks, in a newspaper of general circulation in the province, city, or municipality.
(b) Such notice shall specify the date upon which the tax became delinquent and shall state that
personal property may be distrained to effect payments. It shall likewise state that at any time
before the distraint of personal property, payment of the tax with surcharges, interest and
penalties may be made in accordance with the next following section, and unless the tax,
surcharges and penalties are paid before the expiration of the year for which the tax is due,
except when the notice of assessment or special levy is contested administratively or
judicially pursuant to the provisions of Chapter 3, Title II, Book II of this Code, the delinquent
real property will be sold at public auction, and the title to the property will be vested in the
purchaser, subject, however, to the right of the delinquent owner of the property or any
person having legal interest therein to redeem the property within one (1) year from the date
of sale. (Section 254, LGC)
(ii) Local governments lien
Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or
encumbrances in favor of any person, enforceable by appropriate administrative or judicial action,
not only upon any property or rights therein which may be subject to the lien but also upon
property of profession or calling, or exercise of privilege with respect to which the lien is imposed.
The lien may only be extinguished upon full payment of the delinquent local taxes, fees and
charges including related surcharges and interest. (Section 173, LGC)
(iii) Remedies in general
a. Protest by means of appeal to the Secretary of Justice;
b. Protest against the assessment;
c. Claim for refund or tax credit
(iv) 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. (Section 182, LGC)
(v) Further levy until full payment of amount due
The remedies by distraint and levy may be repeated if necessary until the full amount due,
including all expenses, is collected. (Section 184, LGC)
6

Refund or credit of real property tax

a) Payment under protest


(a) No protest shall be entertained unless the taxpayer first pays the tax. There shall be
annotated on the tax receipts the words paid under protest. The protest in writing must be
filed within thirty (30) days from payment of the tax to the provincial, city treasurer or
municipal treasurer, in the case of a municipality within Metropolitan Manila Area, who shall
decide the protest within sixty (60) days from receipt.
(b) The tax or a portion thereof paid under protest shall be held in trust by the treasurer
concerned.
(c) In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of
the tax protested shall be refunded to the protestant, or applied as tax credit against his
existing or future tax liability.

(d) In the event that the protest is denied or upon the lapse of the sixty-day period prescribed in
subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title
II, Book II of this Code.
(Section 252, LGC)
b) Repayment of excessive collections
When an assessment of basic real property tax, or any other tax levied under this Title, is found to
be illegal or erroneous and the tax is accordingly reduced or adjusted, the payment may file a
written claim for refund or credit for taxes and interests with the provincial or city treasurer within
two (2) years from the date the taxpayer is entitled to such reduction or adjustment.
The provincial or city treasurer shall decide the claim for tax refund or credit within sixty (60) days
from receipt thereof. In case the claim for tax refund or credit is denied, the taxpayer may avail of
the remedies as provided in Chapter 3, Title II, Book II of this Code . (Section 253, LGC)
7

Taxpayers remedies

e) Contesting an assessment of value of real property


(i) Appeal to the Local Board of Assessment Appeals
(LBAA)
Any owner or person having legal interest in the property who is not satisfied with the action of
the provincial, city or municipal assessor in the assessment of his property may, within sixty (60)
days from the date of receipt of the written notice of assessment, appeal to the Board of
Assessment Appeals of the province or city by filing a petition under oath in the form prescribed
for the purpose, together with copies of the tax declarations and such affidavits or documents
submitted in support of the appeal. (Section 226, LGC)
(ii) Appeal to the Central Board of Assessment Appeals (CBAA)
The Central Board of Assessment Appeals shall be composed of a chairman and two (2)
members to be appointed by the President, who shall serve for a term of seven (7) years, without
reappointment. Of those first appointed, the chairman shall hold office for seven (7) years, one
member for five (5) years, and the other member for three (3) years.
Appointment to any vacancy shall be only for the unexpired portion of the term of the
predecessor.
In no case shall any member be appointed or designated in a temporary or acting capacity.
The chairman and the members of the Board shall be Filipino citizens, at least forty (40) years old
at the time of their appointment, and members of the Bar or Certified Public Accountants for at
least ten (10) years immediately preceding their appointment.
The chairman of the Board of Assessment Appeals shall have the salary grade equivalent to the
rank of Director III under the Salary Standardization Law exclusive of allowances and other
emoluments. The members of the Board shall have the salary grade equivalent to the rank of
Director II under the Salary Standardization Law exclusive of allowances and other emoluments.
The Board shall have appellate jurisdiction over all assessment cases decided by the Local Board
of Assessment Appeals. (Section 230, LGC)
(iii) Effect of payment of tax (payment of tax or effect of appeal on the payment of (RPT)
Appeal on assessments of real property made under the provisions of this Code shall, in no case,
suspend the collection of the corresponding realty taxes on the property involved as assessed by
the provincial or city assessor, without prejudice to subsequent adjustment depending upon the
final outcome of the appeal. (Section 231, LGC)
f)

Payment of real property under protest

(i) File protest with local treasurer


a) The protest in writing must be filed within thirty (30) days from payment of the tax to the
provincial, city treasurer or municipal treasurer, in the case of a municipality within
Metropolitan Manila Area, who shall decide the protest within sixty (60) days from receipt.
b) The tax or a portion thereof paid under protest shall be held in trust by the treasurer
concerned.
c) In he event that the protest is finally decided in favor of the taxpayer, the amount or portion of
the tax protested shall be refunded to the protestant, or applied as tax credit against his
existing or future tax liability.
d) In the event that the protest is denied or upon the lapse of the sixty-day period prescribed in
subparagraph (a), the taxpayer may avail of the remedies as provided for in Chapter 3, Title
II, Book II of this Code.
(ii) Appeal to the LBAA
In the exercise of its appellate jurisdiction, the Board shall have the power to summon witnesses,
administer oaths, conduct ocular inspection, take depositions, and issue subpoena and subpoena
duces tecum.
The proceedings of the Board shall be conducted solely for the purpose of ascertaining the facts
without necessarily adhering to technical rules applicable in judicial proceedings.
The phrase person having legal interest in the property in Section 226 of the LGC does not
include an entity that assumes another persons tax liability by contract. (Resolution on MR in NPC
vs. Province of Quezon, G.R. No. 171586, January 25, 2010 ) A review of the provisions of the LGC on
real property taxation shows that the phrase has been repeatedly adopted and used to define an
entity:
1. in whose name the real property shall be listed, valued, and assessed (Sec. 205, LGC)
2. who may be summoned by the local assessor to gather information on which to base the
market value of the real property (Sec. 213, LGC)
3. who may protest the tax assessment before the LBAA (Sec. 226, LGC) and may appeal the
latters decision to the CBAA (Sec. 229, LGC)
4. who may be liable for the idle land tax, (Sec. 237, LGC) as well as who may be exempt from
the same; (Sec. 238, LGC)
5. who shall be notified of any proposed ordinance imposing a special levy, ( Sec. 242, LGC) as
well as who may object proposed ordinance (Sec. 244, LGC);
6. who may pay the real property tax (Sec. 250, LGC);
7. who is entitled to be notified of the warrant of levy and against whom it may be enforced (Sec.
258, LGC);

8. who may stay the public auction upon payment of the delinquent tax, penalties and surcharge
(Sec. 260, LGC); and
9. who may redeem the property after it was sold at the public auction for delinquent taxes (Sec.
254, LGC)

Appeal from decision of assessor to LBAA within 60 days. Payment under protest is not
required if there was mistaken belief that the payment when made was correct. In the case
bar, petitioner had no prior knowledge that it was exempt. It however ruled that 6 years
prescription in Civil Code Art. 1145 apply for claim for refund, there being no similar provision
as in the current LGC (Ramie Textile Inc. vs. Mathay, 89 SCRA 586).
The CTA en banc dismissed the petition of a power company that claimed exemption from
real property tax imposed on its machineries and equipment, due to its failure to exhaust the
admisitrative remedy of appealing the assessment to the LBAA and CBAA pursuant to
Sections 226 and 229 of the LGC. The CTA en banc held that although cases raising purely
legal questions may be excused from exhausting administrative remedies before going to the
courts (Ty vs. Trampe, G.R. No. 117577, December 1, 1995).

Napocor, by claiming exemption from realty taxation, is simply raising a question of the
correctness of the assessment. A claim for tax exemption, whether full or partial, does
not question the authority of local assessor to assess real property tax (NPC vs. Province
of Quezon, G.R. No. 171586, January 25, 2010).

(iii) Appeal to the CBAA


The Board shall have appellate jurisdiction over all assessment cases decided by the Local Board
of Assessment Appeals.
(iv) Appeal to the CTA
The CTA shall exercise exclusive appellate jurisdiction to review by appeal the decisions of the
Central Board of Assessment Appeals in the exercise of its appellate jurisdiction over cases
involving the assessment and taxation of real property originally decided by the provincial or city
board of assessment appeals;
(v) Appeal to the SC
Petitions for certiorari, prohibition or mandamus against CBAA and CTA.
APPEALS IN REAL PROPERTY TAXATION

PROVINCIAL, CITY OR
MUNICPAL
within 60 days must file:
1) Written Petition under Oath
2) With Supporting Documents

LOCAL BOARD OF
ASSESSMENT APPEALS (LBAA
should decide within 120
within 30 days
within 30 days

CENTRAL BOARD OF
ASSESSMENT APPEALS

within 30 days
within 30 days

COURT OF TAX APPEALS (EN


within 15 days
within 15 days

SUPREME COURT

TARIFF AND