Taxation law review notes

- Atty. Francis J. Sababan -

COVERAGE OF TAXATION LAW REVIEW 3. Sources of Income sec. 42 of
NIRC
I. Basic Principles of - Income Taxpayers
Constitutional Limitations a) Individuals
a) Due process clause b) Corporation
which could be either c) Estates and Trusts –
substantive due process -Individuals are classified
and procedural due  Resident Citizens sec. 23 (A),
process clause sec 24 (A) (a)
b) Equal protection clause  Non-Resident Citizens sec 23
Read: (B), 24 (A) (b) 22 (E)
 Ormoc Sugar Central vs.  Overseas Contract Workers
City Treasurer 22 SCRA Sec. 23 (C), 24 (A) (b)
603  Resident Aliens Rev. Reg. sec
 Tiu vs. CA 301 SCRA 178 5, 23 (D), 24 (A) (c)
c) Article III sec. 1 of the  Non-Resident Aliens Engaged
1987 Constitution – non- in trade or business sections
impairment clause 25 (A) (1)
d) Article III sec. 5 –  Non-Resident Aliens Not
freedom of religion Engaged in trade or business
e) Article III sec. 20 – non- sec. 25 (B)
payment of poll tax  Aliens Employed in Multi-
f) Article VI sec. 28 par. 2 – National Corporations sec. 25
flexible tariff clause (C) and Rev. Reg. 12-2001
g) Article VI sec. 28 par. 3 –  Aliens Employed in Offshore
exemption from real Banking Units sec 25 (D)
property tax
 Aliens Employed in petroleum
Read:
Service Contractors &
 Herrera vs. Quezon City Subcontractors sec. 25 (E)
3 SCRA 186 -Corporate Income Taxpayers
 Abra vs. Hernando 107  Domestic Corporations sec. 23 (E),
SCRA 104 and sec 27 of NIRC
 Abra Valley vs. Aquino  Resident Foreign Corporations sec.
52 SCRA 106 22 (H) and (28)A
 Philippine Lung Center  Non-Resident Foreign Corporations
vs. Quezon City 433 sec. 22 (1) and 28 (B)
SCRA 119 -Estates and Trusts sec. 60-66 of
h) Article VI sec. 28 par. 4 – NIRC
qualified majority in tax
exemption Different Kinds of Income Tax
i) International double 1. Net Income Tax secs. 24 (A), 25
taxation (A) (1), 26, 27 (A) (B) (C), 28 (A)
 CIR vs. Johnson 309 up to 3rd par. 31 and 32 (A)
SCRA 87 2. Gross Income Tax secs. 25 (B)
j) Doctrine of equitable recoupment first part and 28 (B) (1)
k) Doctrine of Set-off or 3. Final Income Taxes sec. 57 (A)
compensation in taxation 4. Minimum Corporate Income Tax
 Republic vs. Mambulao 4 SCRA 622 of 2% of the Gross Income secs.
 Domingo vs. Garlitos 8 SCRA 443 27 (E), 28 (A) (2)
 Francia vs. IAC 162 SCRA 753 5. Improperly Accumulated
 Caltex vs. COA 208 SCRA 726 Earnings Tax of 10% of its
 Philex vs. CIR 294 SCRA 687 taxable income sec. 29 NIRC
Rev. Reg. 2-2001
II. Income Tax Law  Optional Corporate Income Tax
Section 22-26 of the National Internal of 15% of its gross income
Revenue Code sections 27 (A) 4th to 10th par.
a) Read in the commentaries or And 28 A(1) but only up to the
magic notes the different kinds of: 4th paragraph
1. Income Taxpayers
2. Income Taxes -Proceed to section 42 and 23 of
the NIRC

1
 Taxation law review notes
- Atty. Francis J. Sababan -
 NDC vs. Comm 151 SCRA 472
 Comm. Vs. IAC 127 SCRA 9
-Then go to sec. 39 of NIRC
 Calazans vs. Comm. 144 SCRA
664 RR 7-2003
-Then proceed to sec. 24 (A), 25 (A)
(1), 25 B,C,D,E, 27 A,B,C; 28 (A)
(1), 28 (A) (6) and sec 51 (D)
-Then continue to sec 24 B 1, 25
B,C,D,E; 27 (D) (1)
-Then go to se. 24 (B) (2) sec. 73
 Comm. Vs. Manning 66 SCRA
14
 Anscor vs. Comm. 301 SCRA
152
-Sec. 25 (A) (2), 25 B, C, C, E, sec. 27 (D)
(4); 28 (A) (7) (D); 32 B (7) (a)
- Then you go to sec. 24 C, 25A (3); 25
B, C, D, E, 27 D (2); 28 (A) (7) (C); 28
B (5) (C) RA 7717 sec. 127 NIRC
- Then you go to sec. 24 D (1); 25 (A)
(3); 25 (B) last par. 27 (D) (5)
 China Bank vs. Court of Appeals 336
SCRA ___; RR 7-2003
-Upon reading sec. 24 (D) (2) read RR 13-
1999
-Upon reading sec. 27 (A) go to sec. 22
(B)
 Batangas vs. Collector 102 Phil. 822
 Evangelista vs. Collector 102 Phil 140
 Reyes vs. Comm. 24 SCRA 198
 Ona vs. Bautista 45 SCRA 74
 Obillos vs. Comm 139 SCRA 436
 Pascua vs. Comm. 166 SCRA 560
 Afisco vs. Comm. 302 SCRA 1
-Upon reading sec. 27 (C) of NIRC see RA
9337 then go to sec. 32 (B) (7) (b) of
NIRC, sec. 133 par (o) of LGC, sec. 154 of
the LGC.
 Pagcor vs. Basco 197 SCRA 52
 Mactan vs. Cebu 261 SCRA 667
 LRT vs. City of Manila 342 SCRA 692
-Proceed to sections 27 (D) (1), 27 (D)
(2), 27 (D) (5) read RA 9337, 28 (A) (7)
(b), 28 (B) (5) (C), 27 (D) (4), (28) (A) (7)
(d), 28 (B) (5) (b)
 Marubeni vs. CIR 177 SCRA 500
 Proctor & Gamble vs. Comm 160
SCRA 560
 Same case Proctor and Gamble on
the Motion for Reconsideration 204
SCRA 377
 Wonder vs. Comm 160 SCRA 573
-Proceed to sec. 27(D) (5)
then sections 27 (E) and 28 (A) (2)
-Go to sec. 28 (A) (3) read RR 15-2002
-Go to sec. 28 (A) (4) see RA 9337
-Then see sec 28 (A) (5) see Marubeni vs.
Comm 177 SCRA 500
-Proceed to sec. 28(B) (5) (a) and sec 32
(B) (7) (a)
 Read Mitsubishi vs. Comm 181
SCRA 214
-Then go to sec. 29 and Rev. Reg. 2-2001
-Upon reading sec. 32 (B) 1 and 2, read
sec. 85 par (e), sec. 108A and sec. 123 of
the NIRC
-Proceed to sec. 33 read Rev. Reg. 3-98
-then go to sec. 34 (A) (1) (a) see
Aguinaldo vs. Comm. 112 SCRA 136, RR
10-2002
-Under Sec. 34 (B) read RR 13-2000
-Upon reading sec. 49 read Banas vs. CA
325 SCRA 259 and Filipina vs. Comm.
316 SCRA 480
-Upon reading sec. 60-66, read Ona vs.
Bautista 45 SCRA 74
III. Estate Tax
-Sections 84-97 see sec. 104
-Upon reading sec. 85 (B) read Vidal
de Roces vs. Posadas 58 Phil. 108
Dizon vs. Posadas 57 Phil 465
-Sec. 85 (G) compare with sec. 100
-sec. 85 (H) compare with sec. 86 (C)
-Upon reading sec. 86 see RR 2-2003
-Upon reading sec. 94 see Marcos vs.
Sandiganbayan 273 SCRA 47
IV. Donors Tax Law
- Sections 98-104
- G and Cumulative methods of filing
donor’s tax returns sections 99 (A),
103 (A) (1) and RR 2-2003
- Sections 100 and 85 (9)
V. Value Added Tax
- Sections 105-115
-Read RA 9337
-Read ABAKADA vs Comm.
GR 168056, Sept. 1, 2005
VI. Remedies Under the Internal
Revenue Code
-Sections 202-229
-RR 12-99
 Phoenix vs Comm 14 SCRA 52
 Basilan vs. Comm. 21 SCRA 17
 Yabut vs. Flojo 115 SCRA 278
 Union Shipping vs. Comm 185
SCRA 547
 Comm. vs. TMX 205 SCRA 184
 Comm. vs. Philamlife 244 SCRA
 Comm. vs. CA & BPI 301 SCRA
435
 BPI vs. Comm. 363 SCRA 840
2
 Taxation law review notes
- Atty. Francis J. Sababan -
-Prescription sections 203 and 222 of - RA 7631
NIRC, sec. 194 of the LGC, sec. 270 of
the LGC, sec. 1603 of Tariff and
Customs Code X. Court of Tax Appeals
-Protest sec. 228 of NIRC and RR 12- - RA 1125 as amended by RA 9282
99 sec. 195 of LGC, 252 LGC, sec.
2313 of Tariff & Customs Code and RA
7651

VII. Local Taxation

- Sections 128-196 of LGC
-Proceed 1st to sec. 186 read
Bulacan vs. CA 299 SCRA 442
-Then proceed to 187
-Then to 151
-128
-Under sec. 133 (e) read Palma vs.
Malangas 413 SCRA 572
-Under 133 (h) read Pililia vs.
Petron 198 SCRA 82
-Under 133 (i) read First Holdings
Co. vs. batangas City 300 SCRA 661
-Under 133 (l) read Butuan vs. LTO
322 SCRA 805
-Under 137 read sec. 193 of LGC
 Misamis vs. Cagayan de Oro
181 SCRA 38
 Reyes vs. San Pablo City 305
SCRA 353
 Meralco vs. Laguna 306 SCRA
750
 PLDT vs. Davao City 363 SCRA
522

- Co-relate sec. 139 and 147 of LGC

- Under sec. 140 of the LGC see
sec. 125 of the Internal Revenue
Code
- Under sec. 150 of the LGC read
the following:
 Phil. Match vs. Cebu 81 SCRA
99
 Allied Thread vs. Manila 133
SCRA 338
 Sipocat vs. Shell 105 Phil.
1263
 Iloilo Bottles vs. Iloilo City 164
SCRA 607

VIII. Real Property Tax

- Sections 197-294
- Sec. 235
 LRT vs. Manila 342 SCRA 692
 Cebu City vs. Mactan 261 SCRA
667

IX. Tariff & Customs Code

- Special Customs Duty sec. 301-304 of
TCC
- Regukar Customs Duty sec. 104 of
TCC

3
 Taxation law review notes
- Atty. Francis J. Sababan -
Rules in the Classroom: Q: Do local governments exercise this
1. do not be absent inherent power?
 if you are absent, you have to A: No. Only the National Government
transcribe what happened in class exercises the inherent power to impose
when you were out. taxes.
 The next meeting you attend class,
consider yourself a resident of Q: The taxing power of local governments
balic-balic, babalikbalikan ka sa is a DELAGATED power. Delegated by
recit. whom?
 Exception: if you get married. A: Delegated by Congress through law in
2. read the assignment. Wag zapote ang case of autonomous regions, and
aral. delegated by the constitution in case of
3. holiday – make up class probably on a LGUs not considered an autonomous
Sunday region.
4. allowed to glance at your notes, wag
lang pahalata/garapal ► Cities, provinces and municipalities →
5. materials: power granted under Art. X Sec. 5&6 of
 codal the Constitution
 commentaries (any author will do)
 magic notes (Sababan Lecture and ► Autonomous Regions → power
Q&A) conferred by Congress through law. Art. X
 Book stand Sec. 20 #2 of the Constitution is a non-
self-executing provision. Thus the power is
Coverage of Taxation Law Review: granted by Congress because said
1. Basic Principles including provision requires an enabling law.
Constitutional Provisions
2. Income Tax ► Article X, Section 5 is self-executing
3. Estate Tax thus the power is granted by the
4. Donor’s Tax constitution.
5. Remedies
6. Local Tax CONSTITUTIONAL LIMITATIONS
7. Real Property Tax
8. Tariff and Customs Code Due Process Clause
9. Court of Tax Appeals
10. VAT (although not part of the coverage Q: why is it a limitation to the power to
of the Bar Exams, questions have been tax?
asked since 1999) A: The due process clause as a limitation
to the power to tax refers both to
 Title 5,6 and 7 are always included in substantive and procedural due process.
the coverage Substantive due process requires that a
 No computations in the bar tax statute must be within the
 There are only 1 or 2 questions in the constitutional authority of Congress to
Bar about Basic Principles pass and that it be reasonable, fair and
 What are the favorite topics in the just.
Bar? Procedural due process, on the other
→ 12 questions on Income Tax hand, requires notice and hearing or at
→ 8-10 questions on remedies least the opportunity to be heard.
→ 8-10 questions allocated to the 7 Ex: On Substantive Due Process- when
topics the Congress passes a law exempting the
13th month pay from tax but with the
BASIC PRINCIPLES: concurrence only of the majority of the
quorum – law would be invalid because
► Taxation is an inherent power of the the Constitution provides that any grant of
State. tax exemption shall be passed with the
concurrence of the majority of all the
Q: What do you mean by INHERENT? members of the Congress.
A: The power to tax is not provided for in
the law, statute or constitution; it depends Q: Does it follow that the adverse party
on the existence of the state. No law or must always be notified?
legislation for the exercise of the power to A: No. As a rule, notice and hearing or
tax by the national government. the opportunity to be heard is necessary
only when expressly required by law.

4
 Taxation law review notes
- Atty. Francis J. Sababan -
Where there is no such requirement,
notice and the opportunity to be heard are
dispensable.
Ex. Before Oct. 1, 1995, you can
secure a TRO without notifying the
adverse party. If you are a suspect in a
criminal case, you have the right to have
an opportunity to be heard (if there is a
law).
Before July 1, 1998, no notice need
be given to a party declared in default.
After the amendment, the party declared
in default has to be notified of subsequent
proceedings albeit without the right to
participate therein.
In the case of a search warrant, the
person to be searched was not notified.
The person searched cannot claim that
there was a violation of due process
because there is no law requiring that the
person to be searched should be notified.
Regarding delinquent tax payers,
before levy, there must be notice.
REASON:
No provision of law requires notice to
the adverse party. If the adverse party is
notified, he may abscond. Thus, in
adversarial proceedings, in connection
with procedural due process, the adverse
party need not be notified all the time.
Equal Protection Clause
► As a rule, taxpayers of the same
footing are treated alike, both as to
privileges conferred and liabilities
imposed. Difference in treatment is
allowed only when based on substantial
distinction. Difference in treatment not
based on substantial distinction is frowned
upon as “class legislation.” This is
violated when taxpayers belonging to the
same classification are treated differently
form one another; and taxpayers
belonging different classifications are
treated alike.
Requirements of Reasonable
Classification:
1) There must be substantial
distinctions that make a real
difference.
2) It must be germane or relevant to
the purpose of the law.
3) The distinction or classification
must apply not only to the present
but also to future situations.
4) The distinction must apply to
persons, things and transactions
belonging to the same class.
Ex: In one case, a tax ordinance was
assailed on the ground that the ordinance
failed to distinguish a worker form casual,
permanent or temporary. The SC said that
the ordinance was invalid because of the
failure to state the said classification.
In PEOPLE v. CAYAT the Supreme Court
mandated the requisites for a valid
classification.
TIU v. COURT OF APPEALS (301 SCRA 278)
Q: what happened in the city of
Olonggapo?
A: The Congress, with the approval of the
President, passed RA 7227, an act
creating the conversion of the military
bases into other productive uses.
Q: Who was the President at that time?
A: President Ramos
Q: What were signed?
A: RA 7227, EO 97 and EO 97-A
→ The first led to the creation of the
Subic Special Economic Zone (SSEZ).
The latter set the limitations and
boundaries of the application of the
incentives (no taxes, local and
national, shall be imposed within
SSEZ. In lieu thereof, 3% of the Gross
Income shall be remitted to the
national gov’t) to those operating their
businesses within the said area.
Q: Who are the petitioners and what was
their contention?
A: The petitioners are Filipino
businessmen who are operating their
business outside the secured area. The
petitioners contended that the law in
question was violative of their right to
equal protection of laws since they are
also Filipino businessmen.
H: The Supreme Court ruled that
there was no violation since the
classification was based on a
substantial distinction.
The element invoked here is
element #1 that there must be
substantial distinction in the
classification of taxpayers on whom
the tax will be imposed.
The Court observed that those
foreign businessmen operating within
the secured area have to give a larger
capital to operate in the secured area
(to spur economic growth and
guarantee employment).
ORMOC SUGAR CENTRAL vs. CIR
Q: What did the municipality of Ormoc
do?
A: The City Council of Ormoc passed a
Municipal Ordinance No.4 imposing
5
 Taxation law review notes
- Atty. Francis J. Sababan -
upon any and all centrifugal sugar
milled at the Ormoc Sugar Central a
municipal tax on the net sale of the
same to the United States and other
foreign countries.
Q: Did the owner accept this imposition?
A: No. the tax due was paid under
protest, then filed a complaint against
the City of Ormoc.
H: The Supreme Court said there was
a violation of the equal protection
clause. The element invoked here was
element #3, that it must be applicable
to both present and future
circumstances. The Supreme Court
said that one must go to the provision
itself, in the case at bar, there was a
violation of element #3 because the
law was worded in such a way that it
only applies to Ormoc Sugar Central
alone and to the exclusion of all other
sugar centrals to be established in the
future.
TAKE NOTE: People vs. Cayat
Freedom of Religion
It Involves 3 Things:
1. freedom to choose religion
2. freedom to exercise one’s religion
3. prohibition upon the national
government to establish a national
religion
Q: Which one limits the power to tax?
A: Prohibition upon the national
government to establish a national
religion because this will require a special
appropriation of money coming from the
national treasury which is funded by the
taxes paid by the people.
Non-impairment Clause
Q: What are the sources of obligation in
the Civil Code?
A: Law, Contracts, Quasi-Contracts,
Delict, Quasi-Delict.
Q: What is the obligation contemplated in
this limitation?
A: Those obligations arising from
contracts.
General Rule: The power to tax is
pursuant to law, therefore, the obligation
to pay taxes is imposed by law, thus the
non-impairment clause does not apply.
► You have to determine first the source
of obligation:
1. If the law merely provides for the
fulfillment of the obligation then
the law is not the source of the
obligation.
2. When the law merely recognizes or
acknowledges the existence of an
obligation created by an act which
may constitute a contract, quasi-
contract, delict, and quasi-delict,
and its only purpose is to regulate
such obligation, then the act itself
is the source of the obligation, not
the law.
When the law establishes the
obligation and also provides for its
fulfillment, then the law itself is the source
of the obligation
Q: So, in what instance does the non-
impairment of contracts clause becomes a
limitation to the power to tax?
A: it is when the taxpayer enters into a
compromise agreement with the
government. In this instance, the
obligation to pay the tax is now based on
the contract between the taxpayer and
the government pursuant to their
compromise agreement.
Take Note: the requirement for its
application: the parties are the
government and private individual.
Poll Tax
Q: What is a poll tax?
A: It is a tax of a fixed amount on
individuals residing within a particular
territory, whether citizens or not, without
regard to their property or to the
occupation in which they may be
engaged.
It is a tax imposed on persons without
any qualifications. persons may be
allowed to pay even if they are not
qualified as to age or property ownership.
Example of Poll Tax: Community Tax
Certificate under Section 162 of the Local
Government Code.
Q: Why is it a limitation to the power to
tax?
A: It is a limitation to the power to tax
because Congress is prohibited from
passing a law penalizing with
imprisonment a person who does not pay
poll tax. (funds for sending a person to jail
is taken from the national treasury which
is funded by the taxes paid by the people)
6
 Taxation law review notes
- Atty. Francis J. Sababan -
Exemption from payment of Real “Exempted by virtue of incidental
Estate Tax purpose” was merely coined by the
Supreme Court. Thus, it does not apply to
Q: What is the requirement for exemption other taxes except Real Estate Tax.
from payment of real property tax under
the 1935, 1973 and 1987 Constitution? PROVINCE OF ABRA v. HERNANDO
A: Art. 6, Sec 22 (3), 1935 Constitution – Q: What is involved in this case?
Cemeteries, churches and parsonages or A A religious institution was involved
convents appurtenant thereto, and all in this case, the Roman Catholic
lands, buildings and improvements used Bishop of Bangued, Inc. (bishop filed
EXCLUSIVELY for RELIGIOUS, CHARITABLE declaratory relief after assessed for
or EDUCATIONAL purposes shall be payment of tax). The respondent judge
exempt for taxation. granted the exemption from taxes of
Art. 8, Sec. 17 (3), 1973 Constitution – said church based only on the
charitable institutions, churches, allegations of the complaint without
parsonages or convents appurtenant conducting a hearing/trial. The
thereto, mosque, and non-profit assistant prosecutor filed a complaint
cemeteries, and all lands, buildings, and contending that petitioner was
improvements ACTUALLY, DIRECTLY, and deprived of its right to due process.
EXCLUSIVELY used for RELIGIOUS and
CHARITABLE purposes shall be exempt SC: the Court ordered that the case be
from taxation. remanded to the lower court for further
Art. 6, Sec. 28 (3), 1987 Constitution – proceedings. The Court observed that the
charitable institutions, churches, and cause action arose under the 1973
parsonages or convents appurtenant Constitution, not under the 1935
thereto, mosque, non-profit cemeteries, Constitution (note the difference). Tax
and all lands, buildings, and exemption is not presumed. It must be
improvements ACTUALLY, DIRECTLY and strictly construed against the taxpayer
EXCLUSIVELY used for RELIGIOUS, and liberally construed in favor of the
EDUCATIONAL and CHARITABLE purposes government.
shall be exempt from taxation.
ABRA VALLEY COLLEGE INC. v. AQUINO
HERRERA v. QC-BOARD OF ASSESSMENT Q: What is involved in this case?
(1935 Constitution) A: An educational institution is
Q: What is involved in this case? involved in this case. The ground floor
A: A charitable institution, St. of the school was leased to Northern
Catherine’s Hospital. The hospital was Marketing Corp., a domestic
previously exempt from taxation until corporation. The 2nd floor thereof was
it was reclassified and subsequently used as the residence of the school
assessed for the payment of real director and his family.
property tax. The Province of Abra now contends
The contention of the respondent that since the school is not exclusively
is that the hospital was no longer a used for educational purposes, the
charitable institution because it school is now liable to pay real estate
accepts pay-patients, it also operates tax.
a school for midwifery and nursing, H: The Court held that the school is
and a dormitory. Since it is not PARTIALLY liable for real estate tax.
exclusively used for charitable 1. Residence – exempt by virtue of
purposes it is not exempt from incidental purpose; justified
taxation. because it is necessary.
H: The Court ruled that petitioner is 2. Commercial – not exempt because
not liable for the payment of real it is not pursuant to the primary
estate taxes. It is a charitable purpose; not for educational
institution, thus exempt from the purposes.
payment of such tax.
The hospital, schools and Q: is the doctrine in the case of Herrera
dormitory are all exempt fro taxation the same with this case?
because they are incidental to the A: NO. in the Herrera case, the exemption
primary purpose of the hospital. was granted to all the real property
NOTE: this arose during the 1935 (hospital, school and dorm). But in this
Constitution. case, the Supreme Court made a

7
 Taxation law review notes
- Atty. Francis J. Sababan -
qualification. The Supreme Court said it
depends.
NOTE: both cases arose under the 1935
Constitution despite having been decided
in 1988.
Q: At present, do we still apply the
exemption from tax by virtue of the
Doctrine of Incidental Purpose?
A: Not anymore. The cause of action in
said case arose under the 1935
Constitution and it does not apply to the
provisions of the 1987 Constitution.
PHILIPPINE LUNG CENTER v. QUEZON CITY
Q: What is involved in this case?
A: A charitable institution, a hospital.
It is provided in the charter of the Lung
Center of the Philippines is a
charitable institution. However, part of
its building was leased to private
individuals and the vacant portion of
its lot was rented out to Elliptical
Orchids. Respondent contends that
since the hospital is not used actually,
directly, an d exclusively for charitable
purposes, it is liable to pay real estate
taxes.
H: The Supreme Court held that the
petitioner is liable to pay tax for those
parts leased to private individuals for
commercial purposes. For the part of
the hospital used for charitable
purposes (whether for pay or non-pay
patients), petitioner is exempt from
payment of real estate tax.
NOTE: petitioner contended that the
profits derived from the lease of its
premises were used for the operation of
the hospital. The Court held that the use
of the profits does not determine
exemption, rather it is the use of the
property that determines exemption.
The case of Herrera does not apply
because said case arose under the 1935
Constitution and the present case arose
under the 1987 Constitution. The
requirements for exemption are different.
In the 1935 Constitution, the property
must be EXCLUSIVELY used for religious,
educational or charitable purposes. Under
the 1987 Constitution, the property must
be used ACTUALLY, DIRECTLY, and
EXCLUSIVELY for religious, educational and
charitable purposes.
Q: Was the doctrine laid down in Abra
Valley affirmed in the Lung Center case?
A: Yes. The Supreme Court unconsciously
applied a doctrine laid down by the 1935
Constitution. The Supreme Court
reiterated the ruling in the Abra Valley
case which arose under the 1935
Constitution. The Supreme Court made a
qualification, it held that it depends on
whether or not the use is incidental to the
primary purpose of the institution.
NOTE: at present, “exemption from tax by
virtue of incidental purpose” is not
applicable to all taxes including real
estate tax.
COMM v. SC JOHNSON and SONS, INC.
Important :
1. international double taxation
2. importance of international tax
treaty
3. implication of most favored nation
clause
Q: What is the corporation involved in
this case?
A: A domestic corporation (DC).
SC Johnson and Sons, Inc. entered
into a license agreement with SC
Johnson and Sons U.S.A (Non-Resident
Foreign Corp, NRFC) whereby the
former was allowed to use the latter’s
trademark and facilities to
manufacture its products. In return,
the DC will pay the NRFC royalties as
well as payment of withholding tax.
A case for refund of overpaid
withholding tax was filed. Apparently,
the DC should have paid only 10%
under the most favored nation clause.
H: The Supreme Court coined the
term International Double Taxation or
International Juridical Double Taxation.
Q: What prompted the SC to coin such
term?
A: Because a single income (tax
royalties paid by a DC) was subjected
to tax by two countries, the Philippines
income tax and the U.S. tax.
International Juridical Double
Taxation applies only to countries
where the tax liabilities of its nationals
are imposed on income derived from
sources coming from within and
without.
Q: Is there an instance where
international double taxation does not
apply?
A: Yes. If it involves nationals of
countries wherein the tax liability is
imposed only from income derive from
sources within and not including those
derived from sources without.
(Ex: Switzerland)
8
 Taxation law review notes
- Atty. Francis J. Sababan -
→ The controversy in the case at bar
involves the income tax paid in the
Philippines.
After paying 25%, the US firm
discovered that they are entitled to
10% under the most favored nation
clause. The question is: was the tax
paid under similar circumstances with
that of the RP-West Germany Treaty?
The CTA and Court of Appeals ruled
that it was paid under similar
circumstances. The phrase referred to
the royalties in payment of income
tax. The Supreme Court ruled that the
lower courts’ interpretation of the
phrase was erroneous. Rather, the
phrase applies to the application of
matching credit.
Q: What is matching tax credit?
A: RP-Germany Treaty provides for
that 20% of the tax paid in the
Philippines shall be credited to their
tax due to be paid in Germany.
The 10% does not apply because
there is no matching credit. Thus,
there is no similarity in the
circumstances.
EQUITABLE RECOUPMENT AND
DOCTRINE OF SET-OFF
Equitable Recoupment
This doctrine provides that a claim for
refund barred by prescription may be
allowed to offset unsettled tax liabilities.
This is not allowed in this jurisdiction,
because of common law origin. If allowed,
both the collecting agency and the
taxpayer might be tempted to delay and
neglect the pursuit of their respective
claims within the period prescribed by law.
Q: What is the doctrine of Equitable
Recoupment?
A: When the claim for refund is barred by
prescription, the same is allowed to be
credited to unsettled tax liabilities.
(Sir gives an illustration found in page 3 of
magic notes)
Q: Is the rule absolute? Reason
A: Yes, the rule is absolute. The rationale
behind this is to prevent the taxpayer and
government official from being negligent
in the payment and collection of taxes.
(furthermore, you have to be honest for
this to work, hence, the government is
preventing corruption)
There is no exception at all otherwise,
the BIR would be flooded with so many
claims.
Set-of
Presupposes mutual obligation
between the parties. In taxation, the
concept of set-off arises where a taxpayer
is liable to pay tax but the government,
for one reason or another, is indebted to
the said taxpayer.
Q: What do you mean by SET-OFF?
A: This presupposes mutual obligations
between the parties, and that they are
mutual creditors and debtors of each
other. In taxation, the concept of taxation
arises where a taxpayer is liable to pay
taxes but the government, for one reason
or another, is INDEBTED to said taxpayer.
REPUBLIC v. MAMBULAO LUMBER CO.
Q: What is the liability of Mambulao?
A: They are liable to pay forest
charges (under the old tax code).
NOTE: under our present tax code, the
NIRC, we do not have forest charges as
the same was abolished by President
Aquino.
Q: What did the lumber company do?
A: The lumber company claimed that
since the government did not use the
reforestation charges it paid for
reforestation of the denuded land
covered by its license, the amount
paid should be reimbursed to them or
at least compensated or applied to
their liability to pay forest charges.
H: The Court ruled that the
reforestation charges paid is in the
nature of taxes.
The principle of compensation does
not apply in this case because the
parties are not mutually creditors and
debtors of each other. A claim for
taxes is not a debt, demand, contract
or judgment as is allowed to be set-off
under the statute of set-off which is
construed uniformly, in the light of
public policy, to exclude the remedy in
connection or any indebtedness of the
State or any municipality to one who is
liable for taxes. Neither are they a
proper subject for recoupment since
they do not arise out of contract or the
same transaction sued on.
General Rule: no set-off is admissible
against demands for taxes levied in
general or local governmental purposes.
9
 Taxation law review notes
- Atty. Francis J. Sababan -
Reason: Taxes are not in the nature of
contracts or debts between the taxpayer
and the government, but arises out of a
duty to, and are positive acts of the
government to the making and enforcing
of which, the consent of the individual is
not required.
Taxes cannot be the subject matter of
compensation.
DOMINGO v. GARLITOS
Q: What is being collected in this case?
A: Estate and inheritance taxes.
NOTE: we do not have inheritance taxes
anymore because the same was
abolished by Lolo Macoy.
Q: Who is the administratrix?
A: The surviving spouse.
Q: What did the surviving spouse do?
A: The surviving spouse suggested
that the compensation to which the
decedent was entitled to as an
employee of the Bureau of Lands be
set-off from the estate and inheritance
taxes imposed upon the estate of the
deceased.
H: Both the claim of the government
for estate and inheritance taxes and
the claim of the (intestate) for the
services rendered have already
become overdue hence demandable
as well as fully liquidated,
compensation therefore takes place by
operation of law, in accordance with
Art. 1279 and 1290 of the Civil Code
and both debts are extinguished to the
concurrent amount.
Compelling Reason: Congress has
enacted RA 2700, allocating a certain
sum of money to the estate of the
deceased.
FRANCIA v. IAC
Q: This happened in what city?
A: Pasay City
Q: What is the tax being collected? Who
is collecting the same?
A: Payment for real estate taxes for
the property of Francia. It appears that
petitioner was delinquent in the
payment of his real estate tax liability.
The same is being collected by the
Treasurer of Pasay.
Q: What is the suggestion of petitioner?
A: Suggested that the just
compensation for the payment of his
expropriated property be set-off from
his unpaid real estate taxes. (the other
part of his property was sold at a
public auction)
H: The factual milieu of the case does
not justify legal compensation.
The Court has consistently ruled
that there can be no off-setting of
taxes against the claims that the
taxpayer may have against the
government. A taxpayer cannot refuse
to pay a tax on the ground that the
government owes him an amount.
Internal Revenue taxes cannot be
the subject of compensation because
the government and the taxpayer are
not mutually creditors and debtors of
each other, and a claim for taxes is not
a debt, demand, contract or judgment
as is allowed to be compensated or
set-off.
Furthermore, the payment of just
compensation was already deposited
with PNB Pasay, and the taxes were
collected by a local government, the
property was expropriated by the
national government. (diff parties, not
mutual creditors and debtors of each
other.)
CALTEX PHIL v. COA
Q: What is being collected?
A: Caltex’s contribution to the Oil
Price Stabilization Fund (OPSF).
COA sent a letter to Caltex asking
the latter to settle its unremitted
collection stating that until the same is
paid, its claim for reimbursement from
the OPSF will be held in abeyance.
Q: Why is Caltex entitled to
reimbursement?
A: Because of the fluctuation of the oil
prices in the Middle East and Europe.
Caltex wanted to off-set its unremitted
collection from its reimbursements.
H: The Court did not allow the set-off,
and reiterated its ruling in the case of
Mambulao and Francia. Furthermore,
RA 6952 expressly prohibits set-off
from the collection of contributions to
the OPSF. The Court likewise stated
that Caltex merely acted as agent of
the government in collecting
contributions for the OPSF because
such is being shouldered by the
consumers when they purchase
petroleum products of oil companies,
such as Caltex.
Taxation is no longer envisioned as
a measure merely to raise revenues to
support the existence of the
government. Taxes may be levied for
regulatory purposes such as to provide
means for the rehabilitation and
stabilization of a threatened industry
which is vested with public interest, a
10
 Taxation law review notes
- Atty. Francis J. Sababan -
concern which is within the police
power of the State to address.
PHILEX MINING CORP v. COMM
The petitioner is liable for the payment
of excise taxes, which it wanted to be set-
off from its pending claim for a VAT Input
credit/refund.
The Court did not allow set-off. Taxes
cannot be the subject of compensation for
the simple reason that the government
and taxpayer are not mutual creditors and
debtors of each other. Taxes are not debts.
Furthermore, in the instant case, the
claim for VAT refund is still pending. The
collection of a tax cannot await the results
of a lawsuit against the government.
DOUBLE TAXATION
Double taxation is allowed because
there is no prohibition in the Constitution
or statute.
Obnoxious double taxation is the
synonym of double taxation.
Elements of Double Taxation:
1) Levied by the same taxing
authority
2) For the same subject matter
3) For the same taxing period and
4) For the same purpose
There is no double taxation if the tax is
levied by the LGU and another by the
national government. The two (2) are
different taxing authorities.
LGUs are expressly prohibited by the
provisions of RA 7160 or the LGC of 1991
from levying tax upon: (1) the National
Government; (2) its agencies and
instrumentalities; (3) LGUs (sec.113(o)).
The National Government, pursuant to
the provisions of RA 8424 of the Tax
Reform Act of 1997, can levy tax upon
GOCCs, agencies and instrumentalities
(Section 27 c)), although income received
by the Government form:
1) any public utility or
2) the exercise of any essential
governmental function
is exempt from tax.
KINDS OF INCOME TAXPAYERS
Q: Generally, how many kinds of income
taxpayers are there?
A: Under section 22A of NIRC, there are
three (3), namely:
1. individual;
2. corporate;
3. estate and trust.
I. INDIVIDUAL TAXPAYER
Q: How many kinds of individual
taxpayers are there?
A: There are seven (7). Namely:
1. Resident Citizen (§23A and 24A);
2. Nonresident Citizen (§23B and
24A);
3. OCW and Seaman (§23C and 24A);
4. Resident Alien (§22F, 23D and
24A);
5. Nonresident Alien Engaged in Trade
or Business (§22G, 23D and 25A)
6. Nonresident Alien NOT Engaged in
Trade or Business (§22G, 23D and
25B)
7. Aliens Engaged in Multinational
Companies, Offshore Banking
Units, Petroleum Service
Contractors (§25C,D and E)
Resident Citizen (RC)
Q: How many types of RC?
A: There are two (2), namely:
1. RC residing in the Philippines; and
2. Filipino living abroad with no
intention to reside permanently
therein.
Q: If you are abroad, and you have the
intention to permanently reside therein,
can you still be considered a RC?
A: Yes. If such intention to permanently
reside therein was not manifested to the
Commissioner and the fact of your
physical presence therein, you may still be
considered a RC.
OCW and Seamen
OCW was used and not OFW in the
CTRP, because the classification shall
cover only those Filipino citizens working
abroad with a contract. TNTs are not
covered.
A Filipino seaman is deemed to be an
OCW for purposes of taxation if he
receives compensation for services
rendered abroad as a member of the
complement of a vessel engaged
exclusively in international trade.
Consequently, if he is not a member of
the complement or even if he is but the
vessel where he works is not exclusively
engaged in international trade, said
seaman is not deemed to be an OCW. He
is either a RC or a NRC depending on
11
 Taxation law review notes
- Atty. Francis J. Sababan -
where he stays most of the time during
the taxable year.
If he stays in the Philippines most of
the time during the taxable year, he is
considered a RC, otherwise, a NCR.
If you are a seaman in the US Navy,
you are not the one being referred to.
The importance of ascertaining
whether or not a seaman is a RC or a NRC,
is that if he is a RCm he is taxable on ALL
income derived from all sources within
and without. If he is a NRC, he is taxable
only on income derived form sources
within the Philippines.
Q: What is the significance of using OCW?
A: It only covers Filipinos who works
abroad with a contract. It does not cover
TNTs.
Q: What is the status of a TNT?
A: Since they are not covered by this
classification, they are considered RC
because they work abroad without a
contract and they have not manifested
their intention to permanently reside
abroad. (distinguish from an immigrant)
Requirements for a seaman to be
considered an OCW:
1. must be a member of the compliment
of a vessel;
2. the vessel must be exclusively
engaged in international trade or
commerce.
Resident Alien (RA)
An individual whose residence is within
the Philippines and who is not a citizen
thereof.
Intention to reside permanently in the
Philippines is not a requirement on the
part of the alien.
The requirement under RR#2 is that
he is actually present in the Philippines,
neither a sojourner, a traveler, not a
tourist.
Whether he’s a transient or not is
determined by his intent as to the nature
and length of his stay.
Q: Is the intention to permanently reside
in the Philippines necessary?
A: No, so long as he is not a sojourner,
tourist or a traveler.
Non-Resident Alien Engaged in
Trade or Business (NRAETB)
A foreigner not residing in the
Philippines but who is engaged in trade or
business here.
RR 2-98 has expanded the coverage of
the term, “engaged in trade or business”
to include the exercise of a profession.
Furthermore, by the express provision of
the law, a NRA who is neither a
businessman nor a professional but who
come to and stays in the Philippines for an
aggregate period of more than 180 days
during any calendar year is deemed to a
NRAETB in the Philippines.
Q: How many types?
A: There are three (3) types, namely:
1. NRA engaged in trade or business
(25a1);
2. NRA who practices a profession
(Revenue Regulation 2-98);
3. foreigner who comes and stays in
the Philippines for an aggregate
period of MORE THAN 180 days
during any calendar year.
Q: What is the status of a Chinese who
stays here for 200 days in 2001?
A: NRAETB
Q: Suppose he stayed here for 100 days
in 2000 and another 100 days in 2001?
A: He is not a NRAETB. To be considered
as such, he must stay for an aggregate
period of more than 180 days during a
calendar year.
Q: What is the income tax applicable to
said taxpayer?
A: Net Income Tax (NIT) on all its income
derived form sources within the
Philippines.
Non-Resident Alien Not Engaged
in Trade or Business
Q: How many kinds?
A: Only one.
The reason why the NRANETB are
included in any income tax law is because
they may be deriving income form sources
within the Philippines.
They are subject to tax based on their
GROSS INCOME received form all sources
within the Philippines.
Aliens Employed by Regional or
Area Headquarters & Regional
12
 Taxation law review notes
- Atty. Francis J. Sababan -
Operating Headquarters of
Multinational Companies/ Aliens
Employed by Ofshore Banking
Units (Aliens Employed by MOP)
► Status: either a RA or NRA depending
on their stay here in the Philippines.
► Their status may either be RA or NRA
because Section 25 C and D does not
distinguish.
► Liable to pay 15% from Gross Income
received from their employer
► Income earned from all OTHER sources
shall be subject to the pertinent income
tax, as the case may be.
Aliens Employed in Multinational
and Ofshore Banking Units
Q: How are they classified?
A: If they derived income from other
sources aside from their employer, you
may classify them either as RA, NRAETB,
or NRANETB.
Aliens Employed in Petroleum
Service Contractors and
Subcontractors
► Status: ALWAYS NRA. If they derive
income from other sources, such income
shall be subject to the pertinent income
tax, as the case may be.
► Income derived or coming from their
employer shall be subject to a tax of 15%
of the gross.
II. CORPORATE TAXPAYER
1. Domestic Corporation (DC) – 1) Exercise of a profession – not a
created or organized under
Philippine laws.
2. Resident Foreign Corporation (RFC)
– corporation created under foreign
law, and engaged in trade or
business.
3. Nonresident Foreign Corporation
(NRFC) – created under foreign law,
and NOT engaged in trade or
business.
Q: What are deemed corporations under
the NIRC?
A: The term corporation shall include
partnerships, no matter how created or
organized, joint stock companies, joint
accounts, associations, or insurance
companies, but DOES NOT includes
general professional partnerships and a
joint venture or consortium formed of the
purpose of undertaking construction
projects or operations pursuant to or
engaging in petroleum, coal, geothermal
or consortium agreement under a service
contract with the Government.
1. Partnerships and others no matter
how created
2. Joint Stock Companies
3. Joint Accounts
4. Associations
5. Insurance Companies
CIR v. COURT OF APPEALS
The phrase no “matter how created or
organized” was interpreted.
Even if the partnership was pursuant
to law or not, whether nonstick, nonprofit,
it is still deemed a corporation.
Reason: because of the possibility of
earning profits form sources within the
Philippines.
Q: Are partnerships always considered
corporations? Is there no exception?
A: General Rule: a partnership is a
corporation.
Exception: General Professional
Partnerships (GPP)
Q: What is a GPP?
A: It is a partnership formed by persons
for the sole purpose of exercising their
profession, no part of the income of which
in derived from any trade or business.
(what if a partner has other businesses
not related to the GPP? > read section 26
quoted hereunder)
Two (2) Kinds of GPP formed for:
corporation; exempt from
Corporate Income Tax (CIT)
2) Exercise of a profession and
engaged in trade or business – a
corporation; subject to CIT
TAN v. DEL ROSARIO
general rule: a partnership is a
corporation
exception: GPP
exception to the exception: if the GPP
derives income from other sources, it is
considered a corporation, thus liable to
pay corporate income tax.
Rule:
1. if the income is derived from other
sources and such income is subject
13
 Taxation law review notes
- Atty. Francis J. Sababan -
to NET INCOME TAX, it is not
exempt and it is considered a
corporation.
2. if the income is derived from other
sources and such income is subject
to FINAL INCOME TAX, it is still
EXEMPT and it is not deemed a
corporation. ( separate return for
this. It will not reflect in the GPP’s
ITR)
» This is pursuant to the fact that FIT will
not reflect in the ITR of the GPP since the
withholding agent is liable for the
payment of the FIT.
Q: What is the importance of knowing
whether the corporation is exempt or not?
A: To determine their tax liability. This is
important to determine the tax liability of
the individual partners of the GPP.
► Section 26 (1st paragraph) provides: “a
GPP as such shall not be subject to the
Net Income Tax…” however, “…persons
engaging in business as partners in a GPP
shall be liable for income tax only in their
separate and individual capacities.”
In short, each partner will be paying
NIT, and the distributive shares they will
be receiving from the net income of the
GPP will be included in the gross income
of the partner.
Q: If the GPP is deemed a corporation, will
the partners have to pay for the income
tax?
A: No. as far as the share of the GPP is
concerned, it is considered a taxable
dividend which is subject to FIT.
Q: Is a joint venture a corporation?
A: Generally, yes, it is a corporation.
Q: Corporation X and Corporation Y joined
together. How many corporations do we
have?
A: Three, namely Corporation X, Y, and
X+Y. the joint venture has a separate and
distinct personality from the two
corporations.
Q: When is a joint venture not considered
a corporation?
A: It is not deemed a corporation when it
is formed for the purpose of undertaking a
(“construction?) project or engaging in
petroleum, gas, and other energy
operations pursuant to “?” or consortium
agreement under a service contract with
the government.
Domestic Corporation
Is one created or organized in the
Philippines or under its laws.
Taxable on all income derived from
sources within or without the Philippines.
Resident Foreign Corporation
Foreign corporations engaged in trade
or business in the Philippines.
Taxable for income derived within the
Philippines.
Non-Resident Foreign Corporation
Foreign corporations not engaged in
trade or business in the Philippines.
Taxable for income derived within the
Philippines.
Both DC and RFC are liable for the
payment of the following:
1) NIT – Net Income Tax
2) FIT – Final Income Tax
3) 10% income tax on corporations
with properly accumulated
earnings.
4) MCIT (Minimum Corporate Income
Tax) of 2% of the Gross Income
5) Optional Corporate Income Tax of
15% of the Gross Income
A NRFC is liable for payment of the ff:
1) GIT- Gross Income Tax
2) FIT – Final Income Tax
III. TRUST AND ESTATE
Q: How many for each?
A: Seven (7) kinds for each because the
trust or estate will be determined by the
status of the trustor, grantor, or creator,
or of the decedent.
The status of the estate is determined
by the status of the decedent at the time
of his death; so an estate, as an income
taxpayer can be a citizen or an alien.
When a person who owns property
dies, the following taxes are payable
under the provision of income tax law:
1) Income Tax for Individuals – to
cover the period beginning
January to the time of death.
2) Estate Income Tax – if the
property is transferred to the
heirs.
14
 Taxation law review notes
- Atty. Francis J. Sababan -
3) If no partition is made,
Individual or Corporate Income
Tax, depending on whether
there is or there is no
settlement of the estate. If
there is, depending on whether
the settlement is judicial or
extrajudicial.
Judicial Settlement
1) During the pendency of the
settlement, the estate through the
executor, administrator, or heirs is
liable for the payment of ESTATE
INCOME TAX (Sex, 60 (3)).
2) If upon the termination of the
judicial settlement, when the
decision of the court shall have
become final and executory, the
heirs still do not divide the
property, the following possibilities
may arise:
a) If the heirs contribute to the
estate money, property or
industry with the intention to
divide the profits between and
among themselves, an
UNREGISTERED PARTNERSHIP
is created and the estate
becomes liable for payment of
CIT (Evangelista vs. Collector
(102 Phil 140))
b) If the heirs without contributing
money, property or industry to
improve the estate, simply
divide the fruits thereof
between and among
themselves, a CO-OWNERSHIP
is created and Individual
Income Tax (IIC) is imposed on
the income derived by each of
the heirs, payable in their
separate and individual
capacity (Pascual vs. COMM
(165 scra 560) and Obillos vs.
COMM (139 SCRA 436))
Extrajudicial Settlement and if NO
Settlement
Some possibilities may arise. The
income tax liability depends on whether or
not the unregistered partnership or co-
ownership is created.
Trust
Trusts can be created by will, by
contract or by agreement. The status of a
trust depends upon the status of the
grantor or trustor or creator of the trust.
Hence, a trust can also be a citizen or an
alien.
Q: Where the trust earns income and
such income is not passive, who among
the parties mentioned is liable for
payment of income tax thereon?
A: The TRUST itself, through the trustee
or fiduciary but only if the trust is
irrevocable.
If it is revocable, or for the benefit of
the grantor, the liability for the payment
of income tax devolves upon the trustor
himself in his capacity as individual
taxpayer.
KINDS OF INCOME TAX
Q: How many kinds of income tax?
A: There are Six (6), namely:
1. Net Income Tax (NIT);
2. Gross Income Tax (GIT);
3. Final Income Tax (FIT);
4. Minimum Corporate Income Tax of
2% of the Gross Income (MCIT)
5. Income Tax on Improperly
Accumulated Earnings subject to
10% of the Taxable Income;
6. Optional Corporate Income Tax of
15% on the Gross Income
I. NET INCOME TAX
Q: what is the formula?
A: Gross Income – Deductions and
Personal Exemptions = Taxable Income
Taxable Income x Tax Rate = Net
Income
Taxable Net Income – Tax Credit =
Taxable Net Income Due
Net Income means Gross Income less
deductions and
Formula:
GI
- deductions
Net Income
x Tax Rate
Income Tax Due
Q: What is the rate?
A: Individual: 32%
Corporation: 30%
NOTE: the formula allows for deduction,
personal exemptions and tax credit.
Q: What are the other terms for NIT?
A: NIRC:
15
 Taxation law review notes
- Atty. Francis J. Sababan -
a. taxable income
b. gross income (wlang kasunod)
→ only income tax from improperly
accumulated earnings does not use this
term.
1. CFA: “to be included in the gross
income”
2. Revenue Regulations and Statutes:
a. ordinary way of paying income
tax;
b. normal way of paying income
tax .
Characteristics:
Q: Who are not liable to pay NIT?
A: 1. NRANETB (liable for GIT);
2. NRFC (GIT also);
3. With certain modifications, AEMOP,
if they derive income from other
sources;
Q: Is the taxable net income subject to
withholding tax?
A: It is subject to withholding tax if the
law says so.
Q: What if the law is silent?
A: If the law is silent, it is not subject to
withholding tax.
Characteristics:
► NRANETB and NRFC, though not
engaged in trade or business, are liable to
pay by way of the gross for any income
derived in the Philippines. While not
engaged in trade or business, there is a
possibility that they may earn income in
the Philippines.
Q: Is this subject to withholding tax?
A: Yes, it is subject to withholding tax
because the persons liable are foreigners.
This rule is ABSOLUTE
NOTE: there are two (2) ways of paying
taxes depending on which side of the
bench you are.
III. FINAL INCOME TAX (FIT)
Q: What is the formula?
A: (Each Income) x (Particular Rate)
Unlike in the gross income tax where
you add all the income from all the
sources and multiply the sum thereof by
the rate of 25% or 35%, as the case may
be, in final income tax, you cannot join all
the income in one group because each
income has a particular rate.

Q: What is another term for withholding Q: What is the rate?

tax? A: 35% as the case may be.
A: It is also known as the creditable
withholding tax system under the income NOTE: like GIT, the formula does not allow
tax law. deductions, personal exemptions, and tax
credit.
Q: Do we have to determine if there is an
actual gain or loss? Characteristics:
A: Yes because the formula for
deductions, etc. Q: Who are liable to pay FIT?
A: All taxpayers are liable to pay FIT
Q: If you fail to pay, will you be held provided the requisites for its application
liable? are present.
A: Yes, you will be held liable.
Q: Do you still have to pay NIT?
II. GROSS INCOME TAX (GIT) A: No. if you are liable for FIT, no need to
pay NIT or else there will be double
Q: What is the formula? taxation.
A: Gross Income x Rate
NOTE: as time passed by, the number of
Q: How many taxpayers pay by way of FIT increased.
the gross?
A: There are two (2) ► before 1979 – proceeds from the sale
individual - NRANETB of real property not exempt, it is subject
corporation - NRFC to NIT or GIT, as the case may be.
after 1979 – capital gains tax.
NOTE: the formula does not allow any Proceeds from the sale of real property is
deduction, personal exemptions and tax exempt.
credit.
Q: If you fail to pay, will you be liable?

16
 Taxation law review notes
- Atty. Francis J. Sababan -
A: No. the withholding agent is liable to
pay FIT.
► Case of Juday, Richard and Regine
► For one to be liable for the payment of
NIT, the income must be derived on the
basis of an employer – employee
relationship.
Employer – Employee Relationship
(3 Cs):
1. contract;
2. control;
3. compensation;
► However, in the case of celebrities,
there is no employer – employee
relationship, they are merely receiving
royalties. Royalties are subject to final
withholding tax, thus the agent is liable to
pay. (so, distinguish nature of income,
whether royalty or compensation)
RULE:
1. for NIT, whether or not subject to
Creditable Withholding Tax (CWT),
the taxpayer is always liable if he
fails to pay.
2. for GIT and FIT, absolute liability to
pay is upon the withholding agent.
Reason: to discourage corporations from
claiming too many deductions.
V. OPTIONAL CORPORATE INCOME
TAX
Q: Under what section is this found?
A: Section 27A 4th paragraph and Section
28 A(1) 4th paragraph.
Q: Is this applicable now?
A: No. this is not yet implemented.
Q: To what kind of taxpayer does this
apply?
A: To DC and RFC.
Q: What kind of taxes are applicable or
imposed upon the 1st five individual
taxpayers?
A: Only two (2) kinds are applicable out
of the six (6) kinds of income taxes.
1. NIT;
2. FIT;
Q: What kind of income tax will apply to
AEMOP?
A: Generally, only one kind, 15% FIT with
respect to income derived from their
employer.

Q: Why is it that the rate of withholding is Income from other sources:

always lower, and why is it that the rate of 1. Determine the status of the AEMOP;
GIT and FIT is always equal? a. NIT
A: b. FIT
1. NIT allows deductions; 2. NRANETB
2. GIT and FIT do not allow a. GIT
deductions. b. FIT

Q: Do you have to determine whether Q: What kind of income tax applies to

there is an actual loss or gain? DC?
A: No need to determine because the A: Only four (4) kinds will apply out of the
formula does not allow deductions. Gain is six (6)
presumed. No liability for final withholding 1. NIT
tax except for the sale of shares of stock. 2. FIT
(?) 3. MCIT
4. Improperly Accumulated Earnings
IV. MINIMUM CORPORATE INCOME
TAX (MCIT) Q: May all of these be applied
simultaneously?
Q: What is the formula? A: No. only the NIT, FIT and Improperly
A: Gross Income x 2% Accumulated Earnings be applied
simultaneously. NIT and MCIT cannot be
Q: Who pays this tax? applied simultaneously. Only one will
A: DC and RFC only. apply, whichever is higher between the
two.
Q: May it be applied simultaneous with
NIT? Q: What kind of tax will apply to NRFC?
A: No. there must be a computation of
the NIT first then apply which ever is A: Out of the six (6) kinds, only two (2)
higher. The MCIT is paid in lieu of the NIT. will apply:

17
 Taxation law review notes
- Atty. Francis J. Sababan -
1. GIT
2. FIT
Q: What is the significance of knowing
the classification of these taxpayers?
A:
1. to determine the kind of income
tax applicable to them;
2. to determine their tax liability.
Q: Under Section 23, who are liable for
income within and income without?
A: Only
1. RC
2. DC
► The rest of the taxpayers will be liable
for income coming from sources within.
► Income from sources without, no
liability, therefore exempt.
NOTE: The income taxpayer is not a RC or
a DC. Determine if the income came from
sources within or without to know the
taxpayer’s liability.
► If the facts are specific, do not qualify
your answer. Answers must be responsive
to the question.
Q: Is section 42 relevant to all the
taxpayers?
A: NO. SECTION 42 IS NOT MATERIAL TO
ALL taxpayers, particularly the RC and DC
because these two are liable for both
income within and without.
► Section 42 is applicable only to
taxpayers who are liable for income
within, the rest of the taxpayers are
otherwise exempt.
Q: Section 42(A)(1) provides for how
many kinds of interests?
A: It establishes two (2) kinds of
interests, namely:
1. interest derived from sources
within the Philippines.
2. interest on bonds, notes or other
interest bearing obligations of
residents, corporate or otherwise.
Q: What is the determining factor in order
to know if the income is from within?
A:
1. location if the bank is from within
the Philippines (pursuant to a
Revenue Reg.)
2. residence of the obligor (whether
an individual or a corp.) – contract
of loan with respect to the interest
earned thereon.
► For example the borrower is a NRAETB,
he borrowed money from a RA. The
interest earned by the loan will be
considered as an income without. RA is
not liable to pay tax since RA is liable only
for income within, therefore exempt from
paying the tax.
NATIONAL DEVELOPMENT CO. v. CIR
F: The National Development
Company (NDC) entered into a
contract with several Japanese
shipbuilding companies for the
construction of 12 ocean-going
vessels. The contract was made and
executed in Tokyo.
The payments were initially in cash
and irrevocable letters of credit.
Subsequently, four promissory notes
were signed by NDC guaranteed by
the Government.
Later on, since no tax was withheld
from the interest on the amount due,
the BIR was collecting the amount
from NDC.
The NDC contended that the
income was not derived from sources
within the Philippines, and thus they
are not liable to withhold anything.
NDC said that since the contract was
entered into and was executed in
Japan, it is an income without.
H: The government’s right to levy and
collect income tax on interest received
by a foreign corporation not engaged
in trade or business within the
Philippines is not planted upon the
condition that the activity or labor and
the sale from which the income flowed
had its situs in the Philippines. Nothing
in the law (Section 42(1)) speaks of
the act or activity of nonresident
corporations in the Philippines, or
place where the contract is signed.
The residence of the obligor who pays
the interest rather than the physical
location of the securities, bonds or
notes or the place of payment is the
determining factor of the source of the
income. Accordingly, if the obligor is a
resident of the Philippines, the interest
paid by him can have no other source
than within the Philippines.
Q: Suppose a NRFC, an Indonesian firm,
becomes a stockholder of two
corporations, a DC and a RFC, and both
corporations declared dividends, what is
18
 Taxation law review notes
- Atty. Francis J. Sababan -
the liability of the Indonesian firm if the
same received the dividends?
A:
1. Dividends received from DC: the
Indonesian firm is liable to pay
taxes. NRFC, under the law, is
liable if the income is derived from
sources within. (Sec 42a)
2. Dividends received from RFC: the
Indonesian firm’s liability will
depend on amount of gross income
from sources within the Philippines.
The NRFC will be liable to pay income tax
if the following requisites are present:
1. at least 50% is income from
sources within;
2. the 1st requisite is for the three (3)
preceding taxable years from the
time of declaration of the
dividends.
► In the absence of any or both
requisites, the income will be considered
from sources without, thus exempting the
Indonesian firm from payment of income
tax.
Q: Same scenario, but this time the
shares of stock of the two corporations
were being disposed off. What is the tax
liability of the Indonesian firm?
A:
1. sale of shares of stock of DC: the
Indonesian firm will be liable for
the payment of taxes because the
income is from sources within.
2. sale of shares of stock of RFC: the
liability will depend on where the
shares of stock were sold. (mejo
Malabo sa notes, please be guided
accordingly)
Q: Filipino Executive, assigned to Hong
Kong, receiving two salaries, one from the
Philippines, the other from HK. The
performance of the job was in HK. Is he
liable for both salaries?
A: No, he is not liable for the two
incomes.
His status is an OCW (note facts: working
in HK under contract). The compensation
he received is not subject to tax pursuant
to Section 42(c). Compensation for labor
or personal services performed in the
Philippines is considered an income
within. When it comes to services, it is the
place where the same is rendered which is
controlling. In the case at bar, the services
were rendered abroad, thus it is an
income derived from sources without,
irrespective of the place of payment.
Q: Suppose a DC hired a NRFC to
advertise its products abroad. What is the
liability of the NRFC? Will there be a
withholding tax imposed?
A: The income is derived from sources
without since the services in this case
were performed abroad. As such, the
NRFC is not liable and therefore exempt
from the payment of tax. If the NRFC is
not subject to NIT, then it is not also
subject to withholding tax.
Q: What is the controlling factor?
A: The controlling factor is the place
where the services were performed and
not where the compensation therefore
was received.
RENTALS AND ROYALTIES
►income from sources within
Q: Granted by who?
A: NRFC
Q: Suppose you are the franchise holder,
how much is the withholding?
A: 35% (GIT)
Q: if the franchise is granted by RFC, how
much is the withholding?
A: 10% (NIT) and in some cases 15%
Section 42(4) MEMORIZE FOR RECIT
(CEKSTTM)
a. right of, or the right to use
copyright, patents, etc
b. industrial, commercial,
scientific equipment
c. supply of knowledge
d. supply of services by
nonresident
e. supply of technical
assistance
f. supply of technical advice
g. right to use: motion picture
films, etc.
Q: What is the rule as regards the sale of
real property?
A: Gains, profits, and income from the
sale of real property located within the
Philippines considered income within.
Q: What about the sale of personal
property, what is the rule?
A: Determine first if the property is
produced or merely purchased.
1. it the property is manufactured in
the Philippines and sold abroad, or
19
 Taxation law review notes
- Atty. Francis J. Sababan -
vice-versa, it is an income partly
within and partly without.
2. if the property is purchased,
considered derived entirely from
the sources within the country
where it is sold.
EXCEPTION: shares of stock of domestic
corporation, it is an income within
wherever it is sold.
COMMISSIONER v. IAC
Q: What is the issue here?
A: They cannot determine if the business
expense was incurred in the
Philippines.
Q: if you are the BIR, and the taxpayer is
not sure, will you disallow the
deduction?
A: No. determine it pro rata.
Formula: GI from within
GI from without
Example: 100,000
1,000,000
= 10%
► Hence, 10% is the ratable share in the
deduction. If the deduction being
asked is 100,000 not all of it will be
allowed. Only 10,000 or 10% of
100,000 will be allowed as deduction.
CAPITAL GAINS AND LOSSES
Section 39
Q: What is capital asset?
A: Capital asset is an asset held by a
taxpayer which is not an ordinary asset.
The following are ordinary assets:
1. stock in trade of the taxpayer or
other property of a kind which
would properly be included in the
inventory of the taxpayer if on
hand at the close of the taxable
year;
2. property held by the taxpayer
primarily for sale to customers in
the ordinary course of trade or
business;
3. property used in trade or business
of a character which is subject to
the allowance for depreciation
provided in subsection 1.
4. real property used in trade or
business of the taxpayer.
All other property not mentioned in the
foregoing are considered capital assets.
Q: What is a capital gain? What is a
capital loss?
A: Capital gains are gains incurred or
received from transactions involving
property which are capital assets. Capital
losses are losses incurred from
transactions involving capital assets.
Q: What is ordinary gain? Ordinary loss?
A: Ordinary gains are those received from
transactions involving ordinary assets.
Capital losses are losses incurred in
transactions involving ordinary assets.
Q: What is the relevance of making a
distinction?
A: It is relevant because Section 39B,C,
and D apply to capital assets only.
1. time when property was held (39B)
(holding period applies only to
individuals);
2. limitations on capital losses (39C);
3. Net Capital Carry-Over (39D)
I. CAPITAL ASSETS
Q: What is the holding period?
A: If capital asset is sold or exchanged by
an individual taxpayer, only a certain
percentage of the gain is subject to
income tax.
It is the length of time or the duration
of the period by which the taxpayer held
the asset.
Q: What is the requirement?
A:
1. the taxpayer must be an individual.
Section 39B states “in case of a
taxpayer, other than a
corporation..”
2. property is capital in nature.
Q: What is the term?
A: 100% if the capital asset has been
held for not more than 12 months; (short
term)
50% if the capital asset has been held
for more than 12 months. (long term)
NOTE: the holding period applies to both
gains and losses.
Q: Do you include capital gains in your
ITR?
A: General rule: yes, include in ITR.
EXCEPT:
1. gains in sales of shares of stock not
traded in stock exchange(section
24);
2. capital gains from sale of real
property(section 24).
20
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: When will the holding period not
apply?
A:
1. property is an ordinary asset
2. taxpayer is a corporation
3. sale of real property considered as
ordinary asset
II. LIMITATION ON CAPITAL LOSSES
►synonymous to 34D & loss capital rule
► this applies to individual and corporate
taxpayer
Q: What is the loss limitation rule?
A: Pursuant to Section 39 C, losses from
sales or exchange of capital assets may
be deducted only from capital gains, but
losses from the sale or exchange of
ordinary assets may be deducted from
capital or ordinary gains. (applies to
individual and corporation)
Q: In connection with 34 D, Losses in
Allowable Deduction, what is the rationale
behind this rule?
A: If it is otherwise, it will run counter
with the rule that the loss should always
be connected with the trade or business,
capital losses are losses not connected to
the trade or business, thus it is not
deductible
Q: what is your remedy?
A: 39 D, net capital loss carry-over
Q: What is the rationale in allowing
ordinary loss to be deducted from
either the capital gains or ordinary
gains?
A: It is already included in ITR, the gross
income less deductions hence it
already carries with it the deduction
TAKE NOTE: Normally if the loss is an
ordinary loss there is no carry over.
Except: a. 34D3
b. if the loss is more than GI
III. NET CAPITAL LOSS CARRY-OVER
Q: What are the requirements?
A:
1. taxpayer is an individual;
2. paid in the immediately
succeeding year;
3. applies only to short term capital
gain;
4. capital loss should not exceed net
income in the year that it was
incurred.
Q: How does net capital loss carry-over
differ from net operating loss carry-over
under Section 34 D (3)?
A: Under the net capital loss carry-over
rule, the capital loss can be carried over in
the immediate succeeding year. In net
operating loss carry-over rule, capital loss
can be carried over to the next three (3)
succeeding calendar year following the
year when the loss was incurred.
NOTE: only 15% of the loss will be carried
over, if the loss is greater than the gains.
► In net operating loss carry-over there
is an exception to the 3 year carry-over
period. In case of mines other than oil and
gas wells, the period is up to 5 years.
Q: What is a short sale?
A: Sale of property by which the taxpayer
cannot come into the possession of the
property. EX: shares
CALAZANS v. CIR
F: The taxpayer inherited the
property fro her father and at the tie of
the inheritance it was considered a
capital asset. In order to liquidate the
inheritance, the taxpayer decided to
develop the land to facilitate the sale
of the lots.
I: Was the property converted to
ordinary asset?
H: The conversion from capital asset
to ordinary asset is allowed because
Section 39 is silent.
Q: Are you allowed to convert ordinary
asset to capital asset?
A: General rule: it is not allowed. Read
Revenue Regulation 7-2003
The case at bar still applies despite of
the issuance of said Revenue Regulation.
Q: What is the conversion prohibited in
the Revenue Regulation?
A: Conversion of real estate property.
Q: What is the rationale?
A: Section 24 D – final income tax of 6%
if the real estate is capital asset. If it is an
ordinary asset, it will be subject to income
tax of 32% for individual taxpayer, and
35% if the taxpayer is a corporation.
Q: What are the properties involve in the
RR 7-2003?
A: 1. those property for sale by the
realtors
2. real property use in trade or
business not necessary realtors
21
 Taxation law review notes
- Atty. Francis J. Sababan -
A: Not Subject to Net Income Tax but
Q: That is the conversion allowed by the they are liable for Gross Income tax.
Revenue Regulation? Is there an instance
when an ordinary asset may be converted Q: Do legally married husband and wife
to capital asset? need to file separately or jointly?
A: Yes, provided that the property is an A: It depends if:
asset other the real property, and it has 1. Pure compensation income- separate
been idle for two (2) years. 2. Not Pure compensation income- joint

SECTION 24 Passive Income

TAX ON INDIVIDUALS Interest, Royalties, prizes and Other
winnings
Q: What is the tax mentioned in section
24? Interest
A: NIT
Q: Bank Interest, what is the
Q: What is taxable income? requirement?
A: (memorize section 31) it is the A: The bank must be located in the Phils.
pertinent items of gross income specified because the income must be derived from
in the NIRC, less the deductions and/or sources w/in.
personal and additional exemptions, if
any, authorized for such types of income Q: Do you include this in your ITR?
by the NIRC or other laws. It refers to NIT A: No! because it is subject already to FIT.
because it allows deductions. The bank is the one liable for the payment
of this.
Q: What do you mean by the phrase
“other than B, C, and D”? NOTE: Liability for NIT, GIT, and MCIT will
A: It means that if the elements of depend on the elements present.
passive income are present, the taxpayer
has to pay FIT. Q: Who are liable for bank interest?
A:
Q: Who are the taxpayers mentioned in 1. RC }
section 24? 2. NRC} Sec. 24 B1
A: 3. RA }
1. RC 4. NRAETB
2. NRC 5. NRANETB Sec. 25 (25%)
3. OCW 6. AEMOP
4. RA 7. DC
8. RFC
► Additionally, under Section 25, 9. NRFC
NRAETB
Q: What is the rate of interest?
Q: What is the tax liability of NRAETB? A: FIT of 20%
A: Section 25(1) NRAETB is subject to
income tax in the same manner as Q: Is there a lower rate?
those individuals mentioned in Section 24. A: 7 ½ % if under EFCDS

Q: What about Domestic Corporations? Q: What if the depositor is non resident

A: alien?
1. Sec. 27 A,B, and C A:
2. Sec. 26- GPP is not subject to -W/in – FIT
income tax. - W/out- exempt

Q: What about Resident Foreign Q: What is the rule on pre- termination?

Corporations?
A: Sec 28(l) it is subject to 35% Net
Income Tax
Q: What about Non Resident foreign
Corporation and Non Resident Alien not
engaged in Trade or Business?
A: If it is pre terminated before 5th year a
FIT shall be imposed on the entire income
and shall be deducted and withheld by the
depositary bank from the proceeds of the
long term deposit based on the remaining
maturity thereof
a. 4 yrs to less than 5 yrs – 5%
b. 3 yrs to less than 4 yrs- 12%

22
 Taxation law review notes
- Atty. Francis J. Sababan -
c. Less than 3 yrs- 20% for RC and DC who are liable w/in and
w/out.
Q: Does it apply to all individuals?
A: No! It does not apply to 10 NRFC and Q; Is it possible for RC and DC to pay
NRA and NRAETB because they are liable MCIT?
to GIT. A: Yes if MCIT is higher than NIT.

NOTE: if the depositary is a Non resident it Winnings

is exempt
Q: Do we apply the P10, 000 req.?
► Resident citizen is liable to pay tax for A: No, we do not apply it only applies to
bank interest earned abroad (NIT) prizes. It must not pertain to illegal
gambling.
Q: If the money earns interest in abroad
who is liable? ► Thus, the only requirement is it must
A: RC and DC only by NIT, the rest are be derived from income w/in.
exempt. No FIT abroad because we do not
have withholding agent abroad. Q: Who are liable? (FIT)
A:
Q: MCIT applies to DC and RFC in relation 1. RC
to bank interest? 2. NRC
A: If the bank interest is derived abroad, 3. OCW
RFC is exempt but DC is liable. 4. RA
Impose NIT if it is higher than the 5. NRAETB
MCIT, otherwise apply MCIT if it’s higher 6. AEMOP (RA, NRAETB)
than the NIT
Not liable to FIT?
Prizes 1 NRANETB- GIT
2 AEMOP (NRANETB- GIT)
Requirements: 3 DC- law is silent NIT
1. Prizes must be derived from 4 RFC- law is silent
sources w/in the Phils. 5 NRFC- GIT
2. it must be more than P 10,000
Q: When does NIT apply to winnings?
Q: Who are liable? (FIT) A:
A: 1. If Taxpayer is DC or RC
1. RC 2. Income is derived abroad
2. NRC 3. Taxpayer is RFC and income w/in.
3. OCW
4. RA NOTE: If income abroad, most TP are
5. NRAETB exempt except DC and RC
6. AEMOP (RC, NRAETB)
Q: MCIT applies when?
Not Liable A: It is higher than the NIT
1. NRANETB- liable for GIT at 25 %
2. AEMPOP (NRANETB- GIT) Royalties
3. DC- NIT 27 D is silent
4. RFC NIT law is silent 28A7a Requirement:
5. NRFC subject to GIT ► The income is from w/in

Q: When can we apply NIT in Prizes?
A: 1. When the taxpayer is RC, RFC and
DC
2. For DC and RC it must be derived
from income abroad RFC it must be
derived from income w/in
3. amount is more than P10,000
► Rate? 20%. Lower rate? 10% on books,
literary works and musical compositions.
Q: You are a writer for Snoop Dogg are
you liable for FIT? What if for April Boy?
A: Liable for NIT if Income abroad like a
writer for Snoop. While FIT if for April Boy.

NOTE: If the prize is derived from sources Q: Who are liable (FIT)?
w/in but it is below P 10,000 it is not A:
subject to tax. If derived from sources 1. RC
abroad, most of them are exempt except 2. NRC

23
 Taxation law review notes
- Atty. Francis J. Sababan -
3. OCW Q: Is there an exception when stock
4. RA dividends are not taxable?
5. NRAETB A: YES, if the shares of stocks are
6. AEMOP (RC, NRAETB) cancelled and redeemed meaning it was
reacquired by the corp.
Not Liable?
1. NRANETB ANSCOR CASE
2. AEMOP →the stockholders cannot escape the
3. DC payment of taxes
4. RFC
5. NRFC Requirement:
Gen Rule- the dividends must be
NOTE: Lower rate of 10% applies to all distributed by a DC.
except NRANETB Except- Regular operating- always a
foreign corp.
Q: When do we apply NIT to Royalties?
A: ► What rate: 10% FIT
1. TP is RC or DC
2. Income is from w/out Q: Who are liable?
3. TP is RF and income is w/in A:
1. RC
► If income is from sources abroad all 2. NRC
are exempt except RC and DC 3. OCW
4. RA
Dividends 5. NRAETB
6. AEMOP (RC, NRAETB)
► Confined with cash and/or property
dividends. Not liable?
1. NRANETB
Q: What are dividends? 2. AEMOP
A: Any distribution made by Corporation 3. DC
to its stockholders outside of its earnings 4. RFC
or profits and payable to its stockholders 5. NRFC
whether in money or in property (Sec. 73)
► Shares of association and partnership
COMM. vs. MANNING is taxable
Q: Where did it come from?
A: shares come from another shareholder Q: Determine the tax liability of the
Q: What are the dividends included? following?
A: Sec. 24 refers to cash or property A:
dividend 1. DC a Stockholder of DC= Exempt
H: For stock Dividends to be exempt it 2. RFC stockholder of DC= Exempt
must come from the profit of the also
corporation. 3. DC stockholder of RF= Liable for
NIT.
Stock Dividends → it is the transfer of the
surplus profit from the authorized capital Capital Gains From Sale of Shares of
stocks. Stock Not Traded (§24C)

Q: Assuming that there are 5 1. Subj to FIT

Incorporators, the Corporation has a P5 M 2. Determine whether there is a loss
Authorized Capital stock. It distributed 1 M or a gain because the tax is impose
stock dividends, is it taxable? upon the net capital gains realized
A: NO, the dividends did not go to the from the sale, barter, or exchange
Stock holder but to the Auth Capital Stock. or other disposition of the shares of
Only cash and Prop Stock go to the Stock stock in a domestic corp.
holder. 3. It is uniformly imposed on all
taxpayer
► Sec 24 B does not mention stock 4. not subj to w/holding tax.
dividends because it is not subject to FIT
but it is subject to NIT under Section 73. Requirements:
1. Shares of stock of a DC

24
 Taxation law review notes
- Atty. Francis J. Sababan -
2. It must be capital asset
3. must not be traded in the stock
market
► 25 R last part: Capital Gains realized
by NRANETB in the Phils. from the sale of
shares of stock in any DC and real prop
shall be subj. to the income tax prescribed
under Sub sec (c) and (d) of Sec. 24.
► SEC. 24 B 1&2: If the elements are
present NRANETB and NRFC are liable to
pay GIT.
Except: under 24 C for NRANETB. What do
you mean by the phrase “ the provisions
of 39 notwithstanding”?
► It refers to the holding period. When it
comes to capital gains from sale of shares
of stock not traded and capital gains from
the sale of real prop. The holding period
does not apply because the basis will be
those provided in 24 C & D and not under
39B (GSP or FMV)
ELEMENT #1 The share is a share in
DC
Q: What if the share is from foreign corp?
A: Determine the income considered. If
income w/in read Sec. 42 (E)
► If the shares sold are that of a foreign
corp it is subj to the ff rules:
a. sold in the Phils= its income w/in
b. sold in abroad= w/out
c. Shares of stock in a Dc is always
considered an income w/in
regardless where it was sold.
Q: Shares of Foreign Corp sold in Phils.
Who’s liable? What tax?
A: Not subj to FIT because one of the
elements is not present . Shares not being
that of a DC.
Hence: a) RC, NRC, OCW, NRAETB,
AEMOP (RA, NRAETB) will pay NIT. DC and
RFC
b) NRANETB and NRFC will pay GIT
Q: Shares of Foreign Corporation sold
abroad?
A: It will be considered an income w/out.
Thus:
most of them will be exempt
except RC and DC liable to pay NIT
ELEMENT # 2 NOT TRADED OR SOLD
IN THE STOCK MARKET
► if sold in the stock market- it is not
subj to FIT
► if sold in the stock market, it will be
subj to percentage tax, in lieu of NIT.
ELEMENT # 3 It must be a capital
asset.
Q: When is it considered an ordinary
asset?
A: 1. When the broker or dealer
a. used it in trade or business
b. held for sale in the ordinary
course of trade or business
2. to all other assets, it will be
considered a capital asset
NOTE: if all elements are present it will be
subj to FIT
If the shares are ordinary asset
1. Ordinary shares in DC- income w/in
a. Most of the taxpayer will pay NIT
except NRFC and NRANETB
2. Ordinary assets of foreign corporations
a. Income within if sold in the Phils:
most will pay except NRANETB
and NRFC
b. Income w/out if sold abroad:
most will be exempt except RC
and DC
MCIT
Q: When is a RFC subj to NIT?
A:
1. Sale of shares of stock of a Foreign
corp in the Phil.
2. sale of shares of stock of DC which
are ordinary asset
► DC and RFC are subj to MCIT which
may be imposed if the NIT is lower than
the MCIT2% MCIT will be imposed if MCIT
is higher than NIT.
Capital Gains From Sale of Real
Property (§24D)
► In 39 B the holding period does not
apply because the basis of income tax is
the gross selling price (GSP) or the Fair
market value (FMV) whichever is higher-
6% FIT
Requirements:
1. The real prop must be sold w/in the
Phils and located in the Phils.
2. It must be a capital asset
3. The seller must be an individual,
estate or trust or a DC
25
 Taxation law review notes
- Atty. Francis J. Sababan -
► RFC not liable for FIT but liable to pay
NIT if all the elements are present.
► NRFC liable to pay GIT and not FIT
► NRANETB liable to pay FIT are all
elements are present.
ELEMENT # 3 The real prop must be a
capital asset
Q: When considered a capital asset?
A: Read R.R. 7- 2003
Q: Ordinary asset- shall refer to all real
property specifically excluded from the
definition of capital asset under Sec. 39
A: Other property not mentioned are
capital asset.
Q: What if all the elements are not
present?
A:
most will be liable to pay NIT
Except NRANETB and NRFC liable for
GIT
Q: May a RC be liable to pay NIT even if
all the elements are present?
A: YES, disposition made to the Govt.
Thus, the taxpayer has the option of
paying 32% NIT or 6% FIT
Q: Which is more advantageous?
A: It depends determine first if there’s a
loss or a gain.
If there’s a gain choose to be taxed at
6% FIT. In this case the gain is always
presumed.
If there’s a loss choose to be taxed at
32% because losses may be considered
an allowable deduction .
Other transactions are covered:
1. sale
2. barter
3. exchange
4. other disposition
NOTE: If the prop is under mortgage
contract and the mortgagee is a bank or
financial inst, the FIT does not apply
because the property is not yet
transferred because there’s a period of
redemption
If after a year the mortgagor failed to
redeem the property that is the only time
that the FIT will apply because there’s
now a change of ownership. If redeemed
w/in 1 yr period FIT will not apply because
there’s no change of ownership.
If the mortgagee is an individual the
FIT is imposed whether or not there is a
transfer of ownership.
Exceptions (§24(D2))
Q: What if the prop being sold was a
movie house, can he claim for the
exception?
A: the prop covered by the exemption is
a residential lot
Q: Who can claim the exemption?
A: Only the taxpayer mentioned in Sec.
24
Requirements:
1. The purpose of the seller is to
acquire new residential real prop
2. the privilege must be availed of
w/in 18 mos. From the sale
3. Comm. must be informed w/in 30
days from the date of sale with the
intention to avail of the exemption
4. the adjusted basis or historical cost
of the residence sold shall be
carried over to the new residence.
5. the privilege must be availed only
once every 10 yrs
6. Certification of the brgy. Capt
where the taxpayer resides that
indeed the prop sold is the
principal residence of the tax payer
(RR 13- 99)
Q: What if the property is worth 10 M and
it was sold only for 2M, what will happen
to the unused portion or profit?
A: If the proceeds are not fully utilized,
the portions of the gain is subj to FIT
SEC. 27A RATES OF INCOME TAX
Q: How many income taxes are paid by a
DC?
A:
1. NIT
2. MCIT
3. FIT
4. 10%Improperly Accumulated
Earnings
5. Optional corporate income tax of
15% of the gross
► DC liable for five, but the optional is
not yet applicable so only 4.
Q: How many can be applied
simultaneously? A: ONLY 3
1. NIT, FIT and 10% IAE
2. MCIT, FIT, 10% IAE
26
 Taxation law review notes
- Atty. Francis J. Sababan -
SEC. 27 (B) PROPRIETARY
EDUCATIONAL INST. & HOSP.
Who are the taxpayers?
1. Non- Profit Proprietary Educl. Inst
and
2. Non Profit Proprietary Hospital
Q: What if the school or hospital is non
profit only, is it exempt?
A: No, subject to 10% on their taxable
income except those covered by
subsection (D)
PROVIDED that gross income from
unrelated business, trade or activity must
not exceed 50% of its total gross income
derived by such educational inst or
hospital from all sources
Requirements:
1. It is a private school or hospital
2. it is stock corp
3. it is non profit
4. that gross income from unrelated
business, trade or activity must not
exceed50% of its total gross
income derived by such
educational inst or hospital from all
sources
5. has permit to operate from DECS,
TESDA, or CHED
Q: What do you mean by unrelated trade
business or activity?
A: It means any trade, Business, or
activity which is not substantially related
to the exercise or performance by such
entity of its primary purpose or
performance
Q: May a school or hospital be exempt
from paying tax? What are the req?
A:
1. It must be non- stock and non-
profit
2. the assets property and revenues
must be used actually, directly,
and exclusively fro the primary
purpose
Q: Under what law? Is it the constitution
or the NIRC which provides fro the
exemption?
A: It is under Sec. 30 of NIRC and not
under Sec.4 Art. 14 of the Constitution.
The provision of the NIRC is the specific
law which prevails over the Constitution
which is the general law.
→ exempt from all taxes and custom
duties
Q: What about exemption from real
property tax?
A: Art. 6 Sec. 28 of the Constitution:
charitable institution churches, ….and all
lands buildings, actually directly and
exclusively used for religious, charitable,
and educational purposes shall be exempt
from taxation.
→ Not Sec. 4 of Art. 14 of the
Constitution.
Q: You donated a property to a school will
you be liable for donor’s tax?
A: not liable if it falls under Sec. 101 (3)
of the NIRC
REQ. FOR EXEMPTION TO DONORS TAX:
1. it must be non-stock, non-profit
educational inst.
2. not more than 30% of the prop
donated shall be used by such donee
for admin purposes.
3. paying no dividends
4. governed by trustees who don’t
receive any compensation
5. devoting all its income to the
accomplishment and promotion of the
purposes stated in its Articles of
Incorporation
Q: What about exemption from VAT?
A: Sec. 109 (m) of R-VAT
Q: What about exemption fro Loc Gov
Code?
A: If its non-stock, non-profit educational
inst. It may be exempted from local
taxation.
Q: Is Art 14 Sec. 4 of the Consti obsolete?
A: NO, if the law is silent apply the
Consti.
SEC. 23: GOCC, AGENCIES, INST of
the GOVT.
GEN RULE: Subj to tax.
EXCEPTIONS:
1. GSIS
2. SSS
3. PHIC
4. PCSO
► PAGCOR no longer included.
Q: If the GOCC is not one of those
enumerated does it follow all of its income
is automatically subject to tax?
A: NO. Under Sec 32. B (7) income
derived from any public utility or from the
27
 Taxation law review notes
- Atty. Francis J. Sababan -
exercise of essential government function 1. Bank interest must be received by a
accruing to the Govt of the Phils or to any Domestic Corp
political subd. Are therefore exempt from 2. Royalties derived from sources within
income tax.
Therefore, even if the GOCC is one of Q: When it comes to bank interest, what
those enumerated under Sec. 27 it may is the difference if the taxpayer is an
still be exempt under Sec. 32 b7b if its individual or corporation?
performing governmental function A: If individual, they may be exempt from
the payment of interest in case of long
NOTE: Pagcor vs. Basco case term deposit except NRANETB
If DC, they are not exempt from long
Q: What is the difference between Sec. tem deposit.
27 C and 32 b7b?
A: Q: What about royalties?
1. Sec 27 C exempts those A: If individual, have a lower rate of
enumerated without any 10%on books, other literary and musical
qualification. compositions. DC have no lower
2. Sec. 32b7b qualification must preferential rate.
concur before it may be exempted.
SEC 27 D2: CAPITAL GAINS FROM
Q: Can the government impose tax on SALE OF SHARES NOT TRADED
itself?
A: It depends on who the taxing authority SEC 27 D3: EFCDS
is. If the taxing authority is the National
Govt. as a rule, YES. Q: What is the expanded foreign
Exceptions currency?
1. those entities enumerated under §27 C A: It is a bank authorized by the BSP to
2. those GOCC falling under §32b7b transact business in the Philippine
Currency as well as acceptable foreign
If the taxing authority is the local currency or both.
government units, as a rule NO. LGU’s are
expressly prohibited from levying tax Q: What is the tax to be paid?
against: (Sec 133(o) A: Normally it is NIT because it is subj
1. National Govt. under Sec 27 D3 and 28 A
2. Its agencies and instrumentalities
3. local government units Q: Who is the income earner?
Exception: Sec 154 of LGC says that A: Depositary banks
LGU’s may fix rate for the operation of
public utilities owned and maintained by Q: Exempt from what kind of transaction?
the within their jurisdiction. A: From foreign currency transaction. If it
involves foreign currency transaction it is
PAL CASE July 20 2006 not exempt but subject to 35 % NIT
H: The SC used 133 (o)an exception
to pay tax, real estate tax, imposed by Q: Who are the other parties?
City of PAranaque on NAIA. The SC A:
said that the airport is not an agency 1. Off shore banking units
or GOCC but mere instrumentality of 2. branches of foreign banks
the Govt. 3. local commercial bank
This is Gross ignorance of the law 4. Other depositary banks under
Sec. 133 (o) is for local taxation not EFCDS
real property taxation which is the one 5. Non- residents
involved in the present case.
► if the above enumeration are the
NOTE: Mactan- Cebu Airport case parties, then depositary bank will be
exempt from paying the NIT
SEC. 27 D(1)
Foreign Currency Loan
Q: How many possible incomes were
mentioned? Q: Who is the lender? Borrower?
A: Two (2): bank interest and royalties A: Lender- EFCDS
Borrower- RC
REQ:

28
 Taxation law review notes
- Atty. Francis J. Sababan -
EXEMPT Q: What is the carry over rule?
Offshore banking units A: Sec 27 E2 states the carry over rule.
Other depositary banks under EFCDS
► In order to avail: only in the year
► exemption of NR from EFCDS: where the MCIT is greater than the NIT.

Q: Who is the income earner? Sec 28 A1

A: Non Residents whether individual or
Corporations Q: What Kinds of taxes are paid by the
RFC?
Q: Derived from whom? A: NIT
A: Depositary Bank under EFCDS MCIT

NOTE: Sec. 24 B Nonresident exempt from

bank interest under EFCDS Sec. 28 B2 MCIT on RFC

Q: What is the difference between 24 b1 ► same with Sec. 27

from 27 D3
A: In 24 B1, NR is exempt only from bank Sec. 28 A3- INTL CARRIER
interst derived from EFCDS while 27D3
exempts NR from any income from Kind:
transactions with depositary bank under 1. Air carrier
EFCDS 2. ships

SEC. 27 D(4)- Inter-corporate dividends- ► An intl. carrier doing business in the

exempt Phils. shall pay 2 ½ % on its Gross Phil
Billings (GPB)
27 D5 Capital Gains from sale of Real
Prop. Q: Is 28 A3 the Gen. rule or the
Exception?
Q: What is the tax? A: It is the general rule because it is
A: 6% FIT under 28 A3

Q: What is the difference if the seller is an ► GPB is in the nature of FIT, applies only
individual and a DC? if all the requirements are present.
A: Individual can sell all kinds of real
property ► RFC will be liable for NIT, hence a RFC
DC can only dispose land and/or engaged in common carriage does not
buildings. pay GPB but NIT

SEC 27 (E) MCIT ► Income without: EXEMPT

Q: Applicable to whom? International Carrier:

A: DC and RFC
► GPB refers to the amount of revenue
Q: Can it be applied simultaneously with derived from: carriage of persons, excess
NIT? baggage, cargo and mail originating from
A: NO, imposed in lieu of the NIT, the Phils in a continuous and
whichever is higher. uninterrupted flight, irrespective of the
place of sale or issue and the place of
Q: What is the Rationale? payment of the tickets or passage
A: to prevent corporations from claiming document.
too many deductions
REQ:
Q: When will it be imposed? 1. Originating from the Phils.
A: 2. Continuous and uninterrupted
1. On the 4th year immediately ff the flight;
year in which such corp 3. Irrespective of the place of sale or
commenced its business. issue and the place of the payment
2. When the MCIT is higher than the of tickets or passage document.
NIT

29
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Do you consider landing rights to From transshipment to final
determine liability? (RR 15-2002) destination, its income w/out-
A: EXEMPT
1. If originates from the Phils and has
landing rights- ONLINE- RFC International Shipping
2. No landing rights- OFFLINE- NRFC
► GPB means gross revenue whether
Q: If there are stopovers, is it still from passenger, cargo, mail
uninterrupted?
A: YES, provided that the stopover does
not exceed 48 hrs. REQ:
it must originate from the Phils.
Q: When will the place of sale of tickets up to final destination
matter as to the taxpayers liability? - regardless of the place of sale or
A: The place of tickets is material only if payments of passenger or freight
the two other elements are not present to documents
be able to know if its subj to NIT or
exempt. Sec28 A(4) OFF SHORE BANKING
UNITS
Revalidated, exchanged or indorsed
tickets OBU’s
1. only acceptable foreign currencies
REQ: 2. always a foreign corporation (subj
1. The passenger boards a plane in a to NIT) except #3
port or point in the Phils. 3. Exempt if income is derived by the
2. The tickets must be revalidated, OBU from EFCDS
exchanged, or indorsed to another 4. Parties:
airline. a) local commercial banks
b) Foreign bank branch
Q: What if it’s the same airline but c) Non Residents
different plane? d) OBU in the Phils.
A: GPB does not apply, it must be to
another airline Difference with EFCDS:
EFCDS
Q: What if it did not originate from the 1. Acceptable foreign currency, Phil.
Phils.? Currency or both
A: Determine if its income within or 2. Can be a domestic or foreign
without. corporation
if ticket was purchased in the Phils. it 3. Exempt if income derived by DC or
is income within hence apply NIT RFC from EFCDS
if purchased outside, it is income 4. Parties:
without, hence exempt a) local commercial banks
b) Foreign bank branch
Transshipment c) Non Residents
d) OBU in the Phils
REQ: e) Other banks under EFCDS
flight originates from the Phils
transshipment of passenger takes FOREIGN CURRENCY LOAN
place at any port outside the Phils.
the passenger transferred on another ► 10% FIT
airline If: Lender- OBU
Borrower- Resident Citizen
Q: How do you apply GPB? EXCEPT:
A: Only the aliquot portion of the cost of 1. OBU
the ticket corresponding to the leg flown 2. Local Commercial Banks
from the Phils to the point of
transshipment shall from part of the GPB. Transactions of Non Residents:
1. Income earner: Non- Residents
Q: Is it liable for the whole flight? 2. Lender: OBU’s
A:
From the Phils to the point of NOTE: Non resident exempt from
transshipment, it is income w/in transactions with OBU’s and EFCDS

30
 Taxation law review notes
- Atty. Francis J. Sababan -
A: Petitioner maintains that there was
SEC. 28 A5 TAX ON BRANCH PROFITS, overpayment of taxes, thus the same
REMITTANCES was asking for a refund of tax
► profits based on the total profits erroneously paid.
applied or earmarked fro remittance
remitted by a branch to its head office Q: Is is subj to FIT?
► Subj to 15% tax A: NO, exempt if petitioner is RFC
H: -not correct to pay 15%
Except: those activities which are
registered with PEZA To be liable for BPRT
1. It is a RFC
NOTE: Interests, Dividends, Rents, 2. Branch did not participate in
Royalties including remuneration for negotiations
technical sevices, salaries, wages,
premiums, annuities, emoluments, or
casual gains, profits, income and
capital gains received by a foreign
corporation during each taxable year SEC. 28 A6a
from all sources within shall not be ► Regional or area headquarters (Sec. 22
treated as branch profits UNLESS the DD) shall not be subject to tax exempt
same are effectively connected with from income tax if the requisites are
the conduct of its trade or business. present.

Branch Profit Remittance Q: What are the requisites?

A:
Two ways to receive income (FC) 1. the HQ do not earn or derive
1. Branch income from the Phils.
2. Subsidiaries 2. Acts only as supervisory,
communications, coordinating
NOTE: centre for their affiliates, subsidiary
1. When a FC establishes branch, it is or branches in the Asia- Pacific
always a FC Region and other foreign markets.
2. When a FC establishes DC, it is a
RFC SEC. 28 A6b

Q; It is in addition to NIT- Why? ► Regional Operating HQ are taxable and

A: NIT because it is RFC liable to pay 10% taxable income.

Q; What kind of tax is imposed under 28 ► Regional Operating HQ is a branch

A5? A: 15% FIT established in the Phils by a multinational
company engaged in any of the services:
Q: How do you apply the rate? 1. Gen. Administration and Planning
A: multiplied to the total profit applied or 2. Business Planning and
earmarked for remittance w/o deductions Coordination
3. Sourcing and procurement of Raw
It applies for branches that are: materials and components.
1. the profit remitted is effectively 4. Corporate Finance and Advisory
connected with the conduct of its Services
trade or business in the Phils. 5. Marketing Control and sales
2. One not registered with PEZA promotion
6. Training and personal management
MARUBENI CASE 7. logistic services
F: A branch was established with AG&P, 8. research and development services
there was investment with AG&P and product development
Q: Did the petitioner participate with the 9. technical support and maintenance
negotiation? 10. data processing and
A: NO communication and business
Q: What did the petitioner pay? development
A: 15% Branch Profit Remittance Tax
(BPRT) Rationale: Why liable? Because the claim
10% Intercorporate Dividends for exemption of resident airlines shall
Q: What’s the issue? be minimized

31
 Taxation law review notes
- Atty. Francis J. Sababan -
8. emoluments
SEC. 28A7a Interests and Royalties: 9. Other fixed and determinable Gains,
profits and income.
► 20%FIT
SEC 28 B2 Non Resident
► Interests under EFCDS= 7 ½ % Cinematographic film owner, lessor or
distributor
Sec. 28A7b Income derived under
EFCDS ► liable for 25% GIT

1. Income derived from foreign currency SEC 28 B3 Non Resident owner or

transactions with: lessor of Vessels chartered by
a) Non Residents Philippine Nationals.
b) OBU
c) Local commercial bank ► liable for 4 ½ GIT
d) Foreign bank branches
e) Other depository bank under the Elements:
EFCDS 1. Chartered to Filipino Citizens or
Corporations
► As a Gen Rule: the above transaction 2. Approved by MARINA
is Exempt
SEC. B(4) Non Resident Owner or
EXCEPTION: Income from such Lessor of Aircraft, Machiniries, and
transaction as may be specified by the other Equipments.
secretary of Finance, upon
recommendation by the Monetary Board ► liable for 7 1/2 % GIT
to be subject to regular income tax
payable by any banks. SEC 28 b5a Interest on Foreign Loans

2. Interest income from foreign currency ► Must be read with Sec. 32 B7a
loans
Interest on Foreign Loans, if the lender is
► granted by depository bank under said 1. NRFC liable to 20% FIT
EFCDS to others shall be subject to 10% 2. Foreign Govt. Exempt because it is
FIT an exclusion (Sec 32 b7a: income
derived by a foreign gov’t from
Exempt if granted to: investments in the Phils on loans,
1. Other OBU in the Phils, and stocks, bond, and other domestic
2. Other depository bank under the securities or from interest on
EFCDS deposits in banks by:
» SEC. 28 A7c: Capital Gains from a) Foreign govt.
Shares of Stocks not Traded in the b) Financing inst owned controlled
Stock exchange or enjoying, refinancing from
» 5% or 10% as the case maybe foreign govt; and
c) Inter nation or Regional
SEC 28A7d: INTERCORPORATE financial inst established by
DIVIDENDS foreign govt.

► DC- RFC= EXEMPT, not subj to tax COMMISIONER OF INTERNAL REV. vs.
MITSUBISHI METAL CORP. (180 SCRA 214)
SEC 28 B1 F: Atlas Mining entered into a Loan and
Sales Contract with Mitsubishi Metal
Q: What kind of tax? Corp. ( A Japanese Corp.) for the
A: 35% GIT on the ff income purposes of projected expansion of the
1. Interest productivity capacity of the former’s
2. Dividends mines in Cebu. The contract provides
3. Rents that Mitsibushi will extend a loan to
4. Royalties Atlas in the amount 20 M dollar, so
5. Salaries that Atlas will be able install a new
6. Premiums( except reinsurance concentrator for copper production.
premiums) -Mitsubishi to comply with its
7. annuities obligation, applied for a loan from

32
 Taxation law review notes
- Atty. Francis J. Sababan -
Export- Import Bank of Japan (Exim
Bank) and from consortium
Japanese banks.
Pursuant to the contract Atlas paid
interst to Mitsubishi where the
corresponding 15% tax thereon was
withheld and only remitted to the
Govt.
Subsequently Mitsubishi filed a
claim for tax credit requesting that the
same be used as payment for its
existing liabilities despite having
executed a waiver and disclaimer of its
interest in favor of Atlas earlier on. It is
the contention of Mitsubishi that it was
the mere agent of Exim Bank which is
a financing inst owned and controlled
by the Japanese Govt.
The status of Eximbank as a
government controlled inst became
the basis of the claim fro exemption by
Mitsubishi for the payment of interest
on loans.
I: WON Mitsubishi is a mere agent of
Eximbank
H: NO. The contract between the parties
does not contain any direct reference
to Exim Bank, it is strictly between
Mitsubishi as creditor and Atlas as the
seller of copper. The bank has nothing
to do with the sale of copper to
Mitsubishi. Atlas and Mitsubishi had
reciprocal obligations- Mitsubishi in
order to fulfill its obligations had to
obtain a loan, in its independent
capacity with Exim bank. Laws
granting exemption from tax are
construed strictly against the taxpayer
and liberally in favor of the taxing
authority.
SEC. 28 D5 b INTERCORPORATE
DIVIDENDS:
► FIT 15% imposed on the amount of
cash and or prop dividends received from
a domestic corporation.
SUBJ TO THE CONDITION: the country
where the NRFC is domiciled allows a
credit against the tax due from the NRFC
taxes deemed paid or deemed to have
been paid in the Phils.
Gen rule: 35 % FIT
Exception: 15% under the “tax deemed
paid rule/ reciprocity rule/ tax sparring
rule”
JHONSONS CASE
2 Kinds of Categories:
1st : Japan, US, Germany, Phils liable for
of income within and income without
2nd : countries liable only for income
within.
MARUBENI Case: 2 Issues
1. Is the payment of 10% FIT correct?
- No because it was a branch and RFC but
still Marubeni was NRFC under the old law
which is liable to pay 35%, but SC said
liable only to 25% because of the tax
treaty
► You cannot refund right away → 15%
BPRT and 10% Inter-corporate Dividends
tax has different basis
In P&G who are involved
- DC (P&G Phil) and NRFC (P&G US)
- DC declares dividends to NRFC
- 35% was withheld and remitted to the
BIR
What did they discover? (after paying)
- they discovered that they are liable
only for 15% so they have a refund of
20%
Q: In the 1st case did the SC allowed the
refund?
A: NO, denial anchored on 2 grounds:
1. One claiming for refund was not
the proper party
2. There was a showing or proof as to
the existence of the “tax deemed
paid” rule
Q: In 2nd case was there a refund?
A: YES, the SC reversed itself
1. Income tax is FIT: the withholding
agent is the proper party because
he is liable to pay said taxes
2. actual proof of payment not
necessary, what is necessary is the
law of the domicile of the country
providing fro tax credit equal to
20% of the tax deemed paid.
Q: What is the rate if the law is silent?
A: 35% FIT
► The rate will only be 15% if there’s a
law recognizing the same but this refers to
the case of those belonging to the first
category.
WANDER CASE
Q: Who are the parties?
33
 Taxation law review notes
- Atty. Francis J. Sababan -
A: DC(Wander) and FC (Glaxo)- they A) Corporations failure to declare
belong to different categories dividends because of reasonable needs of
The BIR tried to collect 35% business
because the law is totally silent about
the tax credit ► reasonable needs means are
H: The SC said that the tax should be 15% construed to mean immediate needs of
which applies 2 instances: the business including reasonable
1. Foreign law do not provide for tax anticipated needs
credit- 35%
2. law provides but the law is silent- Q: What constitutes reasonable
15% accumulation of the corporation’s
3. law is silent because there is no earnings? Examples?
law- 15% A:
4. law is silent because there’s no law 1. allowance for the increase in the
because the subj matter is not accumulation of earnings up to
taxable- 15% 100% of the paid- up capital of the
corporation.
SEC. 29 IAET 2. earnings reserved for the definite
corporate expansion projects or
Q: What is the rate? programs approved by the Board
A: 10% of the gross income (taxable 3. Earnings reserved fro buildings,
income) plants, or equipment, acquisition
approved by the Board
► It is imposed upon the improperly 4. Earnings reserved for compliance
accumulated taxable income of the with any loan agreement or pre-
corporation existing obligations
5. Earnings required by law or other
Q: Applies to what Corp? applicable statutes to be retained.
A: to DC only under RR 2- 6. In case of subsidiaries of foreign
2001( classified as closely held corporation, all undistributed
corporations) earnings or profits intended or
reserved for investments
Q: Is it in the nature of sanction?
A: Yes, it is imposed to compel the NOTE: the corporations belonging in the
corporation to declare dividends. 1st group are normally liable but they can
show that the accumulation of earnings is
Q: Why? justified for reasonable needs of business,
A: because if profits are distributed to the they incur no liability and exempt from
shareholders, they will be liable for the payments of the same.
payment of Dividends tax. Now, if the
profits are undistributed the shareholders B) Corporations which are exempt
will not incur liability on taxes with respect whether or not it is for reasonable needs
to the undistributed profits of the Corp. of the business:
- In a way it is in the form of deterrent 1. Banks, and other non- bank financial
to the avoidance of tax upon intermediaries.
shareholders who are supposed to pay 2. Insurance companies
dividends tax on the earnings 3. Publicly- held corporations
distributed to them. 4. Taxable partnerships
5. General Professional Partnerships
Q: What is taxable income? 6. Non- taxable joint- ventures
A: SEC. 31 defines taxable income as the 7. Enterprises registered with
pertinent items of gross income specified a) PEZA
in this Code, less the deductions and/or b) Bases Conversion Devt Act of
personal and additional exemptions, if 1992 (RA 9227)
any, authorized for such types of income c) Special Economic Zone declared
by this Code or other special law by law

Q: When not liable to pay IAET? Q: What is a closely- held corporations?

A: There are 2 groups of DC exempt from A: Those corporation at least 50% in
payment of IAET (RR2-2001) value of the outstanding capital stock or
at least 50% of the total combined voting
power all classes of stock entitled to vote

34
 Taxation law review notes
- Atty. Francis J. Sababan -
is owned directly, or indirectly by or for
not more than 20 individuals
NOTE: Publicly held Corp. has more than
20 shareholders
Q: What is the time for paying this tax?
A: Calendar Year: Jan 25, 2005- Dec 31,
2005. Today is 2006. You have 1 year to
declare after the close of the taxable year.
2006 is the grace period. You will pay on
January 2007.
Q: If you’re not mentioned to
exempted, will you still be liable?
A: No, if you invoke adjustments
SEC 30. EXEEMPTIONS FROM TAX ON
CORPORATIONS
► Determine the Corporations’
exemptions under Sec. 30 27 C and 22B.
1. Sec 30, the corporations shall not
be taxed under this title (tax on
income) in respect to income
receive by them as such.
2. Sec 27, the corporations
enumerated are always exempt.
Thus exemption is unconditional
3. Sec 22B GPP, as a general rule is
not a corporation
4. except if it earns income from
other business
► Joint Venture w/ service contract w/
government not a corporation, otherwise,
it is liable.
Assignment: Sec. 35
August 21, 2006 – Midterms
August 14, 2006
Q: What is the reason for not including
the corporations exempt under section
27C and Section 22B under Section 30?
A: Because there is an exemption which
does not apply to all exempt corporation.
The exemption under Section 30 is not
absolute while the exemption under
Section 27 C is absolute and without any
conditions. In addition, Section 22B
provides that a joint venture is generally
taxable unless it has a service contract
with the government, a generally taxable
corporation cannot be joined with the
group as generally not taxable
corporation. General Professional
Partnership is exempt but the exemption
is not the same as provided by Section 30.
TAKE NOTE: Las Paragraph of Section 30.
► exemption to the exemption: income
of whatever kind and character of the
foregoing organizations from:
1. any of their properties, real or
personal;
2. any activities conducted for profit
► regardless of the disposition of said
income, shall be subject to tax.
Q: Enumerate the exempt corporations
be under Section 30; What is the
requirement?
A:
1. Labor, agricultural or horticultural
organization not organized
principally for profit;
2. Mutual savings bank not having a
capital stock represented by
shares, and cooperative bank
without capital stock organized and
operated for mutual purpose and
without profit;
3. a beneficiary society, order or
association, operating for the
exclusive benefit of the members
such as fraternal organization
operating under lodge system.
(lodge system: operating world
wide) or a mutual old association
or a non-stock corporation:
a. organized by employees;
b. providing for the payment of
life, sickness, accident or other
exclusive benefits to its
employees and their
dependents;
4. Cemetery (a) company owned and
(b) operated exclusively for the
benefit of its members;
5. Non-stock corporation or
association organized and
operated exclusively for Religious,
Charitable, Scientific, Artistic or
Cultural purposes, or for the
Rehabilitation of Veterans
(RCSACR), no part of its net income
or asset shall belong ot or inure to
the benefit of any member,
organizer, officer, or any specific
person;
6. Business league, chamber of
commerce, or Board of trade, (a)
not organized for profit and (b) no
part of the net income of which
inures to the benefit of any stock
holder or individual;
7. Civil league or organization not
organized for profit but operated
35
 Taxation law review notes
- Atty. Francis J. Sababan -
exclusively for the promotion of
social welfare.
CIR vs. YMCA
Q: What is the basis of Manila BIR for the
imposition of the tax?
A: last paragraph of Section 30, because
YMCA was conducting an activity for
profit.
F: the CTA and the CA invoked the
doctrine laid down in Herrera and Abra
Valley case which involves an
exemption from the payment of Real
property Tax.
H: The SC revised the ruling. YMCVA is
liable to pay income tax applying the
last paragraph of Section 30.
YMCA Is exempt from the payment
of property tax, but not to income tax
on rentals from its property.
The tax code specifically mandates
that the income of exempt
organizations (under section 30) from
any of their properties, real or
personal, shall be subject to tax,
including the rent income of the YMCA
from its real prop.
8. a non-stock and non profit
educational institution;
9. gov’t educational institution;
10. Farmer’s or other mutual typhoon
or fire insurance company, mutual
ditch or irrigation company, or like
organization of a purely local
character, the income of which
consists solely of assessment, dues
and fees, collected from members
for the sole purpose of meeting its
expenses;
11. Farmer’s, fruit grower’s or like
association organized and
operated as a sales agent for the
purpose of marketing the products
of its members and turning back to
them the proceeds of sales, less
the necessary selling expenses on
the basis of the quantity of
produce finished by them.
TAKE NOTE: income of sales agent is
exempt.
Section 31: TAXABLE INCOME
CHAPTER VI: COMPUTATION OF
GROSS INCOME
SECTION 32: GROSS INCOME
Q: What is the tax treatment? Are these
taxable income? Are these included in the
gross income? Is it included in the ITR? Is
it subject to NIT?
A: Sec. 32 A answers the questions.
Q: What is the income tax referred to
here?
A: NIT. The section refers only to the
payment of NIT. It speaks of the NIT.
Q: If the is mentioned under Section 32 A,
does it follow that it is automatically
included in the GIT?
A: No, Section 32 A states “Except when
otherwise provided in this title”
Q: What are the income that are not
included, not subject to NIT?
A:
1. Income that are subject to FIT.
2. Income that are considered an
exclusion; and
3. Income that are exempt.
Q: When do you not apply Sec. 32 A?
A: it applies to all except:
1. NRANETB
2. NRFC
» they do not pay NIT, they pay by way
of GIT.
Q: What are included in the Gross
income?
A:
1. Compensation for services in
whatever form paid including but nor
limited to fees, salaries, wages,
commissions, and similar items. [Sec.
32 A (1)]
Q: What is compensation?
A: all remuneration for services
performed by an employee for his
employer under an employer-employee
relationship.
TAKE NOTE: compensation is included in
the ITR if the taxpayer is not liable for NIT.
Thus, if subject to NIT, included in the ITR.
Q: Is there an instance where the salaries
of a RC is not included in the ITR?
A: Yes, if the salary is subject to FIT, like
when the RC is employed in Multinational,
offshore banking, and petroleum
companies.
2. Gross Income derived from the
conduct of trade or business or the
36
 Taxation law review notes
- Atty. Francis J. Sababan -
exercise of a profession; [Sec. 32 A
(2)]
Q: What is the income tax here?
A: NIT, included in the ITR.
3. Gains derived from dealings in
property. [Sec. 32 A (3)]
Q: Did the law distinguished?
A: No, the law did not distinguished
between real and personal property.
TAKE NOTE:
1. Sale of real property
2. Sale of shares of stock (personal prop.)
► if the elements are present, subject to
FIT. Thus, it is not included in the ITR, the
withholding agent will be responsible for
this.
Q: Income form the sale of property, do
you include this in the ITR?
A: it depends
a. if subject to FIT, not included.
Withholding agent accomplish the
forms
→ subject to FIT if the following
elements are present:
1. it is a capital asset;
2. located in the Phil.: and
3. sold by individual, trust, estate,
DC.
b. if subject to NIT, included in the ITR.
→ Elements are not present, like
when the real prop. is an ordinary asset or
when it is capital asset if the taxpayer is
RFC.
TAKE NOTE: R-R 17-2003
► Real property sale subject to FWT, the
buyer accomplishes the ITR.
4. interest; [Sec. 32 A (4)]
Q: What interest is being referred to
here?
A: interest which is included in the
computation of gross income is interest
earned from lending money and interest
from bank deposit which does not
constitute passive income.
Bank interest from sources, without or
abroad.
Q: Bank interest from Solid Bank, is it
included in the ITR?
A: No, because it is included or
considered an income within, thus subject
to FIT. Thus, not included in the ITR.
5. Rents. [Sec. 32 A (5)]
► subject to NIT, included in the ITR.
6. Royalties; [Sec. 32 A (6)]
Q: What is being referred to here?
A: royalties which does not constitute
passive income. Royalties derived from
income without. – subject to NIT. Thus not
included in the ITR.
Q: Who are the taxpayers?
A: Liable from income w/in and w/out and
the rest are exempt.
1. RC
2. DC
7. Dividends. [Sec. 32 A (7)]
Q: What kind of dividends?
A: one that does not constitute a passive
income.
TAKE NOTE:
1. DC individual taxpayer = FIT
2. DC – DC & RFC = EXEMPT
3. DC – NRFC = FWT
► only dividends issued by a FC to an
individual taxpayer (RC OR RA) is included
in the computation of the gross income.
Thus, included in the ITR.
8. Annuities. [Sec. 32 A (8)]
Q: What kind of annuities?
A: annuities which are not exempt from
tax are included in the computation of the
gross income. (included in the ITR)
9. Prizes and Winnings [Sec. 32 A (9)]
Q: What kind of prizes and winnings?
A:
a. those that does not constitute
passive income; and
b. those that are not considered as an
exclusion. Thus, exempt.
Passive Income
1. Prizes – derived from sources within
and over 10,000.00
2. Winnings – derived from sources
within.
Exempt:
a. winnings: PCSO and Lotto winnings.
b. prizes:
37
 Taxation law review notes
- Atty. Francis J. Sababan -
► those primarily for recognition of
(1)religious, (2)charitable, (3)scientific,
(4)educational, (5)artistic, (6)literary,
(7)civic achievement are exempt
PROVIDED:
1. the recipient was selected without
any action on his part to enter the
contest or proceedings; and
2. the recipient is not required to
render substantial future services
as a condition to receiving the
prize or award.
► prizes and awards granted to athletes
are also exempted provided:
1. local or international sports
competition or tournament;
2. held in the Philippines or abroad;
and
3. sanctioned by the national sports
association.
Q: When is a prize subject to NIT?
A: 1. when derived from income without;
2. when less than 10,000.00;
3. when the income earner is a DC or
RC.
Q: When is winning subject to NIT?
A: 1. When derived from income without;
2. when the income earner is a DC or
RC.
10. Pensions [Sec. 32 A (10)]
Q: What kind of pension?
A: Included in the gross income if not
exempt
» never subject to fit (?)
11. Partner’s distributive share from
the net income of the general
professional partnership (GPP).
Q: What is being referred to?
A: GPP exempt from payment
corporate income tax
► shares of partners subject to NIT – Sec.
26
SEC 32 B EXCLUSIONS FROM GROSS
INCOME
Q: What do you mean by exclusions? Are
these exempt from income tax?
A: these are not included in the gross
income, THUS, exempt.
TAKE NOTE: Exemptions, exclusions,
deductions, have the same characteristics
→ all tax do not apply.
1. Life insurance [Sec. 31 B (1)]
Q: What is the requirement?
A: only one requirement for exemption:
that the proceeds of the life insurance be
payable upon the death of the insured.
Q: Does it matter who the beneficiary is
or paid in a lump sun or single sum?
A: No. it does not matter.
Exception: amounts held by the insurer
under an agreement to pay interest
thereon, the interest payment shall be
included in the gross income.
2. Amount received by insured as
return of premium [Sec. 32 B (2)]
Q: if the insurance is payable within a
certain time, say 10 years and thereafter
the insured did not die, how much will be
excluded?
A: only the amount received by the
insured as a return of the premiums.
Ex. 1 M – 100 thousand = capital
It is exempt (100K)
900K is taxable.
Q: Why is it excluded?
A: because the amount received merely
represents a return of capital.
Q: is this subject to Estate Tax under Sec.
85 E? do we have the same requirement?
A: no, the requirement for exemption is
not the same under Section 85 E.
3. Proceeds of life insurance:
decedent insured himself,
inclusion or exclusion will depend
on who the beneficiary is.
of
a. the beneficiary is the estate.
» subject to Estate tax, included in
the gross estate regardless of whether
or not the designation of the
beneficiary is revocable or irrevocable.
b. the beneficiary is a third person other
than the estate.
b.1 Revocable Designation → subject
to estate tax, included in the gross
estate.
Reason: because of the insured’s
power to modify or change the
beneficiary.
b.2 Irrevocable Designation → not
subject to Estate tax, not included in
the gross estate.
38
 Taxation law review notes
- Atty. Francis J. Sababan -
Reason: the insured loses the power to
control, modify and change the
beneficiary.
Q: Is it subject to VAT?
A: 1. Non-life insurance – yes, subject to
VAT under 108 (A).
2. Life insurance – NO, subject to
percentage tax under Sec. 123 of the Tax
Code.
4. Gifts, Bequest and Devises
[Sec. 32 B (3)]
Q: Why is the donee exempt from income
tax?
A: Because the law classify it as an
exclusion, not important to know whether
property is real or personal.
What is exempted is the “value of
property acquired by gift, bequest or
devise”
TAKE NOTE:
A. GIFTS are excluded because they
are subject to donor’s tax.
B. BEQUEST and DEVISE are excluded
because they are subject to ESTATE
tax.
Q: what is included in the gross income?
A: income from such property.
► gift, bequest, devise or descent of
income from any property in case of
transfers of divided interest.
5. Compensation for injuries or
sickness [Sec. 32 B (4)]
Q: is this the same as those provided
under the workmen’s compensation act
(wca)?
A: YES. There are 3 groups:
a. Health or accident insurance or
those under workmen’s
compensation.
b. personal injuries and sickness; and
c. Damages to prevent injuries and
sickness.
Q: What does injury include?
A: The term injury includes death, even if
not injured, if the person dies this will be
available.
Q: when will the damages recovered be
exempt?
A: General Rule: all damages awarded
are tax exempt.
Exception: damages representing loss
of income.
Q: Why is it considered an exclusion?
A: because this is just an indemnification
for the injuries or damages suffered.
6. Income exempt under a treaty
[Sec. 32 B (5)]
Q: What is excluded?
A: income of any kind required by treaty
binding upon the Phil. Government.
7. Retirement benefits, pensions,
gratuities [Sec. 32 B (6)]
Q: Why do we need to distinguish
retirement pay, separation pay and
terminal leave pay?
A: because they have different
requirements for exemption.
Q: What is retirement pay?
A: the sum of money received upon
reaching the maximum age of
employment.
a. Under RA4917 (with Retirement Plan)
1. the private benefit plan is
approved by the BIR (RR2-98);
2. the retiring official or employee has
been in the service of the same
employer for the last 10 years;
3. he is at least 50 years old at the
time of retirement; and
4. the official or employee avails
himself/herself of the benefit only
once.
b. Under RA7641 (without retirement plan)
1. the retiring official employee is at
least 60 years old but not more
than 65 years old;
2. the employee or official must have
served the company for at least 5
years;
» entitled to 15 days salary and ½ of the
13th month pay for every year of service.
TAKE NOTE: the retirement benefits under
RA4917 and RA7641 are exempt from
income tax provided the requirements are
present.
SEC. 32 B(6)(c)
► retirement benefits given by foreign
government, foreign corporation, public as
well as private to RC, NRC, RA residing
permanently in the Philippines - exempt
without further qualifications – automatic
exclusions.
39
 Taxation law review notes
- Atty. Francis J. Sababan -
SEC. 32 B(6)(d,e,f) A: the accumulated vacation leave and
sick leave benefits converted to cash or
► retirement benefits given by the money to be given either every year or
Philippine Gov’t through the GSIS, SSS and upon retirement or separation.
PVAO are exempt without further
qualifications = automatic exclusions. Terminal Leave Pay granted upon
retirement or separation:
August 21, 2006. » uder PD220, TLP in the Gov’t or in
- midterms 6-8 pm until sec 32 B(6) NIRC. the Private Sector shall be exempt
from income tax if given or granted
August 28, 2006. upon retirement or separation.
TLP granted on a yearly basis:
ANSWERS = MIDTERMS 1. employee in the private sector:
a. accumulated sick leave –
► Gross Income include both capital and subject to income tax.
ordinary gains, Sec. 31 says gross income- b. Accumulated vacation leave: if
deductions, that which is ordinary loss. more than 10 days (meaning
- may be deducted from capital gains and 11 pataas) – subject to income
ordinary gains. tax;
»If 10 days or less – exempt.
Q: What is separation pay? 2. Gov’t Employee:
A: on given when one is terminated from » governing law: EO 291 of Pres.
the service because of (1) illness, Estrada, RMC 16-2000.
(2)death, (3) physical incapacity or injury,
or (4) causes beyond the control of the Rule: Gov’t workers (both officers or non-
employee. officers) granted TLP on a yearly basis →
exempt from income tax.
Q: Are there any requirement for → there is no qualification as to vacation
separation pay granted by foreign gov’t or or sick leave.
corp?
A: None, the separation pay granted by ► Take Note of 3 cases.
the aforementioned institutions are » be reminded of EO 291, Sec. 2. 78.2
exempt without further qualifications par. 97, RR2-98, RR16-200 (3).
(“other similar benefits”).
Case of Zialcita
Q: is separation pay an exclusion, ► retired from DOJ, contention: TLP
therefore, exempt? should be exempt from income tax
A: No. pursuant to the old law.
GENERAL RULE: Separation pay not SC: on a different ground – TLP is exempt
exempt (?) because it is similar to Retirement pay,
Exception: thus exempt but the ruling’s application is
1. Automatic exclusions, thus exempt if limited only to DOJ employees.
due to:
a. illness Borromeo case:
b. death ► Same as the Zialcita case
c. physical incapacity or injury. Issues: WON the TLP is subject to income
tax and WON COLA and RATA are
2. Conditional exclusion included?
a. causes beyond the control of the SC: RULED TLP is Exempt!
employee- excluded Modified: the rule applies not only to DOJ
b. within employee’s control – officers but also to CSC commissioners.
included.
COMMISSIONER v. CASTAÑEDA
Examples: - Castañeda –DFA officer in Phil. Embassy
1. registration – CBA provides in England.
separation pay, within the control 1. TLP is exempt.
= included. 2. Ruling applies to DFA officers.
2. installation of labor saving devises
or bankruptcy – beyond the control Q: Does the rule or decision applies to
= excluded. Gov’t officials only?
A: No. PD220: Exemption applies to both
Q: What is terminal leave pay? private and public sectors(?)

40
 Taxation law review notes
- Atty. Francis J. Sababan -
it does not matter if TLP is vacation or
sick leave.
RR2-98, Sec. 2.78.1 par. (a)(7)
» JAN, 1998 – the rule applies to both
private and public sectors.
EO291 (SEPT., 2000)
» Officer in gov’t receiving TLP is always
exempt whether or not vacation or sick
leave is granted.
Modified RR2-98:
» TLP will only apply to private sectors
» if granted on a yearly basis – may be
subject to tax: VACATION LEAVE
1. MORE THAN 10 DAYS = TAXABLE
2. LESS THAN 10 DAYS = EXEMPT
» primarily for religious, charitable,
scientific, educational, artistic, literary
or civic achievements:
1. recipient was selected without any
action on his part to enter the
contest or proceedings;
2. the recipient was not required to
render substantial future services
as a condition to receive the prize
or award.
D. prizes and awards in sports (Sec. 32B 7
d)
1. granted to athletes;
2. local or int’l competitions;
3. held here or abroad;
4. sanctioned by the nat’l sports
associations.

8. Miscellaneous items (Sec. 32 B E. 13th month pay and other benefits (Sec.
(7) 32B 7 e)
(a) income derived by foreign
Gov’t [Sec. 32 B (7) (a)] Q: Do you include Christmas bonus in
your ITR?
Q: What kind of income? A: No, because the law says 13th month
A: pay and “other benefits”/”similar benefits”
1. investments in: – xmas bonus is included in the category.
a. loans
b. stocks Q: Who can increase the 30,000 limit?
c. bonds A: The Sec. of Finance.
d. other domestic securities
2. interest from deposits in Banks in Q: Applicable to whom?
the Philippines. A:
1. gov’t; and
Q: Who are income earners? 2. Private institutions.
A:
1. foreign government F. GSIS, SSS, Medicare and other
2. financing institutions owned, contributions (Sec. 32 B 7 f)
controlled or enjoying re-financing ► must be deducted from the GI not NIT
from foreign gov’ts; and because it is an exclusion.
3. int’l or regional financial -creditable withholding tax is an exclusion-
institutions established by foreign must be deducted first from the GI before
gov’ts (established in the you compute the NIT. Otherwise, you are
Philippines) including in the GI something that is
excluded from the same.
TAKE NOTE: if plain foreign corp., subject
to FIT 20%. G. Gains from the Sale of bonds,
debentures, or other Certificate of
EXAMPLES of exclusions: indebtedness. (Sec. 32 B 7 g)
a. Brunei Gov’t earns interest by
depositing money in Makati Bank – Q: Why 5 years?
Exclusion. A: certificate of indebtedness is similar to
b. SMC- Stock dividends to 3. Brunei Bank Interest in a long term deposit.
Gov’t. exclusion
c. Income derived by the Gov’t or its - Sec. 32 B 7 g is similar or the same as 24
political subdivisions (Sec. 32 B (7) (b) B in long term deposit.
a. exercise of public utility
b. exercise of any essential gov’t H. Gains from redemption of shares in
function. mutual fund (Sec. 32 B 7 h)
» accruing to the gov’t.
d prizes and awards (Sec. 32 B 7 c)

41
 Taxation law review notes
- Atty. Francis J. Sababan -
1. Fiscal Year – means an accounting
period of 12 months ending on the last
day of any month other than December.
2. Calendar year – a period of 12 months
beginning on January and ending on
December.
Q: Business expense incurred in February
2006, is it possible to include it for April
2006?
A: yes, it is possible or it is possible if
fiscal year is employed, if it falls under the
fiscal year and all the elements are
present.
- related to trade or business.
REASON: Capital loss has no connection to
the trade or business.
TAKE NOTE:
► for taxpayers liable for income within
and without (RC & DC)), they can claim
deduction for expenses incurred within
and without.
► for taxpayers who are liable only for
income within, they can claim a
deduction for expenses incurred within
the Philippines.
Sec. 34 A EXPENSES
1. For those business expenses not
enumerated under A. You need to prove
that it is an ordinary and necessary
expense.
2. For those enumerated under A, all you
have to prove is that it is incurred during
the taxable year.
Feb. 12, 2007 (Sec. 34 A, Expenses)
Q: Did the law define what is reasonable?
A: No. for salaries and wages all that is
required by law is for it to be reasonable.
- for other forms of compensation, there
must be services actually rendered.
AGUINLDO Case
F: involves a corporation engaged in
selling fish nets, and the corporation have
a land sold through a broker.
►there was substantial profits gained from
the sale of a land which was sold by a
broker. The profit was in turn given to the
workers as special bonus.
►the corporation claimed the bonus as a
deduction.
ISSUE: Should the deduction be allowed?
H: The SC did not allow the deduction, for
other forms of compensation, it must be
made or given for services actually
rendered.
►in this case, it was proven that the sale
was not made by the employees, no effort
or services actually rendered by them
because the sale was made through a
broker.
►
Q: Reasonable Travel Expenses, What is
the requirement?
A:
1. Travel must be in pursuit of
business, trade or profession.
2. Travel expense while away from
home.
Q: Is there a travel expense which was not
in pursuit of business?
A: yes, those which are considered as
fringe benefits (FB), expenses for foreign
travel is considered a FB only if it is not in
pursuit of the trade or business.
Q: can you claim it under Sec. 34 A (1)(a)
(ii)?
A: No, you can claim it under Sec. 34 A (1)
(a)(i) last paragraph.
Q: Reasonable Allowances for rentals for
meralco bills, requirements?
A:
1. required as a condition for the
continued use or possession, for the
purpose of the trade, business or
possession of the property.
2. taxpayer has not taken any title or
no equity other than a lessor.
Q: Reasonable allowance for
entertainment, amusement and recreation
expenses, what is the requirement?
A:
1. connected with the development,
management, and operation of the
trade (DOM);
2. Does not exceed the limits or
ceiling set by the Secretary of Finance;
and
3. Not contrary to law, morals, good
customs, public policy or public order.
Q: How about bribe, kickbacks, and other
similar payments
A: even without this provisions, kickbacks
will not pass the requirement of (i)
42
 Taxation law review notes
- Atty. Francis J. Sababan -
ordinary and (ii) necessary hence not
deductible
EXPENSES ALLOWABLE TO PRIVATE
EDUCATIONAL INSTITUTION
Q: Why only private educational
institution is mentioned and no other
taxpayers?
A: it refers to section 27 for Private
Educational Institution given to the
educational institution.
GENERAL RULE: 36 A (2) and 36 A (3)
expenditures for capital outlays not
deductible as business expense
EXCEPTION: Private Educ. Institution can
claim it under Sec. 34 A (2)
BUSINESS EXPENSE vs. ALLOWANCE
FOR DEPRECIATION
BUSINESS EXPENSE
1. No carry-over
2. can be claimed for one year only.
3. if the amount of capital outlay is
substantial, it cannot accommodate all of
the expenses incurred.
ALLOWANCE FOR DEPRECIATION
1. There is carry over
2. you can claim it for a longer period
depending on the life span of the property.
3. it can accommodate all of the
expenses incurred.
 taxpayer’s allowable deduction for
interest expense shall be deducted by
an amount equal to 42% (RR 10-2000)
of the interest income subject to FIT.
Q: Who claims this deduction?
A: the debtor claims this deduction.
Q: What kind of interest is this?
A: interest on loan.
►interest on debt - when one borrows
money to finance his business interest in
connection with the taxpayer’s profession
trade or business.
REDISCOUNTING OF PAPERS : (Sec. 34 B 2
a)
►a borrower or taxpayer can claim the
interest paid in advance as itemized
deduction when he filed his income tax
return (ITR) depending on whether or not
the principal obligation has been paid.
1. if the entire amount or entire principal
obligation has been paid – the entire
amount of interest can be claimed as
itemized deduction.
2. if only ½ of the obligation had been
paid, then the entire amount of ½ of that
interest can be claimed as a deduction.
3. if no payment had been paid on the
principal obligation, the advance interest
paid cannot be claimed as a deduction on
the years that it was paid.
REQUIREMENTS FOR REDISCOUNTING OF
PAPERS:
1. incurred within the taxable year.
2. individual taxpayer reporting income on
a cash basis.
 No deduction shall be allowed in
respect to the following interest:
1. if within the taxable year an individual
taxpayer reporting income on the cash
basis incurs an indebtedness on which an
interest is paid in advance or through
discount or otherwise.
2. if both taxpayer and the person to
whom the payments has been made or is
to be made are persons specified under
Sec. 36 (B):
a. member of a family
b. bet. an individual and a corp., more
than 50% in advance of the outstanding
stock of which is owned directly or
indirectly by or for such individual;
c. Bet. 2 corp., more than 50% in value of
the outstanding stock of each of which is
owned, directly or indirectly, by or for the
same individual.
d. bet. the grantor and a fiduciary of any
trust;
e. bet. the fiduciary of a trust and the
fiduciary of another trust if the same
person is a grantor with respect to each
trust; or
f. bet. a fiduciary of trust and a beneficiary
of such trust.
Q: Who are not allowed to claim interest
under sec 36 B?
A: interest incurred between related
parties.
Q: What if half-brother?
A: not allowed to claim deduction for
interest.
43
 Taxation law review notes
- Atty. Francis J. Sababan -
TAKE NOTE: interest incurred from the
exploration of petroleum refers not just in
interest incurred on loan of money but
also interest incurred for installment
payments.
Q: Who are related parties?
A: individuals and corporations.
OPTIONAL TREATMENT OF INTEREST
EXPENSE:
1. interest incurred to acquire property
used in trade, business or exercise of
profession can be claimed a an itemize
deduction…
a. on interest; or
b. depreciation (as capital
expenditure?)
Q: What is this interest income?
A: the money borrowed was deposited in
a bank so that it will warn interest. (RR13-
2000)
ILLUSTRATION:
1. loan of 1M from a bank with an interest
of 20%
2. 20% of 1M is Php200,000 but you
cannot claim this whole amount as a
deduction.
3. when you deposited the 1M in the bank,
it earned a bank interest subject to FIT
worth Php10,000.00.
4. 42% (RR) of 10,000 = 4,200 (RR 9337)
5. Php200K-4,200= Php195,800/ this is
the amount you can claim as a deduction.
34 C TAXES:
REQUISITES:
1. taxes must paid or incurred within the
taxable year
2. it must be incurred in connection with
trade or business.
3. can be claimed as:
a. a deduction; or 34 C 1&2
b. tax credit 34 C 3&7
Q: Where should it be deducted?
A:
1. if claimed as a deduction, it should
be deducted from the gross income;
2. if claimed as a tax credit, it should
be deducted from the Net Income Tax due
(bottom of the formula)
MERCURY DRUG CASE
- Discount of senior citizens
SC: discount claimed by senior citizens
shall create a tax credit and must be
deducted at the bottom of the formula.
Q: What is a tax deduction? Example?
A: example is business tax.
►tax deduction is allowed if the taxes
were paid or incurred within the taxable
year and it must be connected to the
trade, business or profession of the tax
payer.
Q: Who are entitled to claim it?
A: those liable to pay NIT. (Tax credit only
for NIT)
Q: What is a tax credit?
A: refers to the taxpayer’s right to deduct
from the income tax due the amount
of tax the taxpayer paid to foreign
country, subject to limitations.
Q: What is the tax credit being referred to
under 34 C (3)?
A: credit against taxes for taxes of foreign
country.
Q: What are the other tax credit under the
code?
A:
1. RA 6452 – selling goods and
commodities to senior citizens, the
discount claimed is treated as a tax credit.
2. income tax paid to foreign country.
3. Input tax on Vat
4. Creditable w/holding tax system under
NIT
5. Tax credit certificate.
Q: Who are allowed to claim it?
A: RC and DC only.
Q: suppose you paid the 100K NIT to US,
can you claim as a deduction the whole
100K? what is the formula?
►same procedure for (1) income tax paid
to foreign country; (2) estate tax paid to
foreign country; and (3) Donor’s tax paid
to foreign country.
A: Formula:
STEP 1
GI from sources w/in
NIT: _____________________
GI from entire world
STEP 2
Quotient x RATE = amount w/c can be
claimed as a deduction
44
 Taxation law review notes
- Atty. Francis J. Sababan -
A: you cannot claim the whole 100K, you
can only claim the product of the quotient
times the rate
TAKE NOTE: deduct at the bottom of the
formula ( sa computation ng GI)
Q: Suppose you are a RC, you pay NIT to
US, will you be able to claim it as a tax
deduction?
A: 1. generally, you can claim it as tax
credit.
2. you can claim under Sec. 34 C (1) b
►if the taxpayer did not signify in his
return his intention to avail himself of the
benefit of tax credit for taxes paid to
foreign country.
►taxes incurred not related to the trade or
business, you have the option to:
a. claim it as tax credit; or
b. claim it as a deduction
►law gives you this privilege.
Q: When is taxes not allowed as a
deduction?
A: Sec. 34 C (1)
1. Income tax;
2. Income tax imposed by authority of
any foreign country;
3. Estate and Donor’ tax; and
4. taxes assessed against local
benefits of a kind tending to increase
the value of the property.
Q: Who are not allowed to claim
deductions?
A: Under 34 C (3) - NRC, NRA; and N/RFC
TAKE NOTE:
1. NRAE and NFC – allowed deduction only
if and to the extent that they are
connected with income from sources
within the Phils.
2. Taxes that had been allowed as
deduction but are later in refunded should
be treated as part of the gross income
during the year that it is received (34 1
last paragraph)
Q: Which would you choose? Tax credit or
deduction?
A: tax credit because it is deducted from
the taxable income while deductions are
deducted from the GI.
FORMULA: GI-DEDUCTION = NET INCOME
x RATE = TAXABLE NET INCOME – TAX
CREDIT)
34 D LOSSES
Q: Is always a requirement that it is
incurred in pursuit of trade, bus. or
profession?
A: No. Sec. 34 D(1) provides for 2 kinds of
losses:
a. incurred in pursuit of trade, bus. or
profession;
b. property connected with t,b,p, if
the loss arises from fire, storms,
shipwrecks or other casualties or from
robbery, theft or embezzlement
(arising from natural calamity).
Q: What is the requirement?
A:
1. Loss actually sustained during the
taxable year
2. Not compensated for by insurance
or other forms of indemnity.
3. Not claimed as a deduction for
estate tax purposes.
Q: This is your itemized deduction which
can be claimed as a deduction from?
A: Gross income
TAKE NOTE:
► The itemized deduction of losses,
however, is not confined to section 34B. it
is also found under section 86A (1) (e)
which also pertains to deductions
available under the estate tax law.
►Losses within six (6) months after the
death of the decedent can be claimed as
itemized deduction of losses under
Section 34B. However, may be claimed as
deduction under estate tax return
provided that the same are not claimed as
itemized deduction of losses under
Section 34B.
Q: How many carry-overs do we have
under the Code?
A: 3. Namely:
1. Section 27 E (32) Carry forward of
excess minimum Tax
2. Section 39 D Net Capital Loss Carry-
over
3. Section 39 D 3 Net Operating Loss
Carry-Over.
KINDS OF LOSSES AND THEIR CARRY-
OVERS:
45
 Taxation law review notes
- Atty. Francis J. Sababan -
A. ORDINARY LOSS – NOLCO ( #3 3. carried over as a deduction from the
above) GI for the next 5 years following such
loss.
Q: Why is there a need for a carry over 4. no substantial change in the
under Sec. 34 D # when you can claim the ownership of the business or
loss from both capital and ordinary loss? enterprise.
A: if the loss exceeds the income for the
taxable year, you cannot deduct the Q: What is the limit?
entire amount of loss from your income A: 75% of the nominal value of
for that year so the excess may be outstanding shares is held by or on behalf
deducted for the taxable year following of the same persons/ corporation
the loss.
► individual no problem, problem lies with
B. CAPITAL LOSS – NET CAPITAL LOSS corporations or enterprises.
CARRY OVER ( # 2 above)

ABANDONMENT LOSSES
NET CAPITAL NET OPERATING
LOSS CARRY-OVER LOSS CARRY- 1. contract area where petroleum
OVER operations are undertaken is partially or
wholly abandoned;
1. taxpayers is an 1. taxpayer may be ► all (1) accumulated exploration and (2)
individual only not an individual or development expenditures pertaining
corporation. corp; thereto shall be allowed as a deduction.

2. involves net 2. losses incurred 2. a producing well is subsequently

capital loss or connected with abandoned:
T or B; ►unamortized cost and undepreciated
cost of equipment directly used therein
3. carry-over as loss 3. Business losses shall be allowed as a deduction in the
from sale of capital not previously off- years it was abandoned.
asset in the next set as a deduction
succeeding year from the GI carried TAKE NOTE:
over as such for 1. if abandoned well is reentered and
the next 3 production is resumed; or
consecutive years; 2. if equipment or facilities are restored
4. can only be 4. can be deducted into service in the year of resumption or
deducted from from capital gains restoration and shall amortized or
capital gains. and/or ordinary depreciated.
gains.
Q: What is the Tax benefit rule?
A: Last Par. of Sec. 34 E (1): recovery of
bad debts previously allowed as deduction
NET OPERATING LOSS CARRY in the preceding year shall be included as
REQUIREMENTS: part of the gross income in the year of
1.Net operating loss of the business or recovery to the extent of the income tax
enterprise incurred w/in the taxable year benefits of said deduction.
2. not previously off-set as a deduction
from the GI Q: What is a Bad Debt?
3. carried over as a deduction from the GI A: Bad debts shall refer to those debts
for the next 3 consecutive taxable years resulting from the worthlessness or
immediately following the year of such incollectibility in whole or in part of
loss. amounts due the taxpayer by others,
arising from money lent or from
Q: Can the period be extended? uncollectible amounts of income from
A: yes, for mines other than oil and gas goods sold and services rendered.
well.
1. net operating loss w/out the benefit CHINA BANK VS. CA
incentives provided by law; ► bad debts can only be claimed if
2. incurred in any of the first 10 years pursuant to a contract of loan
of operation. - no bad debts for loss of instruments.

46
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Who claims it? property due from exhaustion, wear and
A: a. creditor tear and normal obsolescence.
b.money lender

Q: What year can it be claimed? Q: What kind of property is involved?

A: can be claimed in the year it was A: 1. Real property except parcel of land
actually sit ascertained to be worthless 2. Personal Property
and charged off, meaning cancelled in the
books of account. REQUISITES:
1. depreciation deduction must be
Q: Do you need to file an action before reasonable
you can claim? 2. for the exhaustion, wear and tear,
A: No, all you have to do is prove that you including reasonable allowance for
did exert effort to claim or recover the obsolescence
same. 3. property used in the trade of business

Q: What cannot be deducted as bad Q: What do you mean by “reasonable

debts? allowance”?
A: A: it shall include, but not limited to, an
1. debts not incurred in connection allowance computed in accordance with
with the trade, business and rules and regulations prescribed by the
profession of taxpayer. Secretary of Finance, upon
2. transactions, mered into recommendation of the Commissioner,
between parties mentioned under any of the following methods:
under Section 36 (B) namely. 1.Straight-line method
a) between members of the family 2.Declining balance method
b)between an individual who owns 3.Sum-of-the-year-digital method; and
more than 30% of 4.any other method which may be
outstanding capital stock of a prescribed by the Secretary of Finance
corporation and that upon recommendation of the
corporation Commissioner
c) between two (2) corporations
more that 50% of the DEPRECIATION OF PROPERTIES USED
outstanding capital stock of IN PETROLEUM OPERATIONS
which is owned by or for the
same individual 1. properties directly related to
d)between a grantor and fiduciary of production of petroleum
any trust 2. allowed under (1) straight line or (2)
e) between two (2) fiduciaries of two declining balance method
(2) trusts who has the same 3. useful life of properties used or
grantor related to production of
f) between a fiduciary of a trust and petroleum shall be ten (10) years
above fiduciary of such trust or such shorter life as may be
permitted by the Commissioner.
SECURITIES BECOMING WORTHLESS 4. for property not used directly in the
1. ascertained to be worthless and production of petroleum (1)
charged off within the taxable year depreciated under the straight line
2. capital asset method, and useful life is only five
3. taxpayer, other than a Bank or (5) years
trust company incorporated under
Phil. Laws DEPRECIATION OF PROPERTIES USED
4. substantial part of business is the IN MINING OPERATIONS
receipt of deposit
5. considered as a loss from the sale ALLOWANCE FOR DEPRECIATION:
of capital assets on the last day of 1.all properties used in mining operations
such taxable year other than petroleum operations shall be
computed as follows:
34 F DEPRECIATION a. if the expected life is ten (10) years or
less – normal rate of depreciation
Q: What is depreciation?
A: It is the gradual dimension in the
service or useful value of tangible

47
 Taxation law review notes
- Atty. Francis J. Sababan -
b. if the expected life is more than ten TAKE NOTE:
(10) years – depreciated over any number 1.unique because deducted from the
of years between five (5) years and the taxable net income and not from the gross
expected life. income
►second step of the formula deduction
REQUIREMENTS:
1. depreciation is allowed as a deduction Q: Who is claiming the deduction?
from 61; and A: the donor
2. contractor notifies the Commissioner
at the beginning of the depreciation Q: Who are the Donees?
period which depreciation rate shall be A: 1.Government of the Philippines or any
used. of its agencies or any political subdivision
thereof exclusively for public purpose
DEPRECIATION DEDUCTIBLE BY NRAETB 2. Accredited Domestic corporation or
OR RFC association organized and operated
► reasonable allowance for the exclusively for religions, lion,
deterioration of property charitable, scientific, youth and sports
development, cultural or
1. arising out of its use or educational purposes or for the
employment rehabilitation of veterans, or to
2. or non-use in the business, trade or social welfare institution, or to non
profession government organization and no part
3. property is located in the of its net income inures to the benefit of
Philippines any private stock holder or individual

34 G DEPLETION OF OIL and GAS Q: How many kinds of deduction?

WELLS and MINES A: Two (2) kinds:
► only deduction which is a not self 1.partial deduction
executing deduction ►10% of taxable income in case of
an individual
Q: What is depletion? ►5% of taxable income in case of
A: the exhaustion wear and tear of natural corporations
resources as in mines, oil, and gas wells 2. full /total deduction
►the natural resources called “wasting
assets” Q: Which of the two kinds is the General
Rule?
DEPRECIATION vs DEPLETION A: General Rule: Partial deduction
Exception: Total /Full deduction
1.involves 1. involves natural
property resources Q: Suppose Mr. A made a cash donation of
2. ordinary wear 2. ordinary wear P1M. How much can he claim as a
and tear of and tear of natural deduction?
equipments resources A: First determine the taxable income of
Mr A since he is an individual, he can only
TAKE NOTE: deduct 10% of his taxable income.
►Equipment used in mining operation is
deductible in depreciation Q: What if the Donee is not one of those
mentioned under the law, can he claim a
Q: Method for computing depletion? deduction?
A: cost depletion method A: No.

Q: to whom allowed? TAKE NOTE: Donee is never an individual.

A: only mining entities owning economic
interest in mineral deposits
►Economic interest: capital investments Q: If the Donor is a pure compensation
in mineral deposits income earner and he donates P100,000
to the church, can he claim it as a
deduction?
34H CHARITABLE & OTHER A: No. pure compensation income earner
CONTRIBUTIONS can only claim a deduction under Sec 34
M

48
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: If Donee is the Philippine Government, c) distributed by the court to another
what is the requirement? organization to be used in such a
A: it must be made exclusively for public manner which would accomplish the
purposes general purpose for within the dissolve
organization was organized
Q: What if the Donee is a province?
A: there must be a qualification that it is 34I RESEARCH AND DEVELOPMENT
for public purpose
►In the old law, this is not allowed as a
Q: If the Donee is a Domestic Corporation, deduction. To remedy this, they felt that
what is the requirement? those should be a separate deduction for
A: no part of its income inures to the research and development.
benefit of any private shareholder or
individual REQUISITES:
►tax payer may treat research and
Q: What are those contributions which can development expenditures as ordinary
be deductible in full? and necessary expenses provided:
A: 1.Donations to the Government – no 1. it is paid or incurred during the taxable
conflict with partial (different year
requirement) 2. incurred in connection with trade,
►Partial donated for exclusively public business or profession; and
purposes 3. not chargeable to capital account.
►Full, used in undertaking priority
activities of NEDA Q: Treated as such when?
A: during the taxable year it is paid or
2.Donations to certain Foreign incurred
Institutions or International
Organizations AMORTIZATION OF CERTAIN RESEARCH
►in compliance with agreement, AND DEVELOPMENT EXPENDITURES
treaties or commitment entered into
by the Philippine Government and such ►at the election of the taxpayer, the
donees following shall or may be treated as
deferred expenses:
3.Donations to Accredited Non a. paid or incurred by the taxpayer in
government organizations Non connection with his trade, business or
government organization, non profit profession;
domestic corporation b. not treated as expenses under par 1
and
REQUIREMENTS: c. chargeable to capital account but not
1. organized and operated exclusively for chargeable to property of a character
scientific, research, educational, character which is subject to depreciation or
building and youth and sport depletion
development, health, social welfare,
cultural or charitable purposes or a Q: How to compute taxable income:
combination thereof A: deferred expenses shall be allowed as
2. no part of the net income of which deduction ratably distributed over a
inures to the benefit of any private period of not less than 10 months as may
individual be elected by the taxpayer (beginning
3. uses the contributions directly for the with the month the
active conduct of the activities
constituting the purpose or function for taxpayer first realizes benefits from
which it is organized and operated expenditures.)

►the election or option may be exercised

4. annual administrative expense does not
exceed 30% of the total expenses and
5. in case of dissolution, the assets of
which would be distributed to:
a) another non profit domestic
corporation organized for similar
purpose or purposes
b) to the state for public purpose
for any taxable year after the effectivity of
the code but not later than the time
prescribed by law for filing the return for
such taxable year.
LIMITATION ON DEDUCTION
Q: When not deductible?
A: 1.Any expenditure for the

49
 Taxation law review notes
- Atty. Francis J. Sababan -
(1) acquisition or improvement of land OPTIONAL STANDARD DEDUCTION:
or (2) for the improvement of property to ►can be availed of by an individual who
be used in connection with research and may elect a standard deduction in an
development of a character which is amount not exceeding 10% of his gross
subject to depreciation and depletion income
and office site ► may apply in lieu of the other
deductions under Section 34
2. Any expenditure paid or incurred for ►the taxpayer must signify in his return
the purpose of undermining the his intention to elect the optional standard
existence, location, extent or quality of deduction, otherwise, he shall be
any deposit of one or other mineral considered as having availed of the
including oil or gas. itemized deduction.
► not for mineral exploration
Q: Who can claim this deduction?
34 J PENSION TRUST A: all individual taxpayers except non
resident alien not engaged in trade or
Q: Claimed by Whom? business (NRANETB)
A: the employer Reason: he is not liable to pay by way of
the NIT, thus, follows he cannot claim this
Q; What is a Pension Trust contribution? deduction because he is liable to pay by
A: a deduction applicable only to way of GIT.
employer on account of its contribution to
a private pension plan for the benefit of its TAKE NOTE:
employee deduction is purely business in ►can co-exist with personal and / or
character. additional exemption

Q: Requisites? 34 M PREMIUM PAYMENTS ON HEALTH

A: AND /OR HOSPITALIZATION
1.the employer must have established a INSURANCE OF AN INDIVIDUAL
pension or retirement plan to provide for TAXPAYER
the payment or reasonable pension of his ► for (1) Health and /insurance
employees (2) Hospitalization
2. pension plan must be reasonable and
actually sound; REQUIREMENTS:
3. it must be funded by the employer 1. amount of premiums, paid by
4. the amount contributed must no longer taxpayer for himself and members of
be subject to his control or disposition his family,
5. the amount has not yet been allowed as 2. amount of premiums should not
a deduction and exceed (1) P2,400 per family or (2)
6. the amount has or is apportioned in P200 a month
equal parts over a period of 10 3. gross income of the family for the
consecutive years beginning with the year taxable year is not more than
in which the transfer or payment is made. P250,000

34 K ADDITIONAL REQUIREMENTS
FOR DEDUCTIBILITY OF CERTAIN
PAYMENTS Q: Who can avail of this deduction?
A: 1.individual taxpayer earning purely
►allowed as a deduction only if shown compensation income during the year;
that the tax required to be deducted and 2. individual taxpayer availing
withheld there from has been paid to the itemized or optional standard
BIR in accordance with Section 58 and deduction; and
Section 81 3. individual taxpayer earning both
compensation income and income
34 L OPTIONAL STANDARD from business
DEDUCTION
SECTION 35 ALLOWANCE FOR
KINDS OF DEDUCTIONS: PERSONAL EXEMPTION FOR
1.Itemized deduction INDIVIDUAL TAXPAYER
2.Optional Standard Deduction
3.Personal /Additional Deduction Q: When do we apply this?

50
 Taxation law review notes
- Atty. Francis J. Sababan -
A: apply if individual taxpayer is paying 4. whose such brother or sisters or
by way of NIT children are
(1) not more than 11 years old and
Q; Who are taxpayer? (2) not gainfully employed,
A: those mentioned under Section 24 (A) (3) unmarried
1. RC 5. OR, regardless of age, the same are
2. NRC incapable of self support because of
3. OCW mental or physical defect.
4. RA
►all can claim both personal and Q: Why do we have to determine who the
additional exemption head of the family is?
A: only legally separated individuals can
Q: Why not include NRAETB? Can the claim additional exemptions if they
latter claim any exemption? have qualified dependents.
A: NRAETB is not included because
Section 35 A refers to Section 24 A TAKE NOTE:
►NRAETB can claim personal deductions ►R.A. 7432 and RR 2-98: a senior citizen
but not additional exemptions pursuant to can also be a dependent.
Sec 35 D
Q: Can a widower claim exemptions?
REQUIREMENTS: A: exemptions must be strictly construed,
1.NRAETB should file a true and widower not included in the list under
accurate return Section 35 A – but can claim under sec
2. the amount to be claimed as personal 35B
exemptions should not exceed the ►widower, married or used to be married
amount provided for under Philippine
Laws MARRIED INDIVIDUALS
►each legally married individuals can
TAKE NOTE: claim the personal exemption. Husband
AEMOP: can be a RA or NRAETB and wife = P64,000

BASIC PERSONAL EXEMPTIONS: Q: Who are allowed to claim?

A: Normally , it is the husband who
1. Single individual; or individual claims unless he executes a waiver that
judicially decreed as legally the wife will claim the same (RR2-
separated with no qualified 98)
dependents.
► 20, 000 Additional Exemptions: (35B)

2. For head of the family – can be
single or legally separated with
qualified dependents.
► 25, 000
3. For each married individual – if only
one of the spouse, earns or derives
gross income, only such spouse
can claim the personal exemption.
►32, 000
Q: Who is the “head of the family”?
A: 1.unmarried or legally separated man
or woman
2. With (1) one or both parties or
(2) With one or more brothers and
sisters
(3) with one or more legitimate,
recognized, natural or legally
adopted children
3. living with and dependents upon
him for their chief support
-additional exemption of P8,000 for each
dependent not execeeding four (4)
Q: Who can claim the same?
A: 1.Married couples: only one of the
spouses can claim it;
2.legally separated individuals: can be
claimed by the spouse who has
custody of the child or children
►the additional exemption claimed by
both shall not exceed the maximum
additional exemption herein allowed.
Q: Define “dependents”
A: legitimate, illegitimate or legally
adopted child chiefly dependent upon
and living with the taxpayer if such
dependent is (1) not more than 21 years
of age, (2) unmarried, and (3) not
gainfully employed or (4) if such
dependent, regardless of age is
incapable of self support because of
mental or physical defect.

51
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: What if widower has illegitimate
children, can claim additional
exemption?
A: can claim, can be considered as head
of the family w/ dependent
Q: What if the children are temporarily
away from the parents?
A: still considered living with parents, can
claim exemption
CHANGE OF STATUS: (SEC 35 C)
Q: Reckoning Period?
A: end of the year or close of such year
when such change of status
occurred.
TAKE NOTE:
►always choose the higher amount of
exemption if you are filing a return
covering the period within which the
change of status occurred
1. if the taxpayer should (1) marry or (2)
have additional dependents during the
taxable year, he may claim the
corresponding exemption in full for the
year.
Illustration:
1.Single Jan 1, 2005
2.Married June 1, 2005 – on April 15, 2006
– status: legally married can claim P
32,000
2. if the taxpayer should die during the
taxable year, estate can claim personal
exemption.
Illustration
1.Jan. 25, 2005 taxpayer married w/ one
child
can claim on April 15, 2006
P32,000+
P8,000 } P40,000
► In this case, as if the change of status
occurred at the close of taxable year. If
taxpayer’s spouse or child dies within the
taxable year or the dependent’s became
(1) gainfully employed (2) got married or
(3) became 21 as if the change as status
occurred at the close of taxable year.
Illustration:
1. Taxpayer’s tragic story wife died Jan.
25, 2005 and child died the next day then
another child eloped and get married.
2. Taxpayer despite the tragedy can claim
ton of money on April 15, 2006.
P 32,000
P 16,000 (8,000 per child)
48,000
Section 36. Items not Deductible
36 A. General Rule: In computing net
income, no deduction shall be allowed:
(1) Personal, living or family expenses –
not related to trade or business
(2) Section 36 A (2) and Section 36 A (3)
General Rule: No deductions allowed for
1. Any amount paid out for new
buildings or for permanent
improvements, or betterments, made to
increase the value of any property or
estate
2. Any amount expanded in restoring
property or in making good the
exhaustion thereof for which an
allowance is or has been made.
Exceptions:
1. Option granted to Private
Educational Institution to deduct
the same as capital outlays.
TAKE NOTE:
►Amount paid for new buildings, can be
deducted if it involves intangible drilling
and development cost incurred in
petroleum operations (Sec 34 6 (A)
PREMIUMS PAID ON LIFE
INSURANCE POLICY :
1. covering the life of any officer or
employee or any person financially
invested in any trade of business
carried on by the taxpayer.
2. taxpayer is directly or indirectly the
beneficiary under such policy.
LOSSES FROM SALES OR EXCHANGES
OF PROPERTY (between related parties)
1) between family members
Q: Who is considered the “family of the
taxpayer?”
A: a. brothers and sister (whole is ½
blood)
b. spouses
c. ancestors
d. lineal descendants
Q: are uncles or nieces included?
A: no
IN DONOR’S TAX
►Relatives includes relatives by
consanguinity within the 4th civil code.
Nephew is a stranger and relative ang
nephew.
52
 Taxation law review notes
- Atty. Francis J. Sababan -
2) individual and corporations EXCEPT: sale of shares of stock where
Gen. Rule: NO DEDUCTION you have to determine actual gain or
Except: distribution in liquidation loss
or less than 50% of the
outstanding capital stock Q: When is there a gain?
A: excess of the amount realized over the
3) Two corporations basis or adjusted basis for determining
4) Grantor or Fiduciary gain. (amount realized from the sale or
5) Two fiduciaries of two trust other disposition of property)
6) Fiduciary and beneficiary of trust
Q: When is there a loss?
Sec. 37 Special provisions regarding A: the amount realized is not in excess of
deductions of insurance companies. B or AB
Illustration: 1987 Bar (Juan dela Cruz
Codal Provisions sold jewelry for 300,000 ) contract of
Section 38: Losses From Wash Sales of sale
Stock or Securities ►amount realized is 300,000

Q: What is a wash sale? Q: What will be the basis of the gain?

A: It is a sales or other disposition of stock
securities where substantially identical
securities are purchased within 61 days,
beginning 30 days before the sale and
ending 30 days after the sale.
Q: What period?
A: 61 day period beginning 30 days
before and ending 30 days after the
sale
Q: Jan 20 you purchased share of stock,
and disposed of the same on Feb 5,
2005. Is this a wash sale?
A: No
Q: If it is a loss in wash sale, happens?
A: General Rule: (Sec 131 RR No. 2)
gains from wash sale are taxable but
losses are non-deductible
Exception:
►unless claim is made by a dealer in stock
or securities and with respect to a
transaction made in the ordinary course of
the business of such dealer
Q: Reason why losses in wash sale cannot
be deducted?
A: 1. to avoid too much speculation
in the market
2. taxpayer not telling the truth,
because he may say he
incurred a loss instead of a
gain
Section 40. Determination of Amount
and Recognition of Gain or Loss
GENERAL RULE: This is totally
irrelevant if the income is subject to
fit. In fit gain is presumed.
A: Sec. 40 B (1), property was acquired
by purchase
►Cost: purchase price + expenses
Q: If there is a gain, is the whole gain
subject to income tax?
A: it depends
►if ordinary asset = 100% is subject to
income tax
►if capital assets
a. short term(less than 12 months) :
100% taxable
b. long term (more than 12 months):
50% taxable
Q: suppose property sold is a parcel of
land will the rule be the same?
A: No, and it depends
►ordinary asset: apply the cost
►capital asset: 6% FMV or selling
price which ever is higher
Q: Do we apply the holding period?
A: No, holding period does not apply to
the sale of real property. This is an
absolute rule:
►If realty is ordinary – holding period
does not apply.
►If realty is capital asset – 6% FMV or
selling price applies.
►Holding period applies only to sale of
personal property which is a capital asset
except sale of shares of stocks.
►Holding period also do not apply to
corporations.
Q: If the property is acquired through
inheritance, what is the basis?
A: Sec 40 B (2) fair market value or price
as of the date of acquisition.

53
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Suppose it was a sale of personal
property, do we apply the same
principles?
A: No.
Q: What if it involves a sale of real
property?
A: Apply the same principles
Suppose it was a result of swindling,
theft, robbery or estafa, do we
apply the same principles?
A: Law is silent, take note of the old CIA
ruling on this one
Q: Feb 14, 2006, your GG gave you a
jewelry in Sept your GG breaks up with
you. GG request the jewelry be
returned but you already sold it for
P200,000. Will the entire P200,000 be
included in gross income?
A: Basis: (1) same as if it would be in the
hands of the Donor (FMV as of date of
acquisition); or (2) last owner who did
not acquire the same by gift (cost)
Q: If it involves a parcel of land?
A: apply the same rules Section 40 B (4)
what is the basis?
1. Property was acquired for less
than an adequate consideration
in money or moneys worth: the
basis would be the amount paid
by the transferee for the
property.
Q: Section 40 B (5) what is the basis? A:
40 C (5)
► if the property was acquired in a
transaction where gain or loss is not
recognized (pursuant to a merger or
consolidation plan)
a. corporation, party to a merger or
consolidation, exchanges
property solely for stocks in
another corporation, also a party
to the merger or consolidation
b. is a party to the merger or
consolidation, solely for the
stocks of another corporation
also a party to the merger or
consolidation, or
c. Security holder of a corporation,
party to a merger or
consolidation, exchanges his
securities solely for stock or
security in another corporation,
also a party to the merger or
consolidation. – person transfers
property to corporation to gain
control
40 C EXCHANGE OF PROPERTY
GENERAL RULE: In sale or exchange of
property, the control amount of gain or
loss shall be recognized.
1. gain is taxable
2. losses are deductible
Exception: If permanent to a merger or
consolidation plan, no gain or loss
shall be recognized
1. gain is exempt
2. losses are not deductible
REQUISITES:
1. the transaction involves a contract
of exchange
2. the parties are members of the
merger or consolidation
3. the subject matter is only limited
or confined with the one provided
for by law
►Merger and Consolidation in corporation
code and tax code are not the same.
►Sec 40 (2) (a)
►a corporation which is a party to a
merger or consolidation, exchanges
property solely for stock in a
corporation which is a party to the
merger or consolidation
Illustration:
Transferor gives 1M
Transferee gives 700,000 = not
taxble gain P300,000
►If other property received by transferee
(40 C (3) (a) TRANSFEREE
►if the party receives not just the
subject matter permitted to be
received: lie if the party receives
money and /or property, the gain, if
any, but not the loss, shall be
recognized (meaning taxable) but in
an amount not in excess of the sum of
the money and the FMV of such other
property received.
(40 C (3) (b) TRANSFEROR
1.Transferor corporation receives money
and / or property, distributes it pursuant
to the merger or consolidation plan
►no gain to the corporation shall be
recognized
2. Transferor corporation receives money
and / or property, does not distribute it
pursuant to the merger or consolidation
plan
►the gain shall be recognized but in an
amount not in excess of the sum of such
54
 Taxation law review notes
- Atty. Francis J. Sababan -
money and the FMV of such other stock or unit of participation in
property so received. a corporation.
2. As a result, the person alone or
Q: What is the rule? together with others (not
A: 40 C (3) (a) exceeding of 4 persons) gains
1. gain taxable control of the corporation.
2. loss not deductible
►40 C (3) (b) Q: What is control?
It depends on how distributed: A: ownership of stocks in a corporation
1. pursuant to the merger or possessing at least 51% of total
consolidation plan: voting power.
►gain exempt
►loss not deductible Sec 40 B (5)
2. not pursuant to merger or ►non applicability of income tax is
consolidation plan: only temporary
►gain taxable
►loss not deductible. Reason : Basis will be 40 C (5)
1. 40 C (5) (a) Transferor
Sec 40 C (1) (b) ►basis of stock or securities received
►a shareholder exchanges stock in a by the transferor: same as the basis of
corporation which is a party to a the property, stock or securities
merger or consolidation, solely for the exchanged:
stock of another corporation which is a ►decreased by the (1) money and (2)
party to the merger or consolidation FMV of the property received; and
►increased by (a) amount treated as
Sec 40 C (2) (c) dividend and (b) amount of gain
► a security holder of a corporation recognized
which is a party to the merger or
consolidation, exchanges his securities 2. 40 C (5) (b) Transferee
in such corporation, solely for stock ►as it would be in the hands of
securities in another corporation. transferor increased by the amount of
gain recognized.
►The rule is similar in 40 C (3), (a), (b)
and (c) although different property are Sec 40 (c) (4) Assumption of
involve, that is why the last paragraph of Liability
40 C is a separate paragraph. 1. Taxpayer, in connection with the
exchanges described – receives
►Therefore, Sec 40 C (3) (a,b,c) the rule is securities or stocks permitted (no
1. gain exempt gains recognized) – it is sole
2. loss not deductible consideration of the same – the
other party assumes liability of the
same – the acquisition of liability
40c last paragraph not treated as money and / or
► the transferee becomes a other property – the exchange still
stockholder, parties are not members falls within the exceptions.
of the merger 2. If amount of liabilities assumed +
amount of liabilities to which
►the individual wants to be a property is subjected to exceeds -
shareholder but does not want to adjusted basis of the property
purchase shares but willing to give up transferred – the excess shall be
property as a result of the exchange , considered a gain from the sale of
the person gains control of the a capital asset or of property
corporation which is not a capital asset, as the
case may be.
►The rule is:
a. gain is exempt SECTION 41 INVENTORIES
b. loss not deductible
Requisites: Purpose: Change of inventory to
1. There is A contract of exchange determine clearly the income of any
where property was transferred taxpayer/ to reflect the true income.
by the person in exchange of
Limitation:

55
 Taxation law review notes
- Atty. Francis J. Sababan -
1. once every 3 years
2. approval of the secretary
finance
Section 43 Accounting Periods
1. Fiscal year
2. use of calendar year
a. no annual accounting
b. does not keep books of account
c. individuals
►Use of method as in the opinion of the
commissioner clearly reflects the income:
1. no accounting method has been
employed
2. the method does not clearly reflect
the income
Sec 44 Period in which items of Gross
Income included and Sec 45 Period
for which Deductions and Credit
Taken
►Under Sec 44 amount of all items of
gross income shall be included in the
gross income for the taxable year in
which they are received by the
taxpayer
►Under Sec 45 deductions shall be
taken for the taxable year in which
“paid or accrued” or “paid or
incurred.”
►Sec 44 and Sec 45 are mentioned in the
code because of the death of the person.
Illustration:
Facts: taxpayer dies in the middle of
the year
January 1, 2006 – June 15, 2006
►June 26, 2006 to Dec 31, 2006 the
estate is the taxpayer
►So the income and deductions from
Jan 1 to June 25,, included in the
computation
Section 46 Change of Accounting
Period
Q: Who is the taxpayer?
A: corporation (taxpayer other than
individual)
Q: What kinds of accounting period?
A: 1.fiscal year
2. calendar year
Q: Changes contemplated?
A: 1. fiscal to calendar
2. calendar to fiscal
3. fiscal to another fiscal
►with the approval of the
of Commissioner, net income shall be
computed on the basis of the new
accounting period.
Q: Calendar to calendar, correct?
A: not correct statement
Section 47 (A)
Taxpayer: Corporation
1. Fiscal to calendar
► separate final or adjusted return
shall be made for the period between
the so close of the last fiscal year for
which the return was made and (2) the
following Dec 31.
2. Calendar to Fiscal
►separate final or adjusted return shall
be made for the period between the
close of the last calendar year and the
date designated as the close of the
fiscal year.
3. Fiscal to fiscal
►separate final or adjusted 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.
►File return indicating the change in
accounting method
Section 48 Accounting for Long Term
Contracts
Q: Who are the professionals involved?
A: applies to architects and engineers
Q: What is a long term contract?
A: it means building, installation or
construction contracts covering a period
in excess of one (1) year.
Q: Basis of income?
A: a. persons whose gross income is
derived in whole or in part from such
contract shall report such income upon
the basis of percentage of
consumption.
b. the return shall be accompanied by
a certificate of architects or engineers
showing the percentage of completion
c. deduction of expenditures made
during the taxable year, on account of
the contract is allowed
Section 49 Installment Basis
►contemplates a seller of the property
56
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Is it important to know if the property A: stockholders substantially the same
is personal or real?
A: Yes Q: Limitations?
A: None
Q: Sale of Real Property is it important to ►That is why it is a great source of
know if it is a casual sale or regular corruption
sale?
A: No Section 51 Individual Returns
Who are required to file? (ITR)
Requirement: The initial payments do not 1. RC
exceed 25% of the selling price. 2. NRC
3. RA
Q: If the initial payment exceeds 25% 4. NRAETB – sources within
what do you call it?
A: called deferred sale Q: Who is not mentioned in Sec 51 but
liable to pay by way of NIT?
Q: Consequence? A: OCW/ seaman
A: you must pay the whole amount of the
tax Exception:
RC OR ALIENS: engaged in trade or
Q: Sale of Personal Property, is it practice of profession in Phil. Shall file ITR
important to know if it is a casual or regardless of the amount of gross income.
regular sale?
A: Yes Q: If OFW is exempt from filing a return,
what is he required to file?
Casual Sale has Requirements: A: Information Return
1. selling price exceeds P1,000
2. initial payment not exceeding Q: who are not required to file a return?
25% selling price A:
a. an individual whose gross income
►Regular sale no requirements does not exceed his total personal
Case of Bañas and additional exemptions for
1. subject matter dependents
2. sold by way b. worker (compensation income
3. agreement earners) regardless of the amount
4. cash deposit of compensation shall not required
5. post dated promissory notes to file ITR because the
(installments) management files it. (RR 3-2002)
3. 1st installment promissory note was c. individuals whose sole income is
disconnected subject to FIT
4. 2nd installment exchanged with d. individuals who are exempt from
cash - these two exceeds the income tax
selling price
5. you only compute cash Exception: IT
1. the management files an incorrect
H: Initial payment exceeds 25% return
installment basis is not applicable 2. the employee has two or more
employer
RR 2; Section 175: In payment by way of
installment promissory note, bills of 51 A (3)
exchange and checks will not be
considered in computing the 25% initial A: not required to file ITR may be required
downpayment. to file information return

51 B - Where to file?
Section 50 Allocation of Income and 1. authorized agent bank
Deductions 2. revenue district officer
►tremendous power of the 3. collection agent
Commissioner to allocate the income 4. duly authorized treasurer of the city
and deduction of several corporations or municipality where taxpayer resides
having the same interest. or has principal place of business
Q: Same interest?

57
 Taxation law review notes
- Atty. Francis J. Sababan -
5. office of commissioner – if no legal
residence or place of business in Phil
51 C
Q: When to file?
A: filed on or before the 15th day of April
each year
51 C (1) – NIT Payers using CY
►two days provided (calendar)
1. on April 15; or
2. before April 15 (January, Feb or
March)
► not December because the calendar
year is not yet over
Fiscal year: 15th day of the 4th month
following the close of the fiscal year.
51 C (2) individuals subject to tax on
capital gains
Exception: General Rules Sec 58
1. Sale of shares of stocks
►return filed within 30 days after each
transaction and
►Final consolidated return on or before
April 15
2.Sale of Real Property
►return filed within 30 days following each
sale
51 D Husband and Wife
1. Pure compensation income earner –
separate return RR 3-2000 – pure
compensation income earner regardless of
amount of income not file ITR.
2. Not pure compensation: joint return
51 E. Return of Parent to Include
Income of Children
► unmarried minor receives income from
property received from living parent –
included in the parent’s ITR.
Exception:
1.Donor’s tax has been paid
2.Property exempt from donor’s tax
51 F. Persons Under Disability
Q: Who makes the return?
A:
1.duly authorized agent
2. duly authorized representatives
3. guardians
4.other persons charged with the care
of his person or property
►both incapacitated taxpayer and
agent will be liable for:
1.erroneous return
2. false or fraudulent return
51 G Signature Presumed Correct
► prima facie evidence the return was
actually signed by the taxpayer
Section 52 Corporation Return
►go back to Sec 51 A (2)
General Rule: Sec 58 Final Income
Tax
►return and creditable withholding tax
return is filed monthly
Exception: Sale of Shares of Stocks
(Sec 51 A (2)) Sale of Real Property
►RR -17-2003: Sale of Real Property
subject to final withholding tax, the
buyer is deemed the agent.
Sale of Shares of Stocks
Q: Reasons for filing Final Income tax or
Final Consolidated Return?
A: Reasons:
1. FIT whose actual determination of
gain or loss
2. in connection with Sec 24 C the
basis of the tax is not the gross
income but the net capital gains
realized.
In connection with Sec 40:
►actual determination of loss or gain
►file a return within 30 days from date of
transaction
TAKE NOTE: In all other income subject
to FIT, the gains are presumed
INCOME OF MINORS
Q: Minor below 18: Will it be included in
the Minor’s ITR?
A: it depends
1. income from property received
from parents ► included in parent’s
ITR
Except:
a.Donor’s tax paid
b.Property exempt from donor’s
tax
2. income from minor’s own industry
►Minor’s ITR accomplished by
guardian or parents
Q: if the individual is exempt from income
tax, can be required to file a return?
A: General Rule: No
Exceptions:
1.engaged in trade or business; or
2.exercise of profession – Sec 51 A (2)
SEC 52 CORPORATION RETURNS
A.Requirements
58
 Taxation law review notes
- Atty. Francis J. Sababan -
Taxpayer: DC or RFC (except NRFC)
ITR Filed: 1. TRUE AND ACCURATE
a. quarterly income tax return
b. final or adjusted income tax return
Filed by:
1.President;
2.Vice President
3. Other principal officer
►ITR must be sworn by such officer and
the treasurer or assistant treasurer
B. Taxable Year
1. fiscal; or 2. calendar
► corporation cannot change accounting
method employed without the approval or
prior approval of the commissioner (Sec
47)
C. Return of Corporation Contemplatory
Dissolution or Recognition
1.Within 30 days after:
a. the adoption by the corporation of a
resolution or plan for its dissolution; or
b. liquidation of the whole or any part
of its capital stock, including a
corporation which has been notified of
possible involuntary dissolution by the
SEC; or
c. for its reorganization
2.Render a correct return verified under
oath setting form:
a. forms of the resolution or plan;
b. such other information prescribed
3.Secure a tax clearance from the BIR and
file it with the SEC
4.Thereafter, SEC issued a Certificate of
Dissolution or Reorganization.
Section 55 Returns of General
Professional Partnership
► file a return of its income setting forth
1. items of gross income and of
deductions allowed by this title
(Title II – Tax on Income)
2. Names of partners
3. Taxpayer identification number
(TIN)
4. address of partners
5. shares of each partners
►GPP is exempt from corporate income
tax
Q: Why is the GPP obliged to file a return?
A: to determine the shares of each
partners
Section 56 Payment and Assessment
of Income Tax for Individuals and
Corporations
A. Payment of Tax
Q: Who pays the tax of tramp vessels?
A: 1.the shipping agents and or the
husbanding agent
2.in their absence, the captains
thereof
►those people are required to file a return
and pay the tax due before departure
Q: What is the effect of failure to file the
return and pay the tax due?
A: 1.Bureau of Customs may hold the
vessel and prevent its departure until:
a. proof of payment of tax is
presented; or
b. a sufficient bond is filed to answer
for the tax due.

D. Sale of Stocks – ITR Installment Payments

look at the previous notes about it Tax due: more than P2,000
Taxpayer: individuals only (other than
Section 53 Extension of Time to File corporation)
Returns Elect to pay the tax in two (2) equal
installments
Q: To whom granted?
A: Corporations a. 1st installment: paid at the time the
Grounds: Meritorious case return is filed
►subject to the provisions of Sec 56 b. 2nd installment on or before July 15
Time Extension following the close of the calendar
year
Section 54 Returns or Receivers,
Trustees in Bankruptcy or Assignees Q: What is the effect of non payment on
►the aforementioned persons shall the date fixed?
make returns of net income as and for A: The whole amount of tax unpaid
such corporation in the same manner becomes due and demandable
and form as such organization is together with the delinquency
required to make. penalties.

59
 Taxation law review notes
- Atty. Francis J. Sababan -
B. Withholding of Creditable Tax at
Payment of capital gains tax : Source
Q: Paid when? ►The Sec. of Finance, upon
A: on the date the return is filed recommendation of the
Avail exemption for capital gains: commissioner require the
a. no payments shall be required; withholding of a tax on the items of
b. if you fail to qualify for exemption – income payable to natural or juridical
tax due shall immediately become persons, residing in the Phil, by
due and payable and subject to payor-corporation/ person… the
penalties same shall be credited against the
c. seller pays tax – submit intention income tax liability of the taxpayer
or proof of intent within six (6) for the taxable year. At the rate of
months from the registration of not less than 1% but not more than
document transferring 32% thereof.
Q: when is the real property entitled to
refund? Q: What is the maximum?
A: upon verification of compliance A: Maximum: now 35% pursuant to RA
with the requirements for exemption. 9337
Q: When will you allow withholding
►Report gains on installments under beyond 15%?
Sec 49 – tax due from each installment A:
payment shall be paid within 30 days For NIT 15% is the maximum
from the receipt of such payments. 1. FIT – the amount of withholding is
►No registration of document totally
transferring real property 2. GIT - equal to the amount of tax
1. without a certification from
commissioner or his duly authorize Tax Free Covenant Bond
representative that ►the bonds, mortgages, deeds of trust or
a. transfer has been reported other similar obligations of
b. tax has been paid
DC or RFC
B. Assessment and Payment of Deficiency ►contains a contract or provision where
Tax the obligor (debtor) agrees to pay the tax
► Return is filed, the commissioner imposed herein
examiner and assess the correct amount ►normally between the creditor and
of tax debtor
►tax deficiency discovered shall be paid
upon notice and demand from the Q: Who pays the tax?
commissioner. A: Creditor pays the tax by virtue of an
agreement the debtor assumes the
3 INSTANCES CONTEMPLATED liability and the creditor is now free from
1. file the return and pay the tax payment of tax before it can transfer the
2. file the return but not pay the tax property to the buyer.
3. not file the return and not pay the tax
Section 58 Returns and Payment of
Section 57 Withholding of Tax at Taxes Withheld at Source
Source
A. Quarterly Returns and Payment of
A. Withholding of Taxes Taxes Withheld at Source
►subject to the Rules and Regulations 1. covered by a return and paid to:
the Section of Finance may promulgate, a. authorized agent bank
upon recommendation of commissioner: b. revenue district officer
Require the filing up of certain income c. collection agent
tax return by certain income payees. d. duly authorized treasurer of city or
municipality where withholding
Q: Enumeration is all about what? agent has:
A; Enumer ation about Final Income Tax 1. his legal residence; or
Except: Gross Income Tax 2. principal place of business; or
1. 25 B (NRANETB) 3. if corporation , where principal
2. 28 B (NRFC) office is located

2.Tax deducted and withheld

60
 Taxation law review notes
- Atty. Francis J. Sababan -
►held as a special fund in trust for the
government until paid to the collecting
officers.
3.Return for final withholding tax
►filed and paid within 25 days from the
close of each calendar quarter
4.Return for Creditable withholding taxes
►filed and paid not later than last day of
the month following the close of the
quarter during which withholding was
made
5. Commissioner, with approval of Sec
Finance
► require withholding agents to pay or
deposit taxes at more frequent intervals
where necessary to protect the interest of
the government
B. Statement of Income Payments Made
and Taxes Withheld
►Withholding agent shall furnish
payee a written statement showing:
1. income or other payments made
by WHA during such quarter or year
and
2. amount of tax deducted and
withheld
► statement given simultaneously upon
payment at the request of the payee.
Creditable withholding taxes
1. corporate payee – not later than
the 20th day following the close of
the quarter
2. individuals payee – not later than
March 1 of the following year
Final Withholding taxes
►the statement should be given to the
payee on or before January 31 of the
succeeding year.
C. Annual Information Return
►Withholding agent shall submit to the
commissioner an annual information
return containing :
1. the list of payees and income
required
2. amount of taxes withheld from each
payees
3. other pertinent information required
Final Withholding Tax: AIR
►filed on or before January 31 of the
succeeding year
Creditable withholding tax: AIR
►not later than March 1 of the year
following the year for which the annual
report is being submitted
►Commissioner may grant WHA
reasonable extension of time to furnish
and submit the return required herein.
D. Income of Recipient
1. Income upon which any creditable
tax is required to be withheld at
source shall be included in the
return of its recipient.
2. the excess of the amount of tax so
withheld over the tax due on his
return shall be refunded
3. income tax collected at source is
less than the tax due on his return
– difference shall be paid
4. all taxes withheld
1. considered trust fund
2. maintained in separate account
3. not commingled with other
funds of WHA
E. Registration with Register of Deeds
►No registration of any document
transferring real property shall be
effected by the Register of Deeds
unless the commissioner or his duly
authorize representative has certified
that the transfer (1) has been reported
and (2) tax due has been paid
►Register of Deeds requires payment
of tax before transfer of property
Section 59 Tax on Profits Collectible
from Owner of other Persons
►Tax imposed under this title upon gains,
profits and income not falling under the
foregoing and not returned and paid by
virtue of the foregoing
shall be assessed by personal return
Intent and Purpose of this Title
1. All gains, profits and income of a
taxable class shall be charged and
assessed with the corresponding
tax.
2. Said tax be paid by the owner of
the gains, profit or income or the
person having the receipt, custody,
control or disposal of the same
Determination of Ownership:
►determined as of the year for which a
return is required to be filed
CHAPTER X: ESTATES AND TRUSTS
Section 60: Imposition of Tax
61
 Taxation law review notes
- Atty. Francis J. Sababan -
1. Estate ► property of the decedent
created by an agreement, trust or
by last will and testament
2. Trust ►agreement, contract or last
will and testament
Status:
1. Estate: same status as decedent
2. Trust: same status as the grantor
Income taxpayer is the Estate:
►income of the estate pending
partition or no partition at all:
Three kinds of partition:
1. judicial
2. extra judicial partition
3. or no partition at all
During partition Estate earns income:
1. individual – income tax
2. corporation – corporate income
tax
3. estate (Taxpayer = TP)
a.Impose Income as if TP is
individual
b.Impose income as if TP is
corporation
c.Impose income as if estate itself
►depends whether there is a (1) judicial
(2)extra judicial partition or (3) no
partition at all
When there is a judicial settlement which
is final and executory but no partition:
Two possibilities:
1.Creation of unregistered partnership
►Income of the Estate: corporate income
tax
2.Creation of Co-ownership
►Income of the Estate: Income tax on
individual
-co-owner liable in their individual
company
Ponce Case:
H: After finality heirs did not divide the
property, the applicable income tax is
corporate income tax because they
contributed money to engage in real
estate.
SECTION 61 TAXABLE INCOME
(Important)
“Taxable income of the estate or trust
shall be computed in the same manner
and on the same basis as ill the use of an
individual.”
Section 62: Applies during Pendency
of Extra Judicial Settlement
Personal Exemption (P20,000)
Individual ► it will depend whether
he/she is classified as single, head
of the family or married
Estate ►regardless
Special deductions:Income distributed to
the heirs
►if you distribute nothing you cannot
claim this special deductions
►if there is a distribution, the heir shall
be liable to pay whether individual
capacity
►if there is no distribution, heirs are
not liable to pay anything
►Special deduction not apply if individual
tax is paid by the Estate itself.
Payment: made by executor,
administrator, to creditor to preserve the
estate
Sec. 61 and Sec 62
►does not apply if estate is subject to
income or corporate income tax
►it applies if the estate pays itself
during the pendency of the judicial
settlement
Basis: Sec 60 C
“during the period of administration or
settlement of the estate.”
Taxpayer is a Trust:
Q; When liable to pay income tax?
A: If the trust is revocable (if revocable,
Sec 61 and 62 also apply)
Parties:
1.Grantor /creator /trustor
2.fiduciary / trustee
3.beneficiary / Les Qui trust
Q: Who is liable to pay tax:
A: If trust revocable:
► obligation of the trustee
►liability of trust itself and not
personal
Liability of trustee:
If trust irrevocable
►obligation of the grantor
►personal liability of the grantor as an
individual
TWO WAYS OF REPORTING INCOME:
PURSUANT TO RR2 – (1949)
1. report only once
(building paid once)
2. after the span of 25 years
(payment of building divided per year)
62
 Taxation law review notes
- Atty. Francis J. Sababan -
ESTATE TAX: Q: What is the reason for classifying the
1.Sec 60 taxpayers?
2.Real Estate Tax A:
3. Estate Tax 1. NRA and Estate
►transfer tax impose on the Net Estate 2. NRA and FC Donors = property
for the transfer of property to the heirs outside Phil exempt
or beneficiary whether real, personal, 3. all, other than these 3 – taxable w
tangible or intangible in and w/out
Q: Is Section 104 relevant to all
3 KINDS OF TRANSFER TAX: taxpayers?
1.Estate Tax A: No, material only to NRA and FC
2. Donor’s Tax Section 104 speaks of intangible personal
3. Sec 135 of LGU Transfer of Real property located in the Philippines.
Property 1.Franchise which must be exercised in
the Philippines;
Q: We don’t have inheritance tax and 2.S.O.B. issued by a Domestic
donees tax, why? corporation;
A: 1973 Marcos issued P.D. 69 3.S.O.B. issued by foreign corporation
Explain: Sec 84, rate is max of 20% of net at least 85% of the business of which
before the rate is 60% plus additional is located in the Philippines. – do not
amount. confuse with 42 (2nd par)
►resulted to many gimiks through tax 4.S.O.B. of foreign corporation which
avoidance scheme, like creating a family acquired a business situs in Phil
corporation (only taxable is the 5.S.R. in business, partnership or
stockholders which is exempt) industry established in the Phils
►Congress enacted RA 7449 decreased
60% to 35% and then RA 8424 – 35% to Q: NRA, German donates SOS of FG to
20% Filipina gf, is it subject to donor’s tax?
Q: Now is it safe to create a family A: it depends (you must qualify)
corporation? 1.Subject to donor’s tax if:
A: No more. 1.S.O.B. FG at least 85% of business
located in the Phil
Q: Now: Iba na ang scheme – which is 2.S.O.B. FG which acquired a business
better sale or donation? situs in Phil
A: 2.Exempt
1.Sale of RP considered capital assets 1.personal property outside of Phil;
►6% to 1.5% doc. Tax 7.5 % better or
2.Sale of RP considered ordinary asset 2.intangible personal property net
►5% to 52% as per use may be taxable if following requisites concern:
3.Donation if given to all compulsory
heir A decedent at the time of his death or the
► relative lower than 20% which is 15% donor at the time of donation was a
► stranger: 30% so go with 20% citizen and resident.
1.of a foreign country which at the time
Q: Who are the taxpayers? of his death or donation did not impose
A: Sec 104 Estate and Donors a transfer tax of any manner, in respect
1.Estate of intangible personal property of
a. RC citizens of Philippines not residing in
b.NRC that foreign country; or
c. RA
d. NRA 2. the laws of the foreign country
2. Donor’s Tax allows a similar exemption from
a. RC transfer or death taxes of every
b.NRC character or description in respect of
c. RA intangible personal property owned by
d. NRA citizens of the Philippines not residing
e. DC in that foreign country.
f. FC
Q: What if citizen of one country and
►A corporation cannot die of a natural resident of another country will the
death. exemption apply?

63
 Taxation law review notes
- Atty. Francis J. Sababan -
A: No, law requires that he must be a
citizen and resident of the foreign
country.
Campos Rueda Case:
F: NRA died – married to Moroccan man,
so she was a Moroccan resident.
Donated SS in DC – administrator
claims exemption, ground: In Morocco,
intangible personal property of
Filipinos not residing therein is exempt
from transfer tax.
BIR contends: Morocco is not a country
but a colony of Spain.
H: claim granted – even if it is not a full
pledged state, or it’s a mere colony,
what matter is that the foreign law
provides for an exception.
SECTION 84 RATES OF ESTATE TAX
Q: What is the formula for Estate tax?
A: Gross Estate (Sec 85)
- Deductions (Sec 86)
--------------
Net Estate
x Rate
-------------
Taxable net income
- Tax credit
---------------------
Tax due
Gross estate (define) – Sec 104
►gross estate include real and
personal property, whether tangible or
intangible, or mixed, wherever
situated
NRA: Decedent / Donor – property
situated outside of Philippines not
included on the gross estate
Section 85 Gross Estate (inclusion)
A.Decedent’s interest
►includes property (1) owned at the time
of death and (2) property not owned at
the time of death
Classic example: Usufruct
Q: if terminated by the death of
usufructuary, is it subject to estate
tax?
A: Not subject to estate tax
Reason: Exempt Transmission under
Sec 87 (a)
►merger of the usufruct in the owner of
the naked title
Q: is there a conflict between Sec 88 a
and Sec 87 a? How do you reconcile?
A: No conflict
1.Section 87 a contemplates a
situation where the usufruct is
terminated.
2.Section 88a contemplates a usufruct
for a fixed period. Ex contract of lease
Q: How do you determine the value of
usufruct?
A: Sec. 88 a provides to determine the
value of the right of usufruct, take into
account the probable life of the
beneficiary.
Q: Why definition of gross estate is longer
than definition of gross gift?
A: transfer occurring after death. estate
tax absolute
Transfer during the life time
►Normally Donor’s tax
However there are exceptions:
1.transfer in contemplation of death
(85B)
2.revocable transfer (85 C)
3.transfer for insufficient consideration
B. Transfer in contemplation of death
Roces case:
F: during lifetime, the following
document were instituted or executed
simultaneously
1.will and 2. donation
The heirs insisted to pay Donor’s tax,
Posados the collector tried to collect
inheritance tax.
unique thing: Donees were also the heirs
in the last will and testament
Donees wanted to pay donor’s tax
because it is always lower than the
estate tax except when the donee is a
stranger
H: this is a transfer in contemplation of
death
Dizon Case:
F: Deed of Donation was executed
Dizon died several days thereafter
son claims Donor’s tax
H:Transfers in contemplation of death
Q: What are transfers deemed in
contemplation of death?
A: 1.Property was transferred during the
lifetime but the decedent:
a. retains possession or receive
income or fruits of property; or
b.retains the right to designate
persons who will possess the
property or the right to receive fruits
or income
c.Revocable Transfers
64
 Taxation law review notes
- Atty. Francis J. Sababan -
1.revocable transfers are included in
the gross estate
Reason: the decedent retains
tremendous power and control over
the property
2.Irrevocable transfers are not included
in the gross estate: exempt
Reason: the decedent losses control
over the property
Notice Not Required because the person
has the control over the property
D. Property passing under general power
of appointment
► same with fidel commissary substitution
3 parties:
1.testator / decedent
2.1st heir
3.2nd heir
TAKE NOTE: To determine whether
included in Estate or not, know who has
the choice to designate the 2nd heir:
►if decedent instructs the 1st heir that he
can transfer the property to whomever he
wants included in gross estate
►1st heir choice – included in gross estate
E. Proceed of Life Insurance
1.Beneficiary is the estate
►included in gross estate whether
designation is revocable or not
2.Beneficiary is 3rd person
► revocable included
►irrevocable not included
F. Prior Interest
►important only due to the codification
of the tax code B,C,E, included whether
before or after the effectivity of the code
G. Transfer for insufficient consideration
Q: Similar provision in Sec 100 (Donor’s
tax) can you apply the two (2)
provisions simultaneously?
A: No, alternative application, one or the
other but not both.
The application will depend on the
time of transfer or motive:
1.If transferred because of
impending death
► estate tax
2.If transfer because of generosity
►Donor’s tax
Q: Parcel of land was sold for less than
adequate consideration (adequate) to
relative for P600,000 when FMV is 1
million pesos. Is this subject to
transfer tax? Is it subject to Donor’s
tax?
A: No, Sec 100 provides the property
should be other than real property
referred to in Section 24 (D)
►Not subject to Donor’s tax, the
applicable tax is 6% FIT
Q: Will your answer be the same if SOS
are sold?
A: No, answer not the same, SOS not
property contemplated in Sec 24 D (1)
►in this case, the amount by which the
FMV of prop exceeds the value of the
consideration shall be deemed a gift
and included in the computation of the
gross gift: subject to Donor’s Tax
Q: What is the subject matter in 85 G?
A: paragraphs 85 B, 85 C, 85 D
Sale in good faith as a defense:
1.under Section 100 is not a defense
2. under Section 85 G, it is a defense
H. Capital of Surviving Spouse
►correlate with Sec 86 C
►both speak of legally married
individual
►pertains to the separate property of
spouse who survived
►capital used in its generic sense
►surviving spouse may be man or
woman
Section 86 (c)
►to determine the limitations of
1. Funeral Expense
2. Whether written notice is required
3. to determine whether gross value
is at least P200,000 (Sec 90)
4.to determine if gross value is at
least 42 M
Q: Who are the taxpayers under 86 A?
A: 1.RC
2.NRC
3.RA
Q: Who is the taxpayer under 86 B?
A: NRA
Q: Why do we need to know this?
A: NRA cannot avail of the following
deductions:
1.family income
2.standard deduction
3.hospitalization
4.retirement pay under RA 4917
A. Deductions Allowed to the Estate
of a Citizen or Resident
65
 Taxation law review notes
- Atty. Francis J. Sababan -
1.ELIT (expenses, losses, indebtedness
and taxes)
a) 1.Actual Funeral Expenses; or
2.amount equal to 5% of gross estate
►apply whichever is lower
Limitation:
a)amount equal to 5% of gross
estate should not exceed P200,000
(basis is the gross value)
b) Judicial Expenses
►no limitation
Pajonar vs Commissioner
I: Whether or not extra-judicial expenses
may be allowed as a deduction
H: This law has been copied from U.S. In
US, expenses to be claimed as a
deduction both judicial and extra
judicial expenses.
Claims against the estate
►Estate is the debtor
Requirements:
1.at the time the indebtedness was
incurred the debt instrument was duly
notarized;
2.loan contracted within 3 days before
death;
3.the administrator or executor shall
submit a statement showing the
disposition of the proceeds of the loan
Claims of the deceased against insolvent
person
►Estate is the creditor
Requirement:
►the only requirement is that the (only)
amount of loan is included in the gross
estate
►notarization and certification not
required
Unpaid Mortgage, taxes and losses
Q: In unpaid mortgage who is the
mortgagor?
►decedent mortgagor
1. Unpaid mortgage
1.value of the decedent’s interest in
the property is undiminished by such
mortgage;
2.included in the value of the gross
estate;
Illustration:
1 million FMV but mortgage is only
600,000 you include 1 million
2.Estate tax
3.Losses
Requirements:
1.losses incurred during the
settlement of the estate;
2.arising from fire, storms, shipwreck
or other casualties, or from robbery,
theft or unbezzlement
3.losses not compensated by
insurance
4.losses not been claimed as a
deduction for income as purpose
5. losses incurred not better than the
last day for the payment of the estate
tax
Property Previously Taxed
►Vanishing Deduction Return
Requirement:
1.person acquires the property by virtue
of donation or inheritance
Q: What if acquired through purchase?
A: Not apply, the property must be
acquired by inheritance or donation
2.Estate tax or Donor’s tax already paid
by the Estate of the Decedent (1st par)
3.Any person who died within five (5)
years prior to the death of the decedent
Q: What are the amounts?
A: Prior Decedent died within:
1.5years – 20%
2.4years – 40%
3.3 years -60%
4. 2years – 80%
5. 1 year -100%
Q: Suppose the person died within 1 year
and it was inherited by son, suppose
the son also died within 1 year or may
be 2 years, should we apply the
vanishing deductions?
A: No more (last par Sec 86 A2)
Transfer for Public Use
►amount of all bequest, legacies,
devises or transfers
Recipient:government or any political
subdivision
►exclusively for public purpose
Take Note: 30% of which not used for
administrative purpose is not a
requirement
FAMILY HOME
►amount equivalent to the current FMV
of the Family Home of decedent.
Limit: FMV should not exceeds 1 million
otherwise the excess will be subject to
estate tax.
Requirements: (RR 2-2003)
1.Person is legally married
66
 Taxation law review notes
- Atty. Francis J. Sababan -
GR: if single not allowed to claim
Except: if head of the family
2.Family Home actual residence of the
decedent
3.Certification of Barangay Captain of
locality
STANDARD DEDUCTIONS
►automatic: RR 2-2003 no requirement
provided the decedent is the one in 86
(A) (RC, NRC, RA)
MEDICAL EXPENSES
Requirements:
1.amount not exceeding P500,000
2.medical expenses incurred by the
decedent within one (1) year prior to
his death.
►must be duly substantiated with receipt
RETIREMENT PAY UNDER RA 4917
(RETIREMENT PAY WITH PRIVATE PLAN)
Requirements:
1.plan duly approved by the BIR
2.person at least 50 years old
3. 10 years in service
4. avail only once
TAKE NOTE: This is a deduction in the
nature of exemption, all other retirement
plan is excluded
B. Deductions Allowed to Non
resident Estates
1.ELIT
2.Property Previously taxed
3.Transfers for public use
C. Shares in the Conjugal Property
D. Miscellaneous Provisions
For NRA: No deduction allowed unless
include in the return the value at the
time of his death that part of his gross
estate not situated in the Philippines.
For proper deduction must include E.
below
E. Tax Credit for Estate Tax Paid to
Foreign Country
SECTION 87 EXEMPTION OF CERTAIN
ACQUISITION AND TRANSMISSIONS
1. Merger of usufruct in the owner of the
naked title;
2. transmission or delivery of the
inheritance or legacy by the fiduciary
heir or legatee to the fideicommissary;
3. transmission from the first heir,
legatee or legacy donee in favor of
another beneficiary, in accordance
with the desire of the predecessor;
4. All bequest, devises, legacies or
transfers to (1) social welfare (2)
cultural and (3) charitable institution
Requirements:
1.no part of the net income insures to
the benefit of any individual;
2.not more than 30% of donation (BDL)
shall be used by such institutions for
administration purposes.
SECTION 88 DETERMINATION OF THE
VALUE OF THE ESTATE
A.Usufruct
1.Determine value of right of usufruct:
►consider the probable life of the
beneficiary based on the latest Basic
Standard Mortality Table
B.Properties
►fair market value of the Estate at the
time of death
1.FMV determined by Commissioner
2.FMV schedule of values fixed by the
Provincial or City Assessors
SECTION 89 NOTICE OF DEATH TO BE
FILED
Q: What is the Basis?
A: the gross estate of the person
Q:When is the notice required to be filed?
A: 1.all cases of transfer subject to tax
2.although exempt, when gross values
of the estate exceeds P200,000
Q: When filed?
A: within two (2) months
1. after decedent’s death
2.same period after qualifying as
executor or administrator
►give a written notice
Q: If the Net Estate is at least P16,000
will you in form the commissioner?
A: yes, the gross is at least 3-4 million
SECTION 90 ESTATES TAX RETURNS
Q: When required to file return?
A: 1.all cases of transfer subject to tax
2.even though exempt, gross value
of the estate exceeds P200,000
3.regardless of gross value of the
estate, when the same consists of
registered or registrable prop such as:
a.real property
b.motor vehicle
c. shares of stocks
d. other similar property where
clearance from BIR necessary for
67
 Taxation law review notes
- Atty. Francis J. Sababan -
transfer of ownership in the name
of the transferee
►return must set forth the following:
1.value of the gross estate at time of
death
2.deductions allowed
3.information necessary to establish
correct taxes
Q: What if Estate is exempt, is it required
to file a return?
A: General Rule: No
Exception:
a. gross value exceeds P200,000
b.estate contains registrable
property
Q: if the estate or gross estate exceeds 2
million, what is the requirement?
A: return must be duly certified by a CPA
B. Time of Filing
►filed within 6 months from decedent’s
death
►within 30 days for filing the return
►within 30 days after promulgation of
such order
1.certified copy of the schedule of
partition and
2.order of court approving the same
C. Extension of Time
Time: 30 days
Grounds: meritorious cases
Who grants: Commissioner
D. Place of filing:
►return shall be filed with:
1.authorized agent bank
2.revenue district officer
3. collection officer
4. duly authorized treasurer
►city or municipality in which decedent
was domiciled at the time of his death
Q: What if non resident?
A: NR with no legal residence here, with
the office of the commissioner.
Q: Let us say there are 3 compulsory
heirs, namely A, B, and C. A renounces his
inheritance coming from the parents, but
A renounces his inheritance in favor of his
2 siblings, brother and sister B and C. Is
this subject to donor’s tax?
A: NO. It is exempt.
Q: But if in the given example, A said “I
am renouncing my inheritance, but I am
giving it to my sister B”, is this subject to
donor’s tax?
A: YES. Renunciation is to the
disadvantage of the brother.
TAXATION UNDER THE LOCAL
GOVERNMENT CODE:
1. Local Tax
2. Real Property Tax
LOCAL TAXATION (§186, 187, then go to
§151, 128 down)
Q: Mayor Binay of Makati ordered the
collection of elevator tax (for elevator in
the city hall). Is the order of Mayor Binay
legally tenable?
A: NO. There should always be a tax
ordinance after conducting a public
hearing. (§186)
tax ordinance
Q: Can BIR collect the tax even in the
absence of a revenue regulation?
A: YES.
Q: Can a province, city, municipality or
barangay collect the tax if there is no tax
ordinance?
A: NO.
Q: Why is it that there should be a tax
ordinance as required by §186?
A: The rationale is not mentioned in §186,
but if you read the other provisions of the
LGC, you will come to set of conclusions of
the reason why there must be a tax
ordinance.
» In most of these provisions, it always
say: one-half if the town or municipality
shall collect a tax of not exceeding 1% of
the gross receipt.
TAKE NOTE: There is no exact amount;
hence, it is the tax ordinance which will fix
the exact amount.
public hearing
In Congress, the requirement is not
absolute (by discretion only). Under local
taxation (last phrase of §186), the
requirement is ABSOLUTE.
REYES vs. SECRETARY (320 SCRA 486)
F: In the municipality of San Juan (just
beside Mandaluyong) there was a tax
ordinance passed. Reyes, a resident,
68
 Taxation law review notes
- Atty. Francis J. Sababan -
claims that there was no public 2. decision of the Central Board of
hearing conducted, he maintains that Assessment Appeals.
under §186 last phrase, there should
always be a public hearing. » From CTA en banc, the appeal must be
H: The SC said: “yes, that requirement is file with the SC within 15days.
an absolute one, but since the
petitioner failed to produce evidence » Go to §151:
to support his allegation, if there is no The city could impose the tax already
proof presented other than his own imposed by the province of by the
statement, we hereby rule that the municipality.
ordinance was passed in accordance
to the procedure mandated by law”. Q: What are the numerous taxes
While it is true that a public hearing is imposable by the province which a city
an absolute requirement, he who now allowed to impose?
alleges, must prove the same. A: Those enumerated in §135 to §141 of
the LGC
Q: If you don’t agree with the validity or
the constitutionality of the tax ordinance, Reasons why a municipality wanted to be
what will be your remedy? converted into a city:
A: Within 30 days from the effectivity of 1. §151
the ordinance, the taxpayer should file an 2. §233 (real estate tax)
appeal with the office of the Secretary of » In addition, the law says that the city
the DOJ (§187) could increase the rate of the tax by not
more than 50% of the maximum EXCEPT
REYES vs. SECRETARY (320 SCRA 486) those enumerated in §139:
F: Reyes asserted the validity and a) professional tax
constitutionality of the tax ordinance b) amusement tax
only after the lapse of thirty (30) days
(perhaps his lawyer was thinking that A. General Principles (§128-130)
an ordinary statute may be contested
anytime with the RTC, CA or SC). ► reiteration of the constitutional tax
H: With regard to a tax ordinance, w have provisions
a specific rule, failure to assail the
validity with the specific period of ► notice that the constitutional
time, is fatal to the taxpayer. Since it limitations on taxation do not only apply
was filed beyond the 30day period, we to the national government but also to
do not disturb the validity of the local government units.
ordinance.
B. Definitions (§132)
Q: Within what period should the Sec. of
Justice decide?
A: Within 60 days from the time the Local Taxing Authority (§132)
appeal was filed. Failure to decide within  for a province, it is the provincial
this time, the taxpayer has the remedy to board or the provincial council
file an action with the regular courts. (sangguniang panlalawigan)
 for a city, we have the city council
» If the decision was made within the 60 (sangguniang panlusod)
day period, and receives the decision, his  for the municipality, we have the
remedy is to file an appeal within 30days municipal council (sangguniang
form the receipt of the decision to court of pangbayan)
competent jurisdiction → RTC.  for the barangay or barrio, we have
the barangay council.
» Beginning April 23, 2004, from the
ruling of the RTC, pursuant to RA 9282 C. Common limitations on the taxing
(the law uplifting the standards of the power of the LGU’s (§133)
CTA), the ruling of RTC on local tax cases,
is appealable to the CTA en banc. » Under the old law this was §5 of the
Local Tax Code.
TWO APPEALS DECIDED BY THE CTA EN
BANC: Q: Why common?
1. decisions of RTC involving local tax
cases

69
 Taxation law review notes
- Atty. Francis J. Sababan -
A: Because the limitations or prohibitions
apply to all LGUs, the provinces, cities,
municipalities and barangays.
Two Common Crimes (under §133)
1. absolute prohibition
2. relative prohibition
It shall be unlawful for the LGUs to collect:
I. Income Tax EXCEPT when levied on
banks and other financing institutions
(§133(A))
» the term “other financing
institution shall include money
changer, lending investor, pawnshop
(§131(E))
» rate of tax: does not mention
rate of tax, so long as it is “fair, just
and reasonable”
» It cannot be “prohibited taxation,
because the element of “imposed by
the same taxing power” is not present.
One is imposed by the national
government and the other is by the
LGU.
II. Documentary Stamp Tax (§133(B))
» absolute prohibition
III. Estate tax, inheritance, donations inter
vivos, donations mortis causa EXCEPT in
§135 (§133(C))
» transfer tax on the transfer of
realty to be imposed by provinces and
cities (§135)
NOTE: this is not a real estate tax,
this is a local tax.
IV. Custom duties, charges or fees for the
registration of vessels or ships, wharfages
fees and wharage dues EXCEPT if the
wharf had been established, maintained
and operated by the locality (§133(D))
» wharfage due – is a custom fee
imposed on the weight of the cargoes.
» wharf – a pier
» special levy on public works (§240)
» allows provinces cities and
municipalities to impose a special real
estate tax known as “special levy or
public works”
» let us say the municipality
established a pier for a minimal value
of P10M; out of P10M, under §240,
60% of this may be recovered; the
other 40% may be recovered by
warfage due.
v. Tax, fee or charge for goods or
commodities coming out or passing
through the territorial jurisdiction even if
in the guise of a toll or a fee (§133(E))
» an absolute prohibition
» commodities marketed in a public
market, let’s say in the city of Pasig,
where the commodities came from
Laguna then to Tanay, Cainta, Taytay;
just imagine if each of the towns will
impse 1peso for every head of a
chicken or 50cents for every bundle of
vegetable.
PALMA DEV’T CORP v. MALANGAS
ZAMBOANGA DEL SUR (113 SCRA 572)
F: Municipal council passed a tax
ordinance entitled “police surveillance
fee” which provide that ALL motor
vehicle passing through a particular
street in the town proper of Malangas
which will lead to the pier or wharf will
pay a certain sum of money whether it
is camote, copra, palay,or rice. One of
the owners of the motor vehicle is
Palma Dev’t Corp. carrying copra,
banana and coconut to be loaded in a
ship docked at pier of Malangas. The
lawyer of petitioner assailed the
validity of the ordinance stating that it
is a clear violation of §133(E).
H: It is not the title of the ordinance
which is controlling but it is the
essence of the substance of the tax
ordinance. The tax ordinance clearly
violated §133(E), therefore, the SC had
no option but to declare the tax
ordinance null and void for being in
violation of the law.
VI. Taxes, fees or charges on agricultural
and aquatic products when sold by
marginal farmers or fishermen (§133(F))
Q: Don Antonio Florendo, a person
coming from Pampanga who settled in
Davao City, employed thousands of
workers in the different banana
plantation. Can the LGU impose tax on
the agricultural product which is a
banana?
A: YES. The LGU can impose because
Don Antonio is not a marginal farmer.
It is only prohibited if it is sold by a
marginal farmer.
» Marginal Farmer – a farmer or a
fisherman for subsistence only, whose
immediate members are the
immediate members of the family
(§131(P))
VII. Tax, fee or charge on pioneer and
non-pioneer enterprise duly registered
with the board of investments for a period
of 6yrs and 4yrs respectively (133(G))
» relative prohibition because after
the period, the LGU concerned may
now impose the tax.
VIII. Excise tax on articles and tax, fees
and charges on petroleum products
(§133(G))
» relative prohibition since under
§143(H), it says there that taxes which
are prohibited such as excise tax,
70
 Taxation law review notes
- Atty. Francis J. Sababan -
percentage tax and value added tax
nonetheless, the LGU may impose a
tax not exceeding 2% of the gross
receipt (for cities 3%).
» My former student an assistant in
the city legal attorney in a city in
Metro Manila, received a summon from
the RTC (on complaint of a Moral lesson: although
supermarket in Metro Manila)
questioning the validity of the tax
ordinance under §143(H) since the
rate imposed was 3%
I said, “ineng, una file kayo ng
motion to dismiss. Nak ng puta, absent
ka na naman ata eh, you invoke §151
stating that a city can impose a tax
higher than the rate provided for by
law not more than 50% of the
maximum (50% of the maximum of
2% is 1, therefore, 2+1 is 3%)”
BULACAN v. CA (299 SCRA 442)
*first case decide by the SC which
interpreted both the LGC and the NIRC.
F: The then governor, Obet Panganiban
together with his provincial council
passed an ordinance imposing tax on
quarrying under the provision of §138
of the LGC. The problem is that the
ordinance applies to ALL entities
quarrying in the province. One of the
taxpayers, Republic Cement obliged to
pay the tax, argued that under §138 of
the LGC, the tax on quarrying on which
the province may be allowed shall only
be with regard to quarrying private
land, and not only that but under
§133(H), there is a prohibition to
impose excise tax and tax on
quarrying under the IRC is an excise
tax.
H: The tax on quarrying allowed to
provincial governments shall only be
with regard to lands which are public
lands, and since this is a private tax on
quarrying refers to a lot without any
distinction. Hence, if the LGC made a
qualification as to the kind of land
(where it says it should be public
land), by implication, it should refer to
private land under §151 (although the
law did not distinguish); and since it is
a tax by the national government, it
should be collected by the BIR (not the
LGU), and also the SC agreed that it is
an excise tax where LGU’s are
prohibited from collecting; thus, the SC
declared the tax ordinance null and
void for being contrary to law.
» Sir, why is it a problem when the
law is clear that under §138, it shall
only apply to public land?
Perhaps the provincial council
thought that the subject matter of the
tax ordinance may be a subject matter
provided in any book including the IRC,
or worse, that it may impose a tax on
a subject matter not mentioned in any
book.
a tax
ordinance may be passed even if the
subject matter is not provided for in
any law, it has to comply with the
limitations.
PETRON v. PENILLA (198 SCRA 86)
* The facts here arose under the old law
under §5 (now §133) of the local tax code
(PD 231)
F: Petron has a factory/plant in Penilla
where the raw materials petroleum
products are being converted into
refined petroleum products. The
municipal council of Penilla imposed a
tax by way of a tax ordinance saying
that they are invoking the old §19
(now §143(A)) stating that
municipalities are authorized to
impose tax of the manufacture of any
commodity, hence, since it is
manufacture of a petroleum product,
the LGU must e authorized. However,
Petron objected since under §5 (now
§133(H)), the prohibition includes the
prohibition to impose excise tax and
not only that, under this par., the tax
on petroleum products is an excise
tax. Under this par., the law is clear it
does not only prohibit the imposition
of tax, fee or charge over petroleum
products.
H: The controlling provision here the old
§19 (now §143(A)) that LGUs are
authorized to impose the business tax
for the manufacturing over any kind of
commodity by and petroleum product
is “any kind of commodity”.
Q: What do you think?
A: I don’t agree with this ruling
because between §133(H) and
§143(A), it is the former which is more
specific.
IX. Value added tax and percentage
(§133(I) EXCEPT §143(H)
» Relative prohibition.
X. Tax, fee or charge on common carriers
whether by land, water or air (§133(J))
FIRST HOLDING CO. v.BATANGAS CITY
(300 SCRA 661)
* 2nd SC ruling discussing both the IRC and
LGC.
F: This revealed to the public the
existence of 2 very big oil pipelines
coming form Batangas City with a
distance of more than 100km, one
71
 Taxation law review notes
- Atty. Francis J. Sababan -
going to Pandacan Oil Depot and the
other one is going to Brgy. Bicutan,
Taguig. The Batangas City council
deemed it necessary to impose a tax
on the gross receipt of the 1st holding
company for the operation of the oil
pipeline, but the operator argued that
the oil pipeline is not a common
carrier.
H: The SC reasoned out like in the case of
Pajunar v. Comm (328SCRA666),
saying that “we have copied the code
of carrier law form the US where the
definition of a common carrier is one
habitually carrying not only individuals
or passengers but also goods or
commodities, and since the oil
pipelines is habitually carrying
petroleum products which is a
commodity, we rule this as a common
carrier which is under §133(J), LGU is
prohibited from imposing tax on
common carriers, and not only that
but under §170 of the LGC, the law is
very explicit, that ALL LGUs are
prohibited to impose percentage tax
on common carriers”. With that, the
tax ordinance passed was declared
null and void for being contrary to law.
XI. Premiums on re-insurance (§133(K))
» absolute prohibition.
XII. Tax, fee or charge on registration of
motor vehicles and for the issuance of
license and permit for driving thereof
EXCEPT tricycles. (§133(L))
BATUAN CITY v. LTO (322 SCRA 805)
I: Which function was delegated to the
LGU? The LTO registering motor
vehicles “or” the LTFRB granting
franchise and regulation of common
carriers?
H: Under §133(L), the function of the LTO
is prohibited, an therefore what may
be delegated to the LGU is the
function of LTFRB.
XIII. Tax, fee or charge on exportation
of products and is actually exported
EXCEPT under §143(C) where the LGU is
authorized to impose business tax on
exportation (§133(M))
XIV. Tax, fee or charge on cooperatives
duly registered under the cooperative cod
(RA 6938) and Business Kalakalan (RA
6810) (§133(N))
» A cooperative is exempt from local
tax, provided it is duly registered with
the cooperative code and the
cooperative development authority
“or” Business Kalakalan (not kalkalan)
XV. Tax, fee or charge over the
national government, political
subdivisions and agencies and
instrumentalities of the government
(§133(O))
» Relative prohibition since it admits
of an exception under §154 of the LGC
where it says that a LGU may be
authorized to impose a fee or charge
for the operation of a public utility
provided it is owned, maintained and
operated by such LGU.
NAIA v. PARANAQUE (JULY 2006)
H: SC ruled in favor of the airport.
Paranaque being a LGU can’t impose
tax on a government instrumentality.
Airport owned by the government is
not an agency, it being an
instrumentality.
Q: May the government tax itself it
the taxing power is the local
government?
A: NO. The local government cannot
impose tax on the national
government, and with more reason
that it cannot impose a tax with equal
LGU.
D. Taxes that can either be imposed
by Provinces or Cities
I. tax on transfer of realty (§135)
► Note that this is not a real estate tax,
this is a local tax for the simple reason
that it is not provide for under the topic of
real estate tax (§198-280)
► Law says “it should not exceed ½ of
1% of the consideration” (NOTE: do not
use zonal value since this is used only
under the IRC, not the LGC.
Q: Since all the provinces and cities must
follow the limitation of the rate (not
exceeding ½ of 1%), is it violative of the
equal protection clause?
A: NO, because the sangguninan had to
determine the actual rate considering the
status of the province.
Q: Why is that Makati fix the rate of 75%
or 3/4 of 1%?
A: Because cities are authorized to
increase the rate of 50% of the maximum,
that is 50% of ½ is 25% (50+25 is 75%).
NOTE: Do not apply transfer of realty
pursuant to RA 6657 (CARP) → this is the
Comprehensive Agrarian Reform Program
→ this is exempt.
II. tax on printing an publication (§136)
72
 Taxation law review notes
- Atty. Francis J. Sababan -
► Normally, a province cannot impose
this because the tax on business can only
be imposed by a city or municipality
EXCEPT this one, on printing and
publication of magazines and periodicals.
III. franchise tax (§137)
► The old national franchise tax under
the old tax code was already abolished.
► We still have franchise tax other than
this one, known as national franchise tax
→ provided for in the republic act granting
franchise.
Two kinds of Franchise Tax:
1. local franchise tax (under LGC
§137)
2. national franchise tax (provided for
in the statute or republic act
authorizing the franchise)
Q: May LGUs impose local franchise tax?
A: We have to consider here many
supreme court decisions and also §193 of
the LGC.
Under §193, it says there “unless
especially provided for in this code,
exemptions granted to natural juridical
persons are hereby withdrawn (abolished)
EXCEPT:
1. local water districts
2. cooperatives registered under the
cooperative code (RA 6938)
3. non-profit and non-stock
educational institution.
BASCO v. PAGCOR (197 SCRA 52)
F: The city council passed a tax
ordinance imposing tax on PAGCOR, an
agency of the government. PAGCOR
objected saying that the local city is
prohibited under the old local authority
act to impose tax on an agency of the
government.
H: The SC declared null and void the tax
ordinance saying Manila cannot do
that.
CEBU v. MACTAN (261 SCRA 667)
F: Cebu government was trying to collect
real estate tax from the Mactan airport
(note: real property tax is a territorial
tax, meaning it should only be
collected within its territorial
jurisdiction). Lawyers of Mactan airport
argued that under §13(O), Cebu, a
LGU, cannot impose tax on an agency
of the government, and they also
invoked the ruling in BASCO.
H: The lawyer of Mactan airport is devoid
of any merit at all, it is 100%
erroneous since the real estate tax is
not a local tax, hence, why invoke a SC
ruling and codal provision which can
only be applied to local tax. Therefore,
Mactan airport should pay Real
Property Tax.
► Before the codification in 1991 (to take
effect January 1, 1992), local taxation was
embodied in a separate book known as
Local Tax Code (PD 231) while real
property tax was provided for in a
separate book known as Real Property Tax
Code (PD 464)
LRT v. CITY OF MANILA (342 SCRA 692)
F: The Manila city government tried to
collect real property tax but the
management of the LRT said “no you
cannot do that to us since it is
exclusively for public use”.
H: NO, you are not exclusively for public
use since every time a person wants
to use the LRT he has to pay.
Q: Why not use the defense that it is
owned by the government?
A: Because in real estate tax, the defense
that it is owned by the government is not
a defense.
The LGC in §199(B) and in §217, both
provisions says that the basis for the
imposition of real estate tax is the ACTUAL
USE of anybody who is using that (maybe
in the concept of usufructuary or in the
concept of a lessee, or in the concept of
an owner); the basis is not ownership.
► in §134, the taxes here must not only
be imposed by provinces, it may also be
imposed by cities in line with §151 →
those enumerated in §135 to 141.
CAGAYAN DE ORO ELECTRIC CO. v.
MISAMIS OCCIDENTAL (181 SCRA 38)
* This was the prevailing rule for more
than 10years from 1988
H: In the franchise or the republic act,
there are only two (2) kinds of
franchise, one is a franchise which
provide for a condition that this tax
(referring to the franchise tax) shall be
in lieu of all other taxes, and the other
franchise is the one which do not
provide for such provision; the
province or the city can impose local
franchise tax if the franchise belong to
the second example.
REYES v. SAN PABLO CITY (305 SCRA 353)
73
 Taxation law review notes
- Atty. Francis J. Sababan -
* Here the SC uniformly ruled NOTE: it is not the only
H: A provision on exemption under §193 always 300, since requirement is
don’t only refer to exemptions the exact amt that it must be
provided for by different statutes, but must be fixed by reasonable
it includes those which claim the ordinance.
exemptions by virtue of the case of
Cagayan de Oro (because SC decisions VI. amusement tax (§140)
are also laws).
► under the IRC, there is also
PLDT v. DAVAO (363 SCRA 750) amusement tax under §125.
F: The franchise holders of Smart and
Globe are claiming exemptions from PBA v. QUEZON CITY (137 SCRA 358)
the local franchise tax because they F: The city government enacted a tax
are saying that they are holding a ordinance trying to collect amusement
franchise which says that it is a tax including amusement tax on the
franchise enacted by the house of PBA (in Araneta, Cubao); but PBA and
Congress in 1995 which carries with it “no, we are already paying
an exemption form local franchise tax. amusement tax to the national
H: By the very explicit provision of §193, government through the BIR because
the removal of exemptions granted by of §125 of the IRC”
different statutes and also by SC H: QC government can no longer collect
decisions applies only to statutes and on the ground that it is already being
decided by the SC on or before Jan. 1, collected by the national government
1992, because §193 says “upon and secondly, in the enumerations of
effectivity of this law”. For exemptions amusement under §140, you will never
covered by §193 therefore, Smart and see professional basketball. Most of all,
Globe are authorized to claim it is the intention of the author that it
exemptions because the statue (RA is only the national government.
7082) was enacted on 1995. *nak ng putang katangahan yan.. the local
tax code PD 231 was enacted in 1974
IV. tax on sand, gravel and other quarry when we don’t have any professional
resources (§138) basketball.. since professional basketball
was born May 1975.
► We are through with that in the case of * ano ba dapt tama diyan? → both the
Bulacan national government and the QC
government can collect. There is no
V. professional tax (§139) violation of the prohibited double taxation,
► this must be correlated with the tax because the taxing powers are different,
under §147. and not only that §140 speaks of
amusement tax on admission fee but
► NOTE that this is an exemption to the under §125, it is abut gross receipts.
rule that a city may increase the rate of
the tax → under §151 of the LGC, the VII. delivery van (§141)
increase is not allowed.
Q: What if not a delivery van, but “sako”
► both §139 and §147 are taxes imposed lang?
on persons exercising professional calling.

Section 139 Section 147

are to be imposed are to be imposed A: The applicable tax is under §143(G)
by provinces and by municipalities (peddler’s tax, one imposed by
cities and cities municipalities and cities.
are applicable to are applicable to If may dalang sasakyan, yari siya ng
workers who must persons who are province sa tax.
pass a working but are
government not required to NOTE: §135-141, these are taxes that can
examination (e.g. take government be imposed by PROVINCES and CITIES.
engineers, examinations §143-150 are taxes to be imposed by
physicians, etc) MUNICIPALITIES, which can also be
there is a It does not provide imposed by CITIES.
maximum (P300) for any amount,

74
 Taxation law review notes
- Atty. Francis J. Sababan -
E. Taxes that can either be imposed
by Municipalities or Cities
I. Business Tax (§143(A-H))
a. manufacturing, repacking,
processing, including the
manufacturer of permitted liquor
and also its dealer
b. wholesaling
c. exportation
d. retailing
e. contractor’s tax
f. tax on banking institution and
financing institution
g. peddler’s tax
h. the exemption under §133(i)
Q: If you have two branches, how many
business taxes do you have to pay?
A: You pay only one business tax (§146)
ILO-ILO BOTTLERS v. ILO-ILO CITY (164
SCRA 607)
F: Ilo-ilo Bottlers was already paying a
business tax on manufacturing under
§143(A) to the city government by
virtue of a tax ordinance. Later on,
they are obliged to pay by virtue of
another tax ordinance imposing
business tax on wholesaling. Naturally,
Ilo-ilo Bottlers argued, “how could it
be, if you manufacture, it necessary
follows that you sell the commodity so,
with the payment of the business tax
on manufacturing, it carries with it the
business of wholesaling”.
H: NO, you have to determine the
marketing system of the company. If
wholesaling is also being done in the
place of manufacture, the business tax
on wholesaling should no longer be
paid it should only be the business tax
on manufacturing. But if the marketing
system of the company provides that
wholesaling shall be done in a
separate place (maybe several
kilometers away), the manufacturer
must still pay the business tax on
wholesale because now it could be
argued that they have the separate
business of wholesaling.
Q: On the business of retailing, should the
business tax of retailing be imposed by
the city or by the municipality “OR” by the
barangay in the city or the barrio in the
municipality?
A: §143(D) must be correlated with §152,
the tax to be imposed by the barangay.
It depends:
a. city
» if the gross receipt of the
retailer exceeds P50T in a
minimum of one year, it is the
right and privilege of a city to
impose the business tax on
retailing.
b. barangay
» if the gross receipt of the
retailer did not exceed P50T, it
is the barangay council where
the business of retailing is
located.
c. municipality
» if the gross receipt of the
retailer did not exceed P30T
within a period of one year.
d. barrio
» if the gross receipt of the
retailer did not exceed P30T
within a period of one year.
NOTE: These distinctions do not apply in
wholesaling. These are only for retailing.
► Paragraph H: for the imposition of
excise tax, percentage tax and value
added tax, the municipality may impose a
tax not exceeding 2% of the gross receipt
(with regard to a city, it may go as far as
3%)
II. Municipalities in Metro Manila who can
increase their rate (§144)
► Right now there are only two
municipalities:
1. San Juan
2. Pateros
III. Professional Tax (§147)
► we are through with that
IV. Fees for sealing and licensing of
weights and measures (§148)
V. Fishery rentals, fees and charges
(§149)
F. Situs of Tax (§150)
► The tax referred to in here is the
business tax on wholesaling and retailing.
Q: RFM is manufacturing commodities,
one of them is Swift hotdogs, this is being
sold not only in Mandaluyong, Metro
Manila, but also to the inter country from
Batanes to Tawi-tawi. Where should the
business tax of wholesaling or the
business tax of retailing be paid? Should it
be in the principal office (Mandaluyong)
75
 Taxation law review notes
- Atty. Francis J. Sababan -
“or” the place where the commodities are
sold?
A: It will be paid in the place where it had
been sold PROVIDED there is a branch
office or a sales outlet (§150(A)).
► If it so happens that the company has
a factory different from the place where
the principal office is located → 30%
should be pain in the principal office and
70% in the municipality or city where the
branch is located.
PHIL MATCHES v. CEBU (81 SCRA 99)
F: Phil Matches were produced in
Nagtahan, Manila. In Cebu city, there
was a warehouse where the matches
were stored. Many of the customers,
by way of wholesale in the warehouse
in Cebu City, they came from different
towns of the Visayan Region. May the
business tax ordinance of Cebu be
imposed on those transactions even if
the buyers did not come from the
territorial jurisdiction of Cebu?
H: Since in this case the contract booked
and paid, meaning, it was negotiated
perfected and consummated in the
warehouse where it was located in
Cebu City, the Cebu City government
has the right to collect business tax.
Q: What if there is an agreement that
commodities would be delivered and that
the buyer would be waiting in some other
town, is the answer still the same?
A: YES, the answer is still the same
because delivery to the carrier is delivery
to the buyer where delivery has been
termed within the territorial jurisdiction of
Cebu.
SHELL v. CEBUCOT, CAMARINES SUR (105
PHIL 1063)
F: The petroleum products were
purchased at the motor vehicle
traversing the neighboring towns of
Cebucot like Bason, Dimalaon, all
towns in Camarines Norte. The
contract of sale was negotiated and
perfected in different municipalities
where the motor vehicle of Shell was
traveling.
H: Although the oil depot was located in
Cebucot, the said municipality cannot
impose tax on that because the
contract of sale was negotiated and
perfected in the different nearby towns
of Camarines.
Q: Is there a conflict with the case of
Shell and Phil Matches?
A: NONE. As a matter of fact, these two
decisions complement each other.
G. Taxing Powers of the Barangay
(§152)
► Only a minimal sum (fair and
reasonable)
Power to impose tax:
1. On commercial breeding of fighting
cocks, cockfights and cockpits
» must be for commercial purposes
2. On places of recreation which charge
administration fee
3. On billboards, signboards, neon signs
and outdoor advertisements
» especially for the barrios and
barangays along the highway
4. For barangay clearance
» if you want to engage in the
business of retailing or wholesaling
→ if barangay captain will not
approve that → within 7days go to
the municipal hall or city hall for
approval
5. For the use of barangay property
» for instance the barangay has a
plaza.
H. Common Revenue Raising Powers
(§153-155)
Q: Why common?
A: All the LGU could impose the same.
But it does not follow that all the
provinces, cities, municipalities could
impose the same. Only the LGU which
operate, establish, maintain the entity
If established by the province, it
should only be the province.
These are:
1. service fee and charges
» for services rendered
2. public utility charges
» provided owned, operate and
maintained by them
3. toll fees and charges
» tax or toll for the use of a bridge or
a street
► Padua filed a civil action in the
MakatI RTC trying to stop the government
form collecting a toll free in the South
Express including the North expressway
alleging that he is affected as a taxpayer
because he is from Paranaque. He argued
that if you use the property of the
government like a street or a public plaza,
you do not pay. He made the analogy, that
76
 Taxation law review notes
- Atty. Francis J. Sababan -
if you go to Luneta, you do not pay the
city government of Manila.
The Makati RTC, the CA and SC had
a uniform ruling that the operator should
be prohibited from collecting further toll
fess because if the operator had already
recovered his investment and earned an
income already, he should be stopped. As
argue by the SC, it copied the argument of
the lawyer (re: Luneta).
» NOTE: that Res Judicata do not
apply here.
When the ruling became final an
executory in 1993, the North and South
Express were totally dismantled and
totally destroyed by the DPWH to give
way to the final and executory ruling of
the Court, that It should no longer be
collected.
After several months, the
government announced in the radio that
the party in the case of Padua, mutually
agreed that the collection shall be
resumed in order to have money for the
maintenance and repair of the highway.
Exceptions to §155 (collection of toll fees)
1. members of AFP
2. members of the PMP
3. post office personnel delivering
mail
4. physically handicapped
5. disabled citizens 65 years and
older.
I. Community Tax (§156)
► In the old days, known as “residence
tax certificate.
Q: If the Filipino is a resident of a foreign
country (NRC), is he liable to pay the
community tax certificate?
A: NO, because the basis of imposition of
this tax is whether or not you are an
inhabitant of the Philippines. Meaning you
are a resident of the Philippines.
Q: What about a foreigner residing in the
Philippines (RA)?
A: YES. You have to pay unless the
foreigner is a trans-investor for not more
than 3months.
► This is applied to both natural and
juridical persons.
Requirements:
1. for a natural person → at least 18
years of age
2. for corporations → upon
registration with the SEC
Q: What if you become 18 in the month of
January or November or December?
A: For those who celebrated their
birthday before July 1 (that is up to June
30), they are liable to pay the tax, for this
year.
For those who celebrated their
birthday on or after July 1, they are not
yet liable to pay this year, but have to
wait until next year.
Q: Is there a difference for those who
reached 18 in the months of Jan-Feb-
March and those who reached 18 in the
months of April-May-June?
A: YES. For those who celebrated
birthdays in the months of Jan-Feb-March,
they have a grace period of 20days within
which to pay. Those who celebrated their
18th birthday in the month of April-May-
June, they do not have any grace period at
all, they have to pay the tax immediately.
Q: If you have a community tax
certificate for this year (2006), can it be
used only until December 31, 2006?
A: NO. It shall be valid up to April 15,
2007. (§163(C))
J. Accrual of the Tax (§166)
► January 1
Q: What if the tax was only approved in
the month of May 2006, do you have to
wait until January 2007?
A: NO. You have the right to collect that
in July 1, because the law is saying that “it
should be collected in the next succeeding
quarter” (§167)
► Mayor Binay had a tax ordinance in
May, sabi ng mga bata niya: “bosing,
collect na tayo ng June”.
Binay: “hindi nga pupwede, maghintay
pa tayo ng July 1”.
Q: What if the tax ordinance had been
existing for several years already?
A: The time of accrual will always be
January 1.
REMEDIES UNDER THE INTERNAL
REVENUE CODE
1. Remedies of the Government
2. Remedies of the Taxpayer
Remedies of the government:
1. Assessment
77
 Taxation law review notes
- Atty. Francis J. Sababan -
2. Collection
Under the NIRC, assessment and
collection have 2 kinds:
1. Normal/Ordinary assessment and
collection – Sec. 203, NIRC
2. Abnormal/Extraordinary
assessment and collection – Sec.
222, NIRC
I. Normal/Ordinary assessment and
collection
► There was a return filed and
it is not fraudulent and not false
II. Abnormal/Extraordinary
assessment and collection
► There was:
1. an omission or failure to file
the return;
2. if there was a return filed, it
was fraudulent, or;
3. the return was false
Q: Is a false and fraudulent return
presumed?
A: NO, false and fraudulent return is not
presumed. The burden of proof to prove
that the return was false and fraudulent
lies against the government through the
BIR.
The mere fact that the return is
erroneous will not make the return
fraudulent, it must be proven by the BIR.
Q: Why is it important to know whether
the assessment is under normal or
abnormal condition?
A: It is important to know because the
prescriptive period between normal and
abnormal assessment differ.
Prescriptive Period for Assessment
1. Normal/Ordinary Assessment – 3 years
from the time the return has been
filed (not the payment of the tax)
(Sec. 203, NIRC)
► 3 Ways of filing the return under Sec.
203, NIRC:
1. filed before the deadline (for any
tax under NIRC)
2. filed on the date of deadline
3. filed after the deadline
► 2 Ways of counting the 3 year period
of Assessment:
1. if return is filed before or on the
day of the deadline, the
prescriptive period starts on the
date of the deadline;
2. if return is filed after the deadline,
the prescriptive period starts on
the date the return has been filed.
» For the calendar year of 2004, a return
must be filed and paid for Net Income Tax
on or before April 15, 2005. Since he was
not able to meet the deadline, the
taxpayer is now being assessed for tax
due for 2004. To minimize interest and
surcharges, it has been suggested by the
BIR that the taxpayer file a late return.
Supposed he filed his return covering
2004 on April 1, 2006. In this example,
the reckoning point is the deadline of April
15, 2005. The starting point of the
counting the 3 yr. period is on the date
the return is filed which is April 1, 2006.
» Suppose it is not a late filing of return,
the counting of the period is on the date
of the deadline which is April 15.
2. Abnormal/Extraordinary Assessment
► the government has 2 options:
a. Assess and Collect
» the prescriptive period for
“assessment” shall be 10 years
from the discovery of none filing or
false or fraudulent return (Sec.
222, par. o, NIRC)
» the prescriptive period for
“collection” shall be 5 years from
the date of final assessment (Sec.
222, par c, NIRC)
b. Collect Without Assessment
through Judicial Action
» since there is “no assessment”
there is no prescriptive period for
assessment
» prescriptive period for
“collection” shall be 10 years from
the date of discovery of none filing
of return or false or fraudulent
return.
► These options are available only if
the Assessment is under the
Abnormal/Extraordinary Conditions.
These are not available under
Normal/Ordinary Assessment
Prescriptive Period for Collection
1. Normal/Ordinary Collection – Sec. 203
did not provide for the prescriptive
period for the collection
- Intention of the author: 5 years
from the date of final
assessment
Reasons: (Sababan agrees with the 5 year
prescriptive period)
78
 Taxation law review notes
- Atty. Francis J. Sababan -
Prescriptive period of collection
under 1st option on Abnormal
Assessment is 5 years from final
assessment (Sec. 222, par c, NIRC)
1. under the old code of 1939,
1977, and 1985, if the
prescriptive period for
collection under abnormal is 3
years, then the prescriptive
period for collection under
normal is also 3 years. If now a
days, it is 5 years in abnormal,
the prescriptive period for
normal should also be 5 years.
2. to say that there is a
prescriptive period for
collection under Abnormal and
there is none under Normal is
too abnormal. It should be the
other way around.
2. Abnormal/Extraordinary Collection
a. assess and collect – 5 years
from the final assessment
b. collect without assessment
through judicial action – 10
years from date of discovery of
none filing, or false, or
fraudulent return.
Q: How to apply these periods?
A: Annual net income tax return filed by
individual using a calendar year. The
return should be filed on or before April
15, 2000. It was filed on April 15, 2000.
Q Without stating the date of final
assessment, can it be collected in 2007?
A: Under normal condition, first
determine the date of final assessment. If
the BIR finally assessed the tax in
November 2001, then 2007 is way beyond
the 5year period to collect. Count the
prescriptive period for collection from the
date of final assessment.
Q: (same facts) Supposed it was finally
assed on March 2003, can it be collected
in 2007?
A: Yes, because it is within the
prescriptive period of 5years.
BASILAN v. COMMISSIONER (21 SCRA 17)
F: Supposed the notice of assessment
was given within the period but it was
received by the taxpayer outside the
period.
I: Whether or not the assessment is
within the period of 3 years.
H: Yes. It is within the period. If the
notice is sent through registered mail,
the running of the prescriptive period
is “stopped”. What matters is the
sending of the notice is made within
the period of prescription.
► It is the sending of the notice and not
the receipt that tolls the prescriptive
period.
Q: What if the return has been amended,
how would you compute the period of
assessment?
A: NIRC is silent.
PHOENIX v. COMMISIONER (14 SCRA 52)
If the amendment of the return is
substantial as distinguished from
superficial, the counting of the
prescriptive period is also amended. The
prescriptive period shall be reckoned on
the date the substantial amendment was
made. If the amendment is superficial,
the counting of the prescriptive period is
still the original period.
Procedure for Assessment (Sec. 228,
NIRC; RR 12-99)
Steps of assessment
1. Sec. 228, NIRC (2 steps)
2. RR 12-99 (3 steps)
2 Steps under Sec. 228, NIRC
1. Pre-assessment notice
2. Final assessment notice
3 Steps under RR 12-99
1. Notice of Informal Conference
2. Preliminary Assessment Notice
3. Formal Letter of Demand and
Notice to Pay the Tax
PROCEDURE (Sec. 228, NIRC; RR 12-
99)
1. Upon receipt of the notice of
informal conference, file a reply
within 15 days from receipt of
notice;
2. Failure to file a reply, 2 things may
happen:
a. BIR will send again the Notice
of Informal Conference or
b. BIR will send a Preliminary
Notice of Assessment
3. Upon receipt of Preliminary
Assessment Notice (PAN), file a
reply within 15 days from receipt
4. Failure to file a reply will result in
either:
a. BIR will repeat PAN
b. Declare the taxpayer in default,
and send you a Final
Assessment Notice (FAN)

79
 Taxation law review notes
- Atty. Francis J. Sababan -
5. Upon receipt of FAN, taxpayer may
file a protest within 30 days.
Q: Is FAN the one appealable to the Court
of Tax Appeals (CTA)?
A: NO. This is because §228, NIRC and RR
12-99 requires the exhaustion of
administrative remedy of protest. After
the receipt of FAN or formal demand
within 30days must file a protest before
the office of the commissioner of internal
revenue.
FORMS OF PROTEST
1. Local Tax (Sec. 125, Local
Government Code (LGC))
2. Real Property Tax (Sec. 252, LGC)
3. Tariff and Customs Code (Sec.
2313, RA 7651)
► In all protest under the different codes,
payment under protest is only necessary
under the “Real Estate Tax”.
RR 12-99
► If the taxpayer receives 2 final
assessments, one under the Net Income
Tax (NIT) and the other in VAT. If the
taxpayer don’t want to file protest under
VAT but want to file a protest under NIT.
The taxpayer in order to be allowed to file
a protest under the NIT must first pay the
VAT where he does not intend to file a
protest.
► This is not “payment under protest”
because, payment under protest is the
one mentioned in Real Property Tax under
Sec. 252, LGC.
Under NIRC, Protest is referred to as:
1. disputing of final assessment or
2. file a motion for reconsideration or
reinvestigation
Q: What should be done after filing a
protest?
A: Count 60days is the period to file the
necessary documents and receipts in
support of the protest.
Q: What is the effect of failure to file the
supporting documents?
A: Failure to file the necessary and
supporting documents within the 60day
period, to be counted on the day the
protest is filed, the final assessment shall
become final and executory.
► On the 51st day you filed the necessary
document, you have to count another
period, which is 180 days from the day
you filed the necessary documents.
Relevance of the 180 Days: 180 days
is the time given to the BIR to decide the
case
Q: Supposed it did not decide the case
within 180days?
A: Do not invoke the Lascano case
because it was rejected by RA 9282
In the Lascano case, before you file an
appeal although the 180 days have
lapsed, you have to wait for the BIR to
take positive action.
The case was ruled only by the CTA,
hence it is not a law. The jurisdiction of
the CTA has been amended by RA 9282.
RA 9282 provides that in case of
inaction of the commissioner after the
lapse of 180days, remedy is to file an
appeal.
RR 12-99 says that after lapse of
180days but within 30days after 180days,
that is the time to file an appeal.
Q: Supposed the BIR rule within 180?
A: Within 30days from receipt of the
decision file an appeal to the CTA sitting in
division.
Q: Supposed the CTA decided not in your
favor?
A: File a motion for reconsideration within
15days to the same division deciding the
case.
Q: Supposed the CTA, in division decided
not in you favor?
A: File an appeal to the CTA sitting en
banc.
Q: Supposed the CTA en banc decided not
in your favor?
A: File an appeal within 15days from
receipt of decision to Supreme Court.
Q: During the pendency of the protest in
the office of the Commissioner, supposed
you receive a notice of collection, levy
and/ or distraint, what is your remedy?
A:
1. YABES v. COMMISSIONER (150
SCRA 278)
2. UNION SHIPPING LINES v.
COMMISSIONER (185 SCRA 547)
YABES v. COMMISSIONER (150 SCRA 278)
F: The taxpayer receives a notice of
collection while waiting for the
decision of his protest. He then filed
an “appeal” with the CTA contending
80
 Taxation law review notes
- Atty. Francis J. Sababan -
his protest has been denied because 1. GUERRERO v. COMMISSIONER
he did not receive a decision but (19 SCRA 25)
receive a notice of collection. 2. BATANGAS v. COLLECTOR (102
Simultaneously, the BIR filed before PHIL 822)
the CFI an “ordinary civil action” for
the collection of sum of money. When GUERRERO v. COMMISSIONER (19 SCRA
the judge of the CFI, was about to 25)
conduct the hearing of the case, the H: No. Because it is no longer the
taxpayer filed an injunction with the disputed assessment.
SC to prohibit the judge of the CFI
contending that a single cause of BATANGAS v. COLLECTOR (102 PHIL 822)
action is pending in two courts, one in H: Yes. In order to avoid multiplicity of
the CTA and another in CFI. suits
H: Injunction was granted prohibiting the
Judge of the CFI and requiring the ► ACCORDING TO JUSTICE VITUG:
Judge to transfer the records to the BATANGAS v. COLLECTOR (102 PHIL 822)
CTA saying that the remedy made by is the better ruling
the taxpayer was the correct remedy.
PROTEST UNDER LOCAL TAX (Sec.
Q: Was the appeal made on time? 195, LGC)
A: Yes, when the BIR filed an ordinary ► Under NIRC, protest is filed in the
action, the protest is deemed denied. Office of the Commissioner
Hence an appeal is a proper remedy. ► Under LGC, protest is filed with the
same City or Provincial or Municipal
UNION SHIPPING LINES v. COMMISSIONER Treasurer who issued the assessment
F: The taxpayer was waiting for the
decision of his protest. But instead, he Period to file Protest
received a notice of collection.  60 days from receipt of
Immediately, he filed a Motion for assessment
Reconsideration and Clarification
asking whether his protest has been Q: If the treasurer did not decide within a
denied. The BIR did not reply or 60day period, remedy?
answer but instead filed an Ordinary A: Go to the court of competent
Civil Action before the CFI. When the jurisdiction (RTC)
taxpayer received summons, he did
not answer but instead filed an Appeal Q: If the RTC decided not in you favor?
before the CTA. A: File an appeal with CTA en banc
I: Whether or not the remedy of Appeal (beginning April 23, 2004)
was the correct remedy and Whether
or not it was filed on time. Q: If the CTA decided not in your favor?
H: Yes. The remedy of appeal is the A: Appeal to the SC.
correct remedy and the appeal was
filed on time. The reckoning period NOTE:
within which to file an appeal is the Pursuant to RA 9282, direct appeal to CTA
time the taxpayer received the en banc can be made from:
summons. 1. Decision of the RTC involving local
taxation exercising appellate
While an Appeal is pending before the jurisdiction
CTA, the CTA will determine: 2. Decision of the Central Board of
1. If the decision was made within Assessment Appeal exercising
180 days, whether the appeal was appellate jurisdiction.
made within 30 days from the
receipt of the said decision, or PROTEST UNDER REAL PROPERTY TAX
2. if there was no decision after the (Secs. 226, 230, and 252)
lapse of 180 days, whether the  Remedy shall be the same
appeal was made within 30 days
upon the expiration or the lapse of Sec. 252, LGC
the 180-day period.  If the taxpayer receives a Notice of
Assessment from municipal, city,
Q: Pending appeal with the CTA, can the or provincial treasurer, the remedy
BIR amend the final assessment?
A: 2 SCHOOLS OF THOUGHT:

81
 Taxation law review notes
- Atty. Francis J. Sababan -
is to file a protest but there must
be first Payment Under Protest.
- This is the only instance where
payment under protest is
necessary
Q: How is payment under protest made?
A: At the back of the receipt there will be
an annotation that there was a payment
under protest within 60days from receipt
of the notice of assessment within the
same treasurer who issued the
assessment.
Q: If the treasurer rules against the
taxpayer, remedy?
A: The remedy is to file an appeal to the
Local Board of Assessment within 30days
from the receipt of the decision.
Q: From the decision of the Local Board of
Assessment?
A: Appeal should be made to the Central
Board of Assessment Appeal.
► Beginning April 23, 2004, the ruling of
the Central Board of Assessment Appeal is
no longer final. It can now be appealed to
the CTA, sitting en banc.
PROTEST UNDER THE TARIFF AND
CUSTOMS CODE (TCC) (Sec. 2313, as
amended by RA 7651)
► Formerly, the automatic appeal under
the TCC applied only to protest; but now a
days, the automatic appeal applies to
both protest and forfeiture.
For Forfeiture Under the Tariff and
Customs Code
► Refers to the Order of the Collector
confiscating the imported goods or
commodities
Doctrine of Primary Jurisdiction
If the Collector ordered the forfeiture
of the imported commodities the order of
the Collector shall be to the exclusion of
all government offices and authority.
Importer of Chemical, under the TCC,
the custom duties is only P27 but the
collector says it should be P52. The
importer will then file a protest with the
Office of the Collector.
In the old days, there is an automatic
appeal from the decision of the collector
under protest. But under RA 7651, the
remedy of automatic appeal is applicable
to both protest and forfeiture.
I. In both cases of protest and forfeiture,
if the importer lose the case and the
government wins, the remedy is to file an
appeal within 15 days before the Office of
the Commissioner.
 From the ruling of the
Commissioner, the importer should
file an appeal within 30 days
before the CTA, sitting in division.
 From the ruling of the CTA in
division, the importer should file an
MR within 15 days before the same
division hearing the case.
 From the ruling of the CTA in
division, deciding on the MR, the
importer should file an appeal
within 15 days before the CTA
sitting en banc.
 From the CTA en banc, appeal to
SC within 15 days.
II. If the importer-taxpayer wins the case,
the government lose the case, Sec. 2313
of TCC as amended by RA 7651, there
shall be an automatic review within 15
days.
Q: Where should the automatic review be
made?
A: It depends. Publish the value of the
commodity.
1. IF P5 MILLION OR MORE –
AUTOMATIC REVIEW SHALL BE
BEFORE THE SECRETARY OF THE
DEPT. OF FINANCE.
2. IF LESS THAN P5 MILLION –
AUTOMATIC REVIEW SHALL BE
BEFORE THE OFFICE OF THE
COMMISSIONER
Q: Suppose the commissioner decide or
did not decide within 30days, what
happens?
A: If the commissioner reverses the ruling
of the collector, the ruling is final and
executory.
If the commissioner affirms or did not
decide within 30days, there shall be an
automatic appeal before the sec. of
finance.
Q: Between the two which will be
appealed to the CTA?
A: The decision of the secretary which
passes through the office of the
commissioner (RA 9282)
But not all the decision of the
secretary which passes the office of the
commissioner affirms or did not decide
within 30days and appealed before the
82
 Taxation law review notes
- Atty. Francis J. Sababan -
secretary of finance will appeal to the CTA 2. If based on other grounds, the
be allowed. minimum amount shall not be
lower than 40% of the original
There are 3 instances when the Secretary assessment.
of Finance renders a decision appealable
to the CTA: Q: Can it be lower than that prescribed by
1. decision of the Secretary by virtue law?
of automatic review passing A: As a rule, no. EXCEPT, if allowed by the
through the Commissioner evaluation board consisting of the:
2. cases of anti-dumping duty, where a) commissioner; and
the anti-dumping duty was ordered b) deputy commissioner.
by the Secretary
3. decision of the Secretary of Instances when the Final Assessment
Finance on countervening duty. becomes final and executor:
1. If the taxpayer did not file the
COMPROMISE (Sec. 204, NIRC) protest on time
2. Failure to submit the supporting
3 Questions asked in 2004 BAR: documents within the 60-day
1. May the Government compromise period
criminal cases and civil cases? 3. After the lapse of the 180-day
2. Supposed the corporation is period, you did not file an appeal
already dissolved, can the within the 30-day period to the CTA
stockholder be obliged to pay? 4. An appeal was filed but made
3. Suppose the civil case filed by the beyond the reglementary period to
BIR is final and executor, can it be appeal
subject to compromise?
METHODS OF COLLECTION (SEC. 205)
CAN THERE BE COMPROMISE IN: 1. Judicial Action
1. CIVIL CASES? a. Civil
- YES, IN ANY STAGE OF THE b. Criminal
PROCEEDING 2. Administrative Action
- EXCEPT WHEN THE CIVIL CASE a. Distraint
IS ALREADY FINAL AND b. Levy
EXECUTORY BECAUSE IT WILL c. Tax lien
BE VIOLATIVE OF THE
SEPARATION OF POWERS Q: Why is it important to know whether
2. CRIMINAL CASES? the final assessment is under normal or
- YES, EXCEPT: abnormal conditions?
a. IF ALREADY FILED IN COURT A: It is important because of the
(RTC) OR; requirement under §222. If the final
b. IF IT INVOLVES FRAUD assessment becomes final and executory,
3. IF THE CORPORATION IS ALREADY the government (BIR) can exercise the
DISSOLVED, CAN THE STOCKHOLDER remedies under §205 in any order or
BE HELD LIABLE TO PAY TAX? simultaneously (§207). But it is not
- GENERAL RULE: NO always the case, because the right of the
- EXCEPT: government to collect is limited in case of
a. IF IT IS PROVEN THAT THE abnormal assessment/collection under
ASSETS OF THE §222. Under the second option, the right
COPORATION IS TAKEN BY of the government is limited to judicial
ONE STOCKHOLDER OR; action either civil or criminal.
b. IF THE STOCKHOLDER DID Administrative remedies such as distraint,
NOT PAY HIS UNPAID levy, or tax lien is not available under
SUBSCRIPTION such condition.

Q: In distraint, levy or tax lien, is the 10

Minimum Amount to be Compromised
(Sec. 204)
1. If the ground is financial incapacity
of the taxpayer, the minimum shall
not be less than 10% of the original
assessment.
year period of collection applicable?
A: No, only the 5year period should apply.
Distraint
Kinds:
1. Constructive (Sec. 206)

83
 Taxation law review notes
- Atty. Francis J. Sababan -
2. Distraint of Intangible (Sec. 208)
3. Actual (Sec. 207, par. a, and Sec. 3. Actual Distraint
209)
► Personal property shall be
1. Constructive Distraint physically taken by the distraining
officer.
► The distraining officer shall make a list ► Within 10 days from the receipt of
of the personal property of the property to the warrant, a report of the distraint
be distraint in the presence of the owner shall be submitted to the BIR (Sec.
of the property or the person in 207, par a last par.)
possession of the property. ► The property subject of distraint
► The owner shall be requested to sign shall be sold at a public auction
the receipt. EXCEPT bank accounts and debits and
credits.
Q: What if the owner refuses to sign the » Notice of sale shall be by
receipt? posting in 2 conspicuous place,
A: Sec. 206: The distraining officer shall stating the date and the place of
require 2 individuals within the the sale (No publication
neighborhood with the warning that they requirement)
should not allow the taxpayer to dispose, ► Sec. 211: after the sale and within
transfer, or sell the property subject of 2 days, a report shall be made to the
distraint. BIR

Grounds for Constructive Distraint (Sec. Q: If the property sold is a personal

206): property, is there a right of redemption?
1. The taxpayer intends to leave the A: NO. The rule is absolute.
Philippines
2. The taxpayer leaves the Philippines Q: If the property is a personal property,
3. The taxpayer ceases or retires is there a right of preemption?
from business A: SEC. 210: Before the scheduled sale,
4. The taxpayer obstructs the the taxpayer is allowed to recover the
collection of the tax. property by paying all the property by
paying all the proper charges as well as
► THESE GROUNDS ALSO ANSWER THE the interest, cost and penalties.
QUESTION: WHAT ARE THE TAXABLE
PERIOD LESSER THAN 12 MONTHS? During the Scheduled Auction Sale, 2
Things may happen:
1. There is bidder and the bid is
2. Distraint of Intangible Property enough
2. There is no bidder or there is a
Limited to 3 Intangible Properties: bidder but the bid is not enough
1. Shares of stocks
2. Bank accounts Q: What is the relevance of knowing the
3. Credits and debits difference?
A: 1. If there is a bidder and the bid is
Share of stocks enough
► Warrant of distraint furnished to » In case of insufficiency, there shall
the taxpayer or the officer of the be further distraint to cover the
corporation with the warning that the liability. (§217)
property is subject of distraint and it » In case of excess, the excess shall
should not dispose of it. be returned to the taxpayer.
2. If there is no bidder or the bid is
Bank Accounts not enough.
► Warrant of distraint furnished to » It will be purchase by the
the taxpayer or the officer of the bank government and the later sold in a
with the warning that the taxpayer public auction again (§212)
should not be allowed to withdraw. » In case of insufficiency, no further
distraint, §217 applies only if there
Debits and Credits was a bidder.
► Warrant of distraint furnished to » In case of excess, the excess shall
the debtor and creditor not be returned to the taxpayer but

84
 Taxation law review notes
- Atty. Francis J. Sababan -
shall be remitted to the national Q: If sold at a private sale, what is the
treasury. requirement?
A: There must be an approval of the
Levy Secretary of Finance (§216)

► Other than the delinquent Q: After sale, if there was deficiency?

taxpayer, warrant of levy is served to A: There shall be no further levy, because
the register of deeds having §215 says that it shall be to the total
jurisdiction over the real property (Sec. satisfaction of the taxpayer.
213)
► Within 10 days from the receipt of Q: After sale, if there was an excess?
the warrant, a report of the levy shall A: It shall not be returned to the taxpayer
be submitted to the BIR (Sec. 207 (b) but shall be remitted to the national
last par) treasury.

Notice of Sale in Public Auction: Sec. 217: this is only true if there was no
1. Posting in 2 conspicuous places bidder or the bid was not enough because
2. Publication in newspaper of of the provisions of the Secs. 212, 215,
general circulation once a week for and 216
3 consecutive weeks.
Sec. 218: no court shall issue an
Q: Is there a right of pre emption? injunction to restrain the collection of tax
A: Yes, §213. under this code

Q: Is there a right of redemption? Determine what kind of injunction is

A: Yes.
2 Things may happen in a Public Auction:
1. There is a bidder and the bid is
enough
2. There is no bidder or the bid is not
enough
Q: What if there is no bidder or the bid is
not enough?
A: Forfeiture shall be made (§215)
3 Definitions of Forfeiture under the
Internal Revenue Code
1. Violation of Excise Tax Law (Sec.
224)
2. If there is no bidder or the bid is
not enough (Sec. 215)
3. The order of the Collector to
confiscate imported commodities
(Sec. 2313, TCC)
Relevance of the Choice of Words:
► Under sec. 212, the law says
“purchase”
► Under sec. 215, the law says
“forfeiture”
» under 215: the real property
shall be automatically registered in
the name of the Government
(forfeiture)
» under 212: the real property is
not automatically registered in the
name of the Government
(purchase)
referred to here:
1. Prohibitory – referred in Sec. 218
because it restrains the collection
of tax.
2. Mandatory
Q: Is the provision limited to “tax under
this code”?
A: Limited to internal revenue taxes.
EXCEPT: CTA (Regular Court) → RA 1125
and 9282: CTA is authorized to issue
injunction to restrain the collection of
taxes or fees collected under other code.
Q: Is the rule of distraint or levy the same
under local taxation?
A: Yes, local tax.
» §175 for DISTRAINT
» §176 for LEVY
Q: How about real property tax?
A: No, distraint is not authorized (§256,
LGC), because the remedy is only Judicial
Action and Levy.
Tax Lien
► Non payment of tax, the government
has the right to claim a lien over the
property of the taxpayer
1. NIRC – Sec. 219, NIRC
2. Local Tax – Sec. 173, NIRC
3. Real Property Tax – Sec. 257,
NIRC
Q: Supposed a parcel of land is about to
be levied by the government, but the

85
 Taxation law review notes
- Atty. Francis J. Sababan -
same is being foreclosed by the
mortgagee, which of the 2 obligee, the
government or the mortgagee shall be
preferred?
A: §219, last portion: The government
is the preferred one if the lien is
annotated and recorded in the registry of
deed. In the absence of annotation in the
registry of deeds, the mortgagee is
preferred.
Q: Do we have the same rule under Local
Tax and Real Property Tax?
A: NO. Both §173 and §257, the
government is always the preferred one.
The lien can only be removed by payment
of tax, interest and penalty.
Sec. 220: approving of filing an ordinary
civil action for violation of the internal
revenue code
► The approval must be made by the
Commissioner of Internal Revenue
HIZON v. REPUBLIC (320 SCRA 574)
F: An ordinary civil action for violation of
the tax code was filed in the city of
San Fernando. But the filing was only
approved by the Revenue Regional
Director of Central Luzon. The plaintiff
opposed the filing in the court on the
ground that it should be approved by
the Commissioner and the Revenue
RD.
H: Sec. 220 should be read with Sec. 7 of
the NIRC
» General Rule: powers and
functions of the Commissioner may
be delegated but not to a position
lower than a Division Chief
» Under Sec. 7, there are powers
which can not be delegated
a) Power to recommend to the
Secretary of Finance to
issue rules and regulation
b) Power to decide a case of
fist impression
c) Power to enter into a
compromise agreement
d) Power to assign BIR officer
in the place of production
subject to income tax
» Since the case does not fall
under the prohibited delegation,
the filing of the case is legal and
tenable.
► Decision of the Commissioner of
Internal Revenue (CIR) is appealable to
CTA.
Q: When is a decision of the cir
appealable to the Secretary of Finance?
A: §4, on matters of interpretation of tax
laws.
SEC. 223: SUSPENSION OF THE
RUNNING OF PRESCRIPTIVE PERIOD
Q: A Filipino taxpayer went to Canada,
after 15years he went back, he is being
assessed by the BIR under normal
assessment. Has the right of the
government to asses the tax already
prescribed?
A: NO. When he went to Canada, the
running of the prescribed period is
suspended.
Q: What if the change of address is within
the Philippines, say only from manila to
Pasay City, is the running of the
prescriptive period suspended?
A: In order that the running of the
prescriptive period will not be suspended,
especially if the change is district office,
§223 provides that the taxpayer must
send a written notice of change of address
to the BIR.
In the absence of the written notice,
the period will be suspended.
Q: Change of address is from Philippines
to abroad?
A: The period will be suspended.
Other Grounds for Suspension:
1. During collection if there is no
property found, the period is
suspended
2. If the BIR is prohibited from making
assessment such when the subject
property is under litigation
3. In distraint of levy, the BIR officer
can’t locate the property
CLAIM FOR REFUND (SEC 229)
Written claim for refund:
1. Sec. 229, NIRC
2. Sec. 112, VAT
3. Sec. 136, Local Tax
4. Sec. 253, Real Property Tax
5. None except sec. 1603, Tariff and
Custom
Written claim for refund under the
input tax (Sec. 112)
► Period is also 2 years from the close of
the taxable quarter when the transaction
was made
86
 Taxation law review notes
- Atty. Francis J. Sababan -
Q: Can we apply §229 to VAT?
A: Yes, because there is no conflict. §112
is refund under input tax system.
§229 is refund for:
1. errors in payment or;
2. collected without authority; or
3. assessment without authority.
► The period to claim refund is 2years.
Doctrine of Equitable Recoupment
► If a taxpayer is entitled to a written
claim for refund but the prescriptive
period to claim has lapsed, the taxpayer is
allowed to credit his written claim for
refund which he failed to recover to his
existing tax liability.
Computed from;
a. Individual – counted on the day the
tax has been paid
1. paying by way of withholding
tax system, the reckoning point
is the end of the taxable year.
2. paying by way of installment,
reckoning point is the date the
last installment is paid.
3. if sold to public auction through
distraint or levy, the date the
proceeds is applied to the
satisfaction of the tax liability.
b. Corporation
1. Existing
- 1992, *** v. Commissioner (205
SCRA 184)
- 1995, Commissioner v. Philam
life (244 SCRA 446)
- 1998, Commissioner v. CTA
(301 SCRA 435)
2. Non-existing
- 2001, BPI v. Commissioner (363
SCRA 840)
1. Existing – the counting of the
prescriptive period is 2 years on
the day the annual adjusted return
is filed, because it is at that day
that the tax liability is known.
2. Non-existing – the counting of the
prescriptive period should also be
reckoned on the day the annual
return is filed. But the corporation
is no longer required to wait till the
taxable period is over to file the
return. Upon receipt of a notice
from the SEC to dissolve the
corporation, within 30 days
thereafter, a return should be filed.
Q: Suppose there is a supervening event,
and the taxpayer was not able to file a
written claim of refund within the period?
A: Regardless of supervening event, a
written claim for refund must be filed
within 2years.
Q: Suppose the 2 year period is about to
expire and there is no decision yet as to
your refund?
A: Remedy is to file an appeal before the
CTA (deemed a denial)
Q: Suppose the BIR decided within 2
years against the refund?
A: Appeal within 30days from the
decision, provided it is still within the 2
year period.
Q: Suppose there is only 21days
remaining after receiving the decision,
when to file an appeal?
A: Within 21days before the end of the 2
year period.
► A written claim for refund should be
filed within 2 years
► Sec 204 (c) last phrase: in case of
over payment a written claim is not
necessary because a return constitutes a
written claim for refund.
Q: May the commissioner of internal
revenue open the bank account of a
taxpayer?
A: General Rule: NO. EXCEPT:
1. To determine the gross value of the
estate; and
2. To enter into a compromise
agreement. (under §204(A))
► The written claim for refund to
determine the gross value of the estate
because the taxpayer is already dead
In case of compromise, there must be
consent.
87